Using Market-Based Instruments to Achieve Environmental Policy Goals: Using Market-Based Instruments to Achieve Environmental Policy Goals: The Case of Cess on Coal Rita Pandey Better Air Quality December, 2004 Agra, India

Issues: b b Indian coal contains 30 to 40% ash (on an average). b b Over 200 million tonnes of coal reaches consumers with ash content averaging 40%. b b Coking coal contains less ash as compared to power grade coal. b b More than 90% of coal produced in India is consumed for electricity generation; more than 75% of which is consumed by thermal power plants; more than 80% of this contains per cent ash. Of the total ash, about 20 per cent is deposited in the form of bottom ash and the remaining 80% is fly ash. b b It is estimated that a typical 210 mega watt unit plant (using coal with 30 per cent ash) on an average, would generate 2.6 MT ash per year. b b Coal ash has serious implications for air, water and land pollution. Reduction of ash would help control these. b b Reduction of ash in coal would also reduce the transportation cost and improve the gross calorific value and useful heat value of coal.

The Coal Ash Regulation: b b A government regulation (w.e.f. June 1, 2001) stipulates that the coal should be washed whenever the distance between the mine and the end user is > 1000 km. b b The power plants located in critically polluted urban areas, and in ecologically sensitive areas are also required to use beneficiated coal containing ash not more than 34 per cent. b b Government also sought to introduce, in a phased manner, coal with maximum 34 per cent ash in all power stations. b b However, in reality, coal washing has not kept pace with the targets. As a result, about 37 per cent unwashed non-coking coal continue to be transported to power plans located beyond 1000 km from the coalfields. b b Available estimates show substantial benefits for power plants from use of washed coal. The gains have been estimated to arise mainly from reduced maintenance cost. Increased plant availability and reduced coal transportation costs.

Is Coal Ash Regulation Sufficient : b b Most of the thermal power plants are owned by the SEBs, which are public firms. These act under soft budget constraints and have no incentive to minimise social (or even private) costs. b b Lack of assurance for continuous supply of washed coal and lack of improved combustion technology to realise full potential benefits. b b Suppliers of coal are also public firms. They fear resistance to higher coal prices. b b SEBs are incurring huge financial losses (because of subsidies and inefficiencies) and thus they and the concerned state governments resist rise in coal prices. b b In this scenario, a coal cess that is paid upfront is expected to provide the desired inducement for change in behaviour than a coal ash legislation alone would do. Further, the tax revenues can be used to stimulate investment in coal washeries, and to support technologies and practices in the coal sector so that the costs of adopting environment friendly technologies and inputs can be lowered.

Computing the Cess on Coal b b In the absence of reliable information about the damage caused at the margin due to ash in coal, an alternative would be to consider the cost of reducing the ash in coal to the desired extent. b b Three types of estimates of cost of beneficiation of coal are available in the Indian context. This paper uses the following estimates. Incremental cost for ash reduction by one percentage point (Rs per tonne of coal) Ash reduction to Mine Ash content34%32%30%25% I Dipika mine38% II Kalinger mine41% III Pipervar mine42%

Contd…. b b The optimal level of beneficiation of coal is taken to be the reduction in ash content of non-coking coal upto the level of 34 per cent. For coking coal it is taken upto the level of 18 per cent. Proposed rates of cess (Rs per tonne) Grade of Coal Rate of Cess Ash % Coking Coal W-I, W-II, SCII W-III W-IV Non-Coking Coal F and G

Contd... b b Proposed rates of cess are substantially lower than the estimated cost of beneficiation of coal. Low rates are proposed to allow adjustment time to the coal miners, coal washeries and the power plants. b b Rates of cess may be pegged to the coal beneficiation cost in about 3 years time from the date of implementation of cess. b b If own price elasticity of demand is zero and it takes more than a year to increase the supply of beneficiated coal, the estimated revenue from the cess would be Rs 1760 million from coking coal and Rs 8350 million from non-coking coal.

Summing up b b This paper recommends a cess on coal differentiated on the basis of grades of coal according to ash content, to induce both the supply and demand for beneficiated coal. b b The paper also recommends that the revenue from cess be used to set up Clean Coal Fund which could be utilised for setting up infrastructure for coal washing, and research and development to support technologies and practices in the coal sector. b b Implementation of cess on coal needs to be complemented with reforms in the power sector, which would create incentives for sound financial and environmental performance of power plants. b b Cess on coal would be complementary to Coal Ash Regulation and other existing environmental regulations prescribed for controlling industrial pollution.