Shadow price of CO2 emissions in Indian thermal power sector

Abstract

This paper estimates production efficiency and shadow prices of CO2 emissions for coal-fired thermal power plants in India. It employs a unique sample of 56 power plants for 2000–2013 acquired primarily by invoking the Right to Information Act 2005. It estimates parametric quadratic directional output distance function using linear programming approach. We find that CO2 intensity of electricity generation could be reduced by about 16 and 23% if the power plants were made to operate efficiently. The estimated average shadow prices of US$ 14.54 and 18.68 for a ton of CO2 emission, depending upon a plant’s strategies for enhancing electricity and reducing CO2 emissions, reflect that the prevailing Clean Energy Cess of US$ 6.15 on a ton of coal or US$ 3.81 on a ton of CO2 emissions is not enough to induce the required emission mitigation. Significant variation in the estimates of shadow prices across the thermal power plants calls for use of economic instruments to reduce the emissions.