A State-Level Resource Allocation Model for Emission Reduction and Efficiency Improvement in Thermal Power Plants

This paper develops a framework for centralized allocation of resources and production targets among firms that produce a bad output side-by-side with a good output. The production technology is specifically defined for thermal power generation sector that produces one good output (electricity) and one bad output (stack emissions) with one polluting input (coal) and two neutral inputs (installed capacity of power plants and labor). The undesirable output is modeled as an incidental by-product resulting from use of the polluting input. We use a modified Directional Distance Function of Aparicio, Pastor, and Ray (2013), formulated with non-parametric Data Envelopment Analysis, to determine the extent by which good output can be increased in each region while minimizing the use of polluting inputs and the level of bad output, by increasing efficiency through reallocation. For empirical illustration, we use data from major coal-fired power plants in India for fiscal year 2005-06 through 2014-15. Each stte within India is treated as a regional jurisdiction within which inputs (only coal and labor) and outputs are reallocated under alternative structural assumptions. Our findings reveal that the thermal power sector is sub-optimal, leaving a scope for emission reduction and increase in power generation in different states of India.