Measuring Environmental Efficiency of Industry: A Case Study of Thermal Power Generation in India

M N, Murty and Kumar, Surender and Dhavala, Kishore (2006): Measuring Environmental Efficiency of Industry: A Case Study of Thermal Power Generation in India. Published in: Environmental and Resource Economics , Vol. Online, (7 December 2006)

Abstract

Technical and environmental efficiency of some coal-fired thermal power plants in India is estimated using a methodology that accounts for firm’s efforts to increase the production of good output and reduce pollution with the given resources and technology. The methodology used is directional output distance function. Estimates of firm-specific shadow prices of pollutants (bad outputs), and elasticity of substitution between good and bad outputs are also obtained. The technical and environmental inefficiency of a representative firm is estimated as 0.10 implying that the thermal power generating industry in Andhra Pradesh state of India could increase production of electricity by 10 per cent while decreasing generation of pollution by 10 percent. This result shows that there are incentives or win-win opportunities for the firms to voluntarily comply with the environmental regulation. It is found that there is a significant variation in marginal cost of pollution abatement or shadow prices of bad outputs across the firms and an increasing marginal cost of pollution abatement with respect to pollution reduction by the firms. The variation in marginal cost of pollution abatement and compliance to regulation across firms could be reduced by having economic instruments like emission tax.

• Item Type: MPRA Paper
• Institution: Institute of Economic Growth, New Delhi
• Language: English
• Keywords: environmental and technical efficiency; shadow prices of bad outputs; air pollution
• Subjects: Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Adoption and Costs ; Distributional Effects ; Employment Effects; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q51 - Valuation of Environmental Effects; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q53 - Air Pollution ; Water Pollution ; Noise ; Hazardous Waste ; Solid Waste ; Recycling

References

Blackorby, C., and R.R. Russell (1989). 'Will The Real Elasticity Please Stand Up?' American Economic Review 79: 882-888. Boyd, G.A. and J.D. McClelland(1999). ‘The Impact Of Environmental Constraints On Productivity Improvement In Integrated Paper Plants’, Journal of Environmental Economics and Management 3, 121-142. Coelli, T. (1995). ‘Estimators And Hypothesis Test for a Stochastic Frontier Function: A Monte-Carlo Analysis’, Journal of Productivity Analysis 6: 247–268. Coelli, T.J. and S. Parelman (1999). 'A Comparison of Parametric and Non-parametric Distance Functions: With Application to European Railways', European Journal of Operational Research 117: 326-339. Coggins, Jay S. and John R. Swinton. (1996). ‘The Price of Pollution: A Dual Approach to Valuing SO2 Allowances,’ Journal of Environmental Economics and Management, 30: 58-72. Drake, L. and R. Simper (2003). 'The Measurement of English and Welsh Police Force Efficiency: A Comparison of Distance Function Models', European Journal of Operational Research 147: 165-186. Färe, R., S. Grosskopf, and W. Weber (2001).‘Shadow Prices of Missouri Public Conservation Land’, Public Finance Review, 29(6). 444-460. Färe, R., and S. Grosskopf (2004). New Directions: Efficiency and Productivity. Boston: Kulwer Academy Publishers. Färe, R., S. Grosskopf, D.W. Noh and W. Weber (2005). Characteristics of a Polluting Technology: theory and practice, Journal of Econometrics 126, 469-492. Greene,W.H. (1990). ‘A Gamma-Distributed Stochastic Frontier Model’, Journal of Econometrics 46, 141–163. _________ (2000). ‘Simulated Likelihood Estimation of the Normal-Gamma Stochastic Frontier Function’, New York: Stern School of Business, New York University. Grosskopf, S., K. Hayes and J. Hirschberg (1995). 'Fiscal stress and the production of public safety: a distance function approach', Journal of Public Economics, 57: 277-296. Hailu, A., Veeman, T.S. (2001). ‘Non-parametric Productivity Analysis with Undesirable Outputs: An Application to the Canadian Pulp and Paper Industry’, American Journal of Agricultural Economics 83,605–616. Hetenaki, L. (1996). ‘Essays on the Impact of Pollution Control on Firm: A Distance Function Approach’, Helsinki: Helsinki Research Centre. Kumar, Surender (2006). ‘Environmentally Sensitive Productivity Growth: A Global Analysis Using Malmquist-Luenberger Index’, Ecological Economics (forthcoming). Kumar, Surender and S. Gupta (2004). ‘Resource Use Efficiency of US Electricity Generating Plants During the SO2 Trading Regime: A Distance Function Approach’, Working Paper 17, National Institute of Public Finance and Policy, New Delhi Kumbhakar, S. C. and C. A. K. Lovell (2000). Stochastic Frontier Analysis, Cambridge: Cambridge University Press. Lovell, C. A. K., S. Richardson, P. Travers and L. Wood (1994). ‘Resources and Functionings: A New View of Inequality in Australia’, in W. Eichhorn, ed., Models and Measurement of Welfare and Inequality (Springer-Verlag). Mehta, S., S. Mundle and U. Sankar (1995). Controlling Pollution: Incentives and Regulation, Delhi: Sage Publisher. Misra, Smita (1999). ‘Water Pollution Abatement in Small-scale Industries: An Exploration of Collective Action Possibilities in Handesari Industrial Area in Gujarat’, Ph.D. Thesis, University of Delhi, Delhi. Murty, M.N., A. J. James and S. Misra (1999). Economics of Industrial Pollution: Indian Experience, New Delhi, Oxford University Press. Murty, M. N. and Surender Kumar (2002). ‘Measuring Cost of Environmentally Sustainable Industrial Development in India: A Distance Function Approach’, Environmental and Development Economics 7: 467-486. _________(2003). Win-Win Opportunities and Environmental Regulation: Testing of Poter Hypothesis for Indian Manufacturing Industries, Journal of Environmental and Management 67, 139-144. _________(2004) Environmental and Economic Accounting for Industry, New Delhi: Oxford University Press. _________(2006). ‘ Measuring Productivity of Natural Capital’,India: Industrialisation in a Reforming Economy, Essays for K L Krishna, edited by S D Tendulkar et al., New Delhi: Academic Foundation. Murty, M.N., Surender Kumar and Mahua Paul (2006). ‘Environmental Regulation, Productive Efficiency and Cost of Pollution Abatement: A Case Study of The Sugar Industry in India’, Journal of Environmental Management(forth coming) Murty, M.N. and S.C.Gulati(2004). ‘Accounting for cost of Environmentally Sustainable Industrial Development in Measuring Green GDP: A Case Study of Thermal Power Generation in Andhra Pradesh State of India’. Working Paper: E/253/2005, Institute of Economic Growth, New Delhi. Palm, F.C. and A. Zellner (1992). 'To Combine or Not to Combine? Issues of Combining Forecasts', Journal of Forecasting 11: 687-701. Pandey, Rita (1998). ‘Pollution Taxes for Industrial Water Pollution Control’, Mimeo, National Institute of Public Finance and Policy, New Delhi. Swinton, John R. 1998. “At What Cost Do We Reduce Pollution? Shadow Prices of SO2 Emissions,” The Energy Journal 19(4). 63-83.