Estimation of Marginal Abatement Costs for Undesirable Outputs in India’s Power Generation Sector: An Output Distance Function

Many production activities generate undesirable byproducts in conjunction with the desirable outputs they produce. The present study uses an output distance function approach and its duality with the revenue function to estimate the marginal abatement cost of CO2 emissions from a sample of thermal plants in India. Two sets of exercises have been undertaken. The marginal abatement cost is first estimated without considering the distinction between the clean and the dirty plants (model-1) and then by differentiating between the two (model-2). The shadow prices of CO2 for the coal fired thermal plants in India for the period 1991-92 to 1999-2000 was found to be Rs. 3,380.59 per ton of CO2 as per model-1 and Rs. 2401.99 per ton of CO2 as per model-2. The wide variation noticed in the marginal abatement costs across plants is explained by the ratio of CO2 emissions to electricity generation, the different vintages of capital used by different plants in the generation of electricity and provisions for abatement of pollution. The relationship between firm specific shadow prices of CO2 and the index of efficiency (ratio of CO2 emission and electricity generation) points to the fact that the marginal cost of abating CO2 emissions increases with the efficiency of the thermal plant. * Economist, National Institute of Public Finance and Policy, 18/2 Satsang Vihar Marg, Special Institutional Area (Near JNU), New Delhi 110 067. Email: [email protected].