The regulated coal sector and CO2 emissions in Indian growth process: Empirical evidence over half a century and policy suggestions
Introduction
Since independence in 1947, the economic growth rate in India was only around three percent for almost three decades. This growth rate increased to 7.5% in 2014.1 Coal, as the primary source of energy, has a significant influence on economic growth in improving social infrastructure and industrialization in the economy. Nationwide economic reforms since the 1990s have brought about considerable changes in the Indian economy. However, the rate of change has been slow in the coal sector and the sector remains highly regulated [2].
The World Energy Outlook [3] published by the International Energy Agency (IEA) has ranked India third in the world, both in production and consumption of coal, while the country has the fourth largest coal reserves after the United States, Russia and China. By 2035, growth in coal consumption will increase by 360 Mtoe, India will be the second largest growth market for coal with 70% demand is from the power station.2 Coal supplies two-thirds of total electricity production and over one-half of the total energy consumption in this country. Due to the supply constraint in a monopoly market environment, coal imports have increased in the recent years.
In India, over ninety percent of coal production is from the government-controlled mines. Coal India Ltd CIL) is the largest contributor 90 percent) along with its subsidiaries [5].3 Due to the highly regulated market structure, supply is largely dependent on the CIL and subsidiaries. According to the Competition Commission of India (CCI), “the effects of various anticompetitive factors identified in the coal sector on the rest of the economy are widespread and create systemic risk. Inefficiencies in any one segment are felt in the entire value chain with a cascading impact on the end-consumers of electricity… there is an imperative to…restructure the sector by introducing more players to reduce the dominance of any one player and facilitate competition”.4 The regulated coal sector generates price distortions in the market. Restricting supply due to a monopoly in an increasing demand environment has created excess demand, forcing India to import coal in recent years.
Following a recent report by the Institute for Energy Economics & Financial Analysis (IEEFA), “while Indonesia and Australia are the world’s two largest exporters of coal, India’s domestic production is larger than either. Combined, China, the United States and India produced nearly 68 percent of the world’s total coal in 2014, and account for 72 percent of the world’s total consumption.”5
India is the third largest CO2 emitter in the world after China and the United States [3]. Following Garg and Shukla [8], it is anticipated that annual CO2 emissions will increase 2.5 times between 2005 and 2030, reaching 3084 Mt of CO2 in 2030, representing an annual emissions growth of 3.7 percent. Maintaining high growth trajectories and simultaneously combating CO2 emissions is clearly a major challenge to India and is a global concern in coming decades. While reducing coal consumption seems to be an option to reduce CO2 emissions, its impact on economic development could be negative, at least in the medium term.
The regulated coal sector is creating excess demand (with monopoly pricing structure), which in turn affects the implementation of carbon abatement policies. Under this backdrop, we contribute towards the literature in three aspects. First, our supply side model reflects that Indian growth is coal dependent. We assume technological improvement happen through industrialization, trade and financial development of the economy and determine the economic growth. Second, we establish that regulatory environment in coal sector reflected through coal rent. This will influence carbon abatement policies with a feedback effect. Finally, our empirical findings suggest that deregulation of this sector will improve overall energy efficiency, competitiveness, and investment opportunities. The current government has emphasized the need for this deregulation and recently started re-shaping finances of the near-bankrupt electricity (mostly generated by coal) distribution sector. Therefore, our research is timely to prescribe policies in breaking this monopoly and improve the overall efficiency of the sector and implementing appropriate energy policies.
The rest of the paper is organized as follows. In Section 2, we present a brief overview of the literature. Here, we highlight the knowledge gap in the literature and emphasize the novelty of our research. Section 3 includes our empirical models and a description of data employed for this purpose. In Section 4, we analyze the empirical findings with the discussion. In the concluding section, we highlight the significant findings and provide policy suggestions to improve the efficiency and overall performance of the coal sector in addressing the future energy demand.
Section snippets
A brief review of literature
The empirical relationship between coal consumption and economic growth is mixed and ambiguous.6 For instance, both Yang [11] on Taiwan, and Yoo [12] on Korea find bi-directional causal relationships between coal consumption and economic growth while Wolde-Rufael [13], on Shanghai, establishes that coal consumption Granger causes real
Empirical modelling and data
Being a coal-dependent country, India is facing challenges in meeting an increasing supply-demand gap of coal to maintain economic growth. Following Bloch et al. [23], we develop an empirical framework considering both sides of the market.
Empirical findings and discussion
In establishing long run dynamics and causality amongst key variables, we follow five major steps, which are discussed in the following sub-sections.
Conclusions and policy implications
India will remain a major coal user at least in the medium term. Following a recent report by the IEA [60], India and Southeast Asian countries are at the forefront of strong coal growth. To quote from the IEA [60], “The Indian government has ambitious plans to provide full electricity access to the 240 million people still without it and to expand the manufacturing sector, where coal is the lowest-cost base load option. While India has an ambitious and accelerating renewables investment
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