Abstract:-
The marginal abatement cost (MAC) of a plant is the ratio of the marginal productivities of the emission-causing input in the production of the desired output and the bad output. Depending upon its impact on the slope and the level of the bad-output frontier of the technology, a technological change (TC) is categorised as increasingly clean (or dirty) or decreasingly clean (or dirty). The impact of a TC on the MAC can be decomposed into a Slope-Effect (SE) and a Level-Effect (LE). Conventional wisdom that a clean (respectively, dirty) TC leads to a downward (respectively, upward) shift in the MAC curve rests on the LE and ignores the SE. The SE and LE can work in opposite directions. If the SE prevails over the LE, then the MAC can increase (respectively, decrease) at every level of abatement in the case of a clean (respectively, dirty) TC. Thus, a clean TC is neither necessary nor sufficient for lowering the costs of abatement, and environmental policies can induce firms to adopt dirty TCs. A net reduction in cost of abatement is possible even when the post-TC MAC curve is higher than or crosses its pre-TC counterpart provided the permit price or the emission tax falls. The change in the equilibrium permit price as reflected by the sectoral MAC obtained under allocative efficiency is unpredictable for increasingly clean or increasingly dirty TCs. Our empirical work on the Indian thermal power plant sector confirms our theoretical results. (Jointly with Resham Nagpal)