Estimation of marginal abatement costs for undesirable outputs in India's power generation sector: An output distance function approach.

Theoretical framework of the present study is based on the
production theory and in particular on the distance function approach.
The distance function (also known as the gauge function, transformation
function, or deflation function) approach identifies a boundary or a
frontier technology, which contains all observation on one side of the
frontier and minimises a suitable measure of total distance of all the
observations from the frontier. Although the basic ingredients of the
theoretical framework on which the distance function is based was
known long ago owing to the works of Debreu (1951), Malmquist (1953),
and Shephard (1953, and 1970), its application became popular by the
works of Rolf Fare, Shawna Grosskopf and others only in recent years.
The methodology based on distance function framework was first
developed by Fare et., al. (1993) and applied by Coggins and Swinton
(1996) to the US coal burning utilities. Hetemaki (1996); Kumar (1999);
Kwon and Yun (1999); Murty and Kumar (2002) etc., have also used the
technique to derive the shadow prices of reducing the undesirable
outputs. The main advantage of using the distance function approach
over the conventional ones i.e., production, cost, revenue, and profit
function is that its computation requires only quantity data. This feature is
of particular importance in the field of environment economics since price
data related to environmental compliance costs are often not available or
are unreliable.

The present study uses the output distance function and its
duality with the revenue function to derive the marginal cost of
abatement or the shadow prices of reducing CO2 emissions for a sample
of coal fired thermal power plants in India. The remainder of the paper is
organised as follows: the next section provides a theoretical model for
estimating the marginal abatement costs. It also describes the
methodology for deriving marginal abatement costs using an output
distance function approach. Section III highlights the procedure for the
empirical estimation of the model, while section IV provides information
about the data used and also discusses the estimation procedure. The
estimated results are presented in section V. The final section VI
concludes by summarising the main results of the study.

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