Externality Assessment of Coal_final

IME, IIT KANPUR

Assessment of Externalitiesdue to Coal Usage

Special Studies Report

Submitted By : Akshaya Pandey (Y9125002)

11/23/2010

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Acknowledgements

I am sincerely thankful to Prof. Rahul Varman who guided me through the study. His

insightful questions, suggestions on different facets of my study were extremely helpful in

coming up with the report. I would also like to thank my colleagues K V Gopakumar and

Gyan Vikas for helping me throughout the study, discussing various issues and giving their

suggestions at various stages of the study. Last but not the least; I would like to extend my

sense of gratitude to IME Department, IIT Kanpur for providing me resources and

opportunity to work on this project.

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Table of Contents

1 Introduction ....................................................................................................................................6

2 Methodology ...................................................................................................................................9

4 Externalities & their relevance for Coal Mining...........................................................................10

4.1 Relevance to our Study .........................................................................................................10

5 Externalities through the Lifecycle of Coal ..................................................................................14

5.1 Mining of Coal......................................................................................................................14

5.2 Coal Preparation & Cleaning ................................................................................................16

5.3 Coal Combustion & Waste Disposal ....................................................................................16

5.4 Impact on Communities ........................................................................................................18

6 Jharia : A Case Study....................................................................................................................22

6.1 Methodology .........................................................................................................................22

6.2 Details of Jharia Region........................................................................................................22

6.3 Calculating Costs of Coal Externalities ................................................................................25

7 Limitations ....................................................................................................................................28

8 Conclusion ....................................................................................................................................29

9 Appendix I: Taxes and Externalities as a Percent of Market Price of Fuel ..................................31

10 Appendix II: Estimating Value of Forest Cover .......................................................................32

11 Appendix III: Major Coalfields and Mining centres in India....................................................33

12 References.................................................................................................................................34

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List of TablesTable 1 Primary Sources of Energy in India ...........................................................................................6Table 2 Coal Consumption by Sector .....................................................................................................7Table 3 Coal Demand in next few years..................................................................................................7Table 4 Cost per Ton of Coal................................................................................................................10Table 5 Externality Costs of Fuels ........................................................................................................11Table 6 Coal Reserves of India .............................................................................................................13Table 7 Externalities at different stages of coal lifecycle......................................................................17Table 8 Emission Trading Prices in Rupees .........................................................................................24Table 9 Cost of Air Pollution................................................................................................................25Table 10 Forest Area diverted for coal mining .....................................................................................25Table 11 Forest Cover losses due to Coal Mining ................................................................................26Table 12 Livelihood losses due to coal mining......................................................................................26

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List of FiguresFigure 1Impact of Externalities on Equilibrium.....................................................................................12Figure 2 Environmental Impacts due to coal usage..............................................................................18Figure 3 Red Corridor............................................................................................................................21Figure 4 Taxes and Externalities as a percentage of Costs ...................................................................31Figure 5 Major Coalfields in India .........................................................................................................33

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1 Introduction

India is one of the fastest growing economies in the world and its demand for energy is

growing at a fast pace. As per CIL Red Herring Prospectus, “The primary energy

consumption in India has grown by approximately 700.0% in the last four decades (Source:

MoC, GoI) and is expected to rise to around 450 kgoe / year (kilogram of oil equivalent per

year) in 2010 (Source: MoC).”

India has been endowed with huge reserves of coal. According to GSI, India has huge

endowments of coal, 276.81 billion tons. [2] In addition, India is the world’s third largest

producer of coal with production of over 530 million tonnes.[1]. Thus, coal will continue to

play a key role in future energy policies of India. India is also the world’s third largest

consumer of coal with over 50% of India’s energy requirements being met by coal

combustion. The table below shows the sources of primary energy sources in India.[2]

Coal 53%

Oil 31%

Natural Gas 9%Hydel Power 6%Nuclear Energy 1%

(Source: Planning Commission of India)

Table 1 Primary Sources of Energy in India

In India, coal is a major fuel in the Power Sector. Almost 75% of total coal consumption and

80% of domestic coal production is used for power sector in India. As on June 30, 2010, the

total installed thermal power generation capacity was 104,423.98 MW (or 64.3% of the total

installed power generation capacity), of which coal based power generation capacity was

86,003.38 MW which accounted for 82.4% of the total thermal power generation capacity.

(Source: CEA, “Power Scenario at a Glance,” June 2010). In addition, other industries like

steel, cement, fertilizers, chemicals, paper and thousands of medium and small-scale

industries are also dependent on coal for their process and energy requirements.[3]

The figure below highlights the estimate of coal demand by various industries in coming

years. The primary consumer of coal is the Indian Power sector (above 75% consumption)

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with steel sector accounting for over 10% consumption. This trend is expected to continue in

the foreseeable future, thus highlighting the importance of coal as a fuel for India.

Sector 2007 2012E 2017E

Power 75% 71% 78%Steel & Sponge 7% 14% 11%

Cement 4% 7% 5%

Others 14% 8% 6%Source: Ministry of Coal

Table 2 Coal Consumption by Sector

Over the next few years, coal demand is expected to grow at rate of 12%-15% annually.

Table 3 Coal Demand in next few years

One of the primary reasons for it is the fact that coal is amongst the cheapest sources of

energy in terms of its market price. The price of coal varies from Rs. 750/ tonne to Rs.

1300 per tonne depending upon its ash content, calorific value, moisture content etc.

However, the Market Price of coal accounts for only a part of the costs incurred. The market

price includes factors such as mining costs, transportation costs, labour costs and other costs

in form taxes etc. It fails to account for the negative externalities inflicted upon the

environment and communities due to the production of coal. These social costs are

disproportionately born by the people and communities living in area near the coal mines

who are often the poorest people in the society. If these costs were to be borne by the

eventual consumers of coal, the prices would be far too high to make coal a viable fuel. To

balance individual interests and society’s interests, it is necessary to close the gap between

the readily available price of coal and the social cost of coal. To do so, one needs to estimate

the true social cost of coal.

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According to a research paper on "Environmentally Responsible Energy Pricing" written by

Viscusi in 1993, these externality costs can go up to 550% of the original price.

Thus, this study aims to explain the following:

a. Why is the assessment of Externalities due to coal usage important?

b. Determine the Externality at various stages of lifecycle of coal.

c. Assessment of the economic cost of externalities due to coal usage in the Indian

context.

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2 MethodologyFor carrying out analysis, I have followed the following methodology:

Understand what are externalities and why are they relevant

Identification of different stages of the lifecycle of coal from pre-mining, mining

fabrication and consumption.

Identify the various stakeholders involved at each stage.

Identify the externalities due to each stage and stakeholder’s getting impacted

negatively due to it.

Relate the above findings to India context by citing instances, facts from various

studies conducted on similar areas. I have also made an attempt to include the

estimated economic costs wherever possible.

Assessment of the economic value of the impact on stakeholders for each ton of coal

produced by using various data gathered on coal production, estimating costs of

livelihood loss, forest loss, environmental pollutions.

The information on the process of coal mining, various stages and environmental impacts and

other externalities due to the same has been gathered from the various articles and journals.

For the purpose of the case-study, I have selected the region of Jharia, in coal belt of India,

which accounts for over 50% of coal production in India. Once a region of dense forest cover,

it has been reduced to bare lands. The local flora and fauna has been impacted to a huge

extent and the damage cannot be undone. Thus, the region is suitable for the purpose of case

study. Most of the data gathered for the study has been taken from secondary sources like

books, journals and articles.

In order to assess the cost of these externalities, different literature on measuring the

environmental and externality costs were studied. On the basis of that, suitable methodologies

for estimation of the various costs was identified and used to assess the costs of externalities.

In this study, various methodologies such as Marginal Productivity Theory, Mitigation cost,

Willingness to pay and Restoration cost method were used to assess the costs of externalities.

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4 Externalities & their relevance for Coal MiningAn externality, which can be positive or negative, is an activity of one agent (for example, an

individual or an organization, such as a company) that affects the well-being of another agent

and occurs outside the market mechanism. These can be both positive externalities and

negative externalities. Accounting for the externalities is important because not accounting

for them results in distortions in pricing and costs, thus preventing the policy makers from

making optimum decisions for the society as a whole.

4.1 Relevance to our StudyAt various stages of Coal Production, certain costs are incurred. Some of these costs are

included in the arriving at the final production costs and thus, the prices for the coal. These

“included costs” generally consist of:

Land Acquisition Costs

Machinery and Equipment costs

Labours costs of directly employing the workforce

Energy costs incurred for operating machinery etc.

Transportation costs

Royalty, Cess and other duties levied on Coal Mining Companies.

The average cost of coal production incurred by CIL by accounting for these “included costs”

are[1]:

(Source: CIL Red Herring Prospectus)

Table 4 Cost per Ton of Coal

These costs account for a number of expenses such as mining costs, Labour costs, Energy

costs, Land Acquisition costs. When the pricing of coal is done, these are the cost which is

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accounted for in addition to the profit earned by the company into coal production. Thus, we

find that average cost of production of coal from Open Cast mines is Rs. 520 per tonne and

from Underground mines is around Rs. 2795 per tonne. This gives an impression that coal is

fairly cheap as compared to other sources of energy and is responsible for its huge popularity.

However, there are certain hidden costs of production which are not paid for by the company

or the eventual consumers for coal. These costs are borne by the larger society irrespective of

whether it is a user of coal or not. Such costs are known as Externalities. These costs may

include a number of costs such as Destruction of Wildlife, Loss of Livelihood, Pollution of

Water and Air, disruption of community life etc.

A study conducted by Viscusi on “Environmentally Responsible Energy Pricing.”[13] in

1993, showed some startling results. Though dated, this report clearly highlights the need for

carrying out an assessment of “External Costs” of any source of energy and incorporating

those costs in pricing of that Energy. As can be seen in the table below, externality costs of

coal as a percent of its price are the highest at 528% whereas current taxes account only for

about 36% of these costs. Thus, if the tax structure was modified to reflect to reflect the true

cost of externalities, coal would be much more expensive than other fuel. Thus, would no

longer remain the fuel of choice.

(Source: Environmentally Responsible Energy Pricing (1993))

Table 5 Externality Costs of Fuels

A more study conducted by Todd. L. Cherry, “The Social Cost of Coal: A Tale of Market

Failure and Market Solution” for the US, states that “The results show that coal is by far the

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most under-priced energy resource: the price per ton of coal was about $30, but the external

costs are nearly $160. Also including climate change risks, the external costs would be about

$190 per ton.”[12].

Figure 1Impact of Externalities on Equilibrium

The impact of the above can be easily illustrated with the help of the above figure. The

demand curve for the coal remains the same. At lower price, a higher quantity of coal will be

demanded and at higher prices a lower quantity of coal will be demanded.

There are two supply curves, one which accounts for only the private costs incurred by the

producer. The second supply curve also accounts for the negative externalities on society due

to coal production. Thus,

Social Costs = Private Costs + Externality Costs.

Assuming that Externalities of coal are unaccounted in determining the market price of coal,

i.e. only the private costs are considered by the producer in determining his supply curve.

Thus, using the market pricing mechanism, the price of coal discovered by the market would

be Pp and Quantity demanded would be Qp. At this price level, the consumption of coal is

higher than the socially optimal quantity. The deadweight losses inflicted on the society due

to this excess consumption of coal are indicated by shaded triangle in figure. Hence, we can

say that the market price sends wrong incentives for users, which in turn make their choices

of the selection of energy source inconsistent with society’s best interests. This discussion

implies that negative externalities of coal are more than merely an ethical problem. It is also a

problem of optimal allocation of resources for the benefit of society which cannot be solved

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by a free market pricing mechanism. In this, the resources are incorrectly being allocated for

higher production of coal.

These costs of negative externality not only distort the entire market pricing mechanism for

the energy sources, but are also disproportionately borne by a very small section of the

society living near the area of production of coal.

The table below shows that 80% of India coal is produced from just 4 states of Chhattisgarh

(16.6%), Jharkhand (28.7%), Orissa(24.4%) and Madhya Pradesh(7.8%).

Table 6 Coal Reserves of India

Due to the lopsided distribution of coal reserves in India, the communities in these states

living around the coal mines will bear the brunt of social costs of the coal while people in

other states will enjoy the benefits of electricity generated by the use of coal.

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5 Externalities through the Lifecycle of CoalThe lifecycle of coal can be broadly divided into the following stages:

Pre-Mining

Mining

Coal Preparation & Cleaning

Combustion & Waste Disposal

The externalities at each stage of coal lifecycle are mentioned below:

5.1 Mining of CoalCoal mining requires huge tracts of land which must be dug up, thus resulting in widespread

deforestation, soil erosion. The removal of forest cover combined with digging up of coal

results in generation of huge amount of dust and particulate matter. According ISM Dhanbad,

the mining activities carried out at the Jharia region have deteriorated it to such an extent that

CPCB(Central Pollution Control Board) has declared it to be among the most polluted

regions in India[4]. The air quality studies carried out in the Jharia region during 1991-2002

indicate that average SPM in Jharia region was about 50% higher than in the Residential

regions (Regional Office Dhanbad) [4]. In order to suppress the dust, large amount of water

is sprayed on the land, thus also resulting in huge consumption of water [5]. This results in

shortages of water for the local communities. Also, digging up massive tracts of land also

changes the hydrological balance of the region, thus affecting the ground water levels.

Depending on the scale of mining, it can generate huge piles of wastes which are

inflammable. These wastes are also rich in Pyrites, which when exposed to atmosphere result

in generation of Sulphuric Acid. The runoff of this Acid, also known as Acid Mine Drainage

(AMD), dissolved other metals such as Zinc, Nickel etc [6]. Thus, it makes the water toxic,

making it unsuitable for local use besides affecting the aquatic life. AMD can also seep

through the surface and contaminate the ground water resources of the region. The blasting of

surface to remove soil also impacts the ground water resources and causes the level to drop

farther.

Red Herring Prospectus of CIL clearly highlights the hazards of underground mining,

“Underground mining activities are inherently risky and hazardous. Specific risks associated with the

underground mining operations include underground fires and explosions (including those caused by

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flammable gas), cave-ins or ground falls, discharge of gases or toxic chemicals, flooding, sinkhole

formation and ground subsidence during underground drillings, removal and processing of coal.”

In addition, if Underground mining is carried out, it may involve digging caves below the

ground water levels, thus, the water flooding the mines needs to be pumped out. The

pumping out of excess water from the underground mines adversely impacts the ground

water levels in the region. It not only impacts the local communities, but also impacts the

vegetation of the regions and its surrounding area. As per the report “True Costs of Coal-

China”, “Of the 96 major state-owned coal mines, 71 per cent face water shortages and 40 per cent

have a serious shortage of water” .[11]

It has additional effects such as land subsidence, which occurs because the land over the

mine collapses. According to “Rich Land & Poor People” published by CSE, around 35000

houses are said to be under immediate threat of subsidence. [4]

Subsidence can also severely affect the region as it affects the water flow patterns in the

region, apart from the damage to roads, pipelines etc in the region. The subsidence of land

also results in cracks on the land, known as pot holes, exposing the coal to the fresh air. This

can result in combustion of coal seams leading to underground fires. In the 44 mines in the

Jharia regions, there are as many as 66 spots of underground mine fires. According estimates

of World Bank, the cost of extinguishing these fires alone is over 10,000 crores whereas

BCCL puts these estimates around 8000 crores. [4] These fires also emit out noxious fumes

which affect the health of the people living in the region.

Quoting a few lines from the Red Herring Prospectus of CIL, India summarises the issue

pretty well

“Their environmental effects of coal fires include pollution of the atmosphere with toxins, and mine

fires often leave a landscape devoid of vegetation and make it uninhabitable. In addition, the effects of

mine fires on ambient air quality are severe once the fires become surface fires. The interaction of the

gases with percolating water causes the change in the characteristic of the water quality of the area.

In addition, the Jharia coalfield fire is believed to be responsible for asthma, chronic bronchitis, and

lung and skin cancer”.

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5.2 Coal Preparation & CleaningOnce coal has been extracted, it must be washed to remove the dust and ash content. This

process is known as benefaction of coal and is carried out at coal washery. Impurities which

are removed from the coal by screening and washing are placed in waste piles .These

impurities include the solid waste from the mine, called “gob,” [6] refuse from coal washing

and coal preparation. Apart from the fact that land on which these impurities are places

cannot be used for any other purpose, these are also highly inflammable. Also, these posses

high level of toxicity. As with the mining waste, rain percolates through these piles

dissolving soluble components and elevating TDS (Total Dissolved solids) in local water

bodies. This runoff is also acidic and contains heavy metals. CSE Report says that, “In a 1998

report, CPCB has classified river Damodar as category D or heavily polluted. It means that the water

is unfit for bathing and drinking purposes. This classification holds till the stretches of Asansol and

Durgapur at West Bengal.”[4]

5.3 Coal Combustion & Waste DisposalThe usage of coal (which is by combustion) releases lots of particulate matter in addition to

SO2, NO2, and CO2 in atmosphere. Currently, nearly half of the SO2 emissions and one-

third of NO2 emission come from power plants running on coal [7].

NO2 emissions and other particulate emissions due to coal are responsible for number of

health related ailments such as asthma, Tuberculosis, silicosis etc. The impacts of CO2

emission on the global warming and climate change are already well documented.

Due to the high ash content of India Coal, fly ash is produced. Thus, giving rise to two issues:

Fly Ash Management

Fly Ash Disposal

The Management and Disposal of Fly Ash involve cooling the Fly Ash which entails huge

consumption of water. It also results in the formation of slurry. As per a report on Externality

Assessment of Coal-Fired Thermal Power Plants, “Estimates indicate that a 1000 MW coal-fired

power plant using coal with 40% ash requires as much as 36 million litres of water each day to pump

out the fly ash that it generates”[17].

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Apart from the above, this discharge of these wastes into adjoining aquatic system has an

adverse effect on the aquatic life. It also affects the livelihood of communities dependent on

those water resources.

Another text quoted verbatim from the report by WWF, titled, “Coming Clean” states

“The Machi fishermen in Dahanu, Maharashtra State, India have suffered tremendous resource loss

from the effects of cooling water intakes. These fishermen point to the hot water discharge from

coal plants as the cause of severe declines in fish and prawn catches. One fisherman attests, “In

the last 4-5 years, fish catches have declined by about 75 percent. Some fish like nevit (cat fish) and

boi (mudskippers) and lobster have almost disappeared.”[17]

Externalities at different stages of coal production and usage have been summarised in the table

below.

Lifecycle Of Coal

Mining Cleaning & Transportation Combustion & Waste DisposalDeforestation Water Pollution CO2, NO2 & SO2 emissionsSoil Erosion Inflammable Waste Piles Acid RainGround Water Shortage Acid Mine Drainage Fly AshAcid Mine Drainage LeachatesLand SubsidenceLoss of LivelihoodDisplacement of PeopleLoss of unique Flora and Fauna of regionUnderground Fires

Table 7 Externalities at different stages of coal lifecycle

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The above externalities can also be summarised with the help of the flow diagram taken from the WWE report. It explains the various externalities at different stages of coal production as well as highlighting which part of environment, i.e. Land, water; air gets impacted due to them.

Figure 2 Environmental Impacts due to coal usage

Source: WWE, Cradle to Grave(2007)

5.4 Impact on CommunitiesApart from the above coal mining totally rips apart the social fabric of the community in

region where mining is done. The most distressing aspect of this issue is the fact that the

worst impact is felt by the people who might not be deriving the benefits out of it. Some of

such issues are:

Landlessness & Homelessness

Joblessness

Loss Of Income

Risk of Marginalization

Health Risks

Disproportionate distribution of Income

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Mining has often been promoted by the Indian state as an “Employment” provider for people

of the region. As per CSE report, “Rich Lands Poor People”, coal provides 3/4th of the

employment to all people employed in mining activities in India [4].However, one needs to

understand that large scale mining carried out by companies like CIL and its subsidiaries, is a

machine intensive activity involving specialized operators. With the improvement in

technology, the number of people needed to mine the coal is constantly on the decline. As per

statistics from CSE report, “Rich Lands Poor People”, in 1996-1997, CIL employed an

average about 2.5 people to mine 1000 tonnes of coal; however, this number had declined to

about 1.4 people by 2004-2005. Also, most of the people employed for mining activities by

state mining companies are not from local communities. In fact, usually they are specialized

machine operators from other regions/states of the country.

Similar studies across the country have shown that mining does not lead to prosperity of the

region. In fact, it increases the poverty and impoverishment of the communities residing in

the region. It also spawns what is called “Illegal Mining”. Some of the people, who do not

migrate, take up jobs as miner in the “Illegal mines”, often earning amount ranging between

Rs. 50-60 for a day’s work. [4]

Apart from the snatching employment of the locals, it also affects the indigenous tribes and

vegetation of the region. As per a CSE, 90% of India’s coal is found in regions occupied by

the tribals[4].Thus, mining adversely affects the tribal’s residing in those areas. An excerpt

from a report on Tehelka highlights this aspect very well:

“In Jharkhand, it has laid waste much fertile land, a large part of which was virgin forest. This has

seriously impacted the aboriginal and semi-aboriginal tribes that are the natives of Jharkhand,

dominant among whom are the Santhals, Agarias and Birhors.

For these tribes, the forests are their entire source of sustenance, and their decimation has meant the

destruction of an entire way of life. “The whole identity of the Santhal adivasis is threatened,” says

Bina Stanis of the Jharkhand-based NGO, Chottanagpur Adivasi Seva Samiti. “Their kin are

dispersed, their sacred groves are violated.”[8]

Since, tribals have been residing in these areas for centuries, their livelihood, and economy is

closely intertwined with the ecosystem of the area, i.e. forest and water resources. Loss of

forest cover and degradation of other resources in these regions due to mining has a much

higher impact on these people, who are already marginalized and vulnerable .The loss

livelihood also causes these people to migrate to other regions in search of livelihood, thus

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increasing the strain resources of neighbouring regions due to influx of people from regions

impacted due to mining. Also, the income level of the families went down after they shifted

to the resettlements colonies. As per CSE, “Rich Land Poor People”, “After CIL took three

acres of land and the families shifted to resettlement colonies, their net cash inflow went down. The

net annual loss in cash flow was Rs. 9250 for landed families and Rs. 7060 for landless families. As

the net cash inflow of families has declined, their indebtness has increased manifold. ”. [4]

The statement made by former Indian President, Mr. Narayanan on 25th Jan 2001 Eve of

Republic Day aptly summarises the issue:

“Let it not be said of India, that this great Republic in a hurry to develop, itself is devastating the

green mother earth and uprooting our tribal population.”[9]

Thus, it is a clear indicator that while some people benefit from the mining activities, the

disproportionate costs of mining are often borne by the local population. Thus, mining

activities are responsible for the poverty and poor conditions of the local population. Most of

the mineral rich regions of India such as Jharia etc are among the most backward regions of

our Country. As a result, mineral rich states are often said to be suffering from “Resource

Curse”.

Apart from the above, there are many other externalities which cannot be accounted for. One

such externality is the “Rise of Naxalism”. It has emerged due to the anger of the tribal

against being oppressed due to mining and other such development projects. If one takes a

look at the regions where Naxalism is most active, he will find that such region are places

where bulk of mining activities are carried out. The map below clearly highlights the regions

where bulk of coal production is carried out. The region within the dark circles is known as

the “Red Corridor”. The Naxalites are most active in those regions.

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(Adapted from: World Coal Report 2007)

Figure 3 Red Corridor

It also implies that the current policy framework for mining and related activities is clearly

inadequate. There is an urgent need for a change in the current policy framework to ensure

more equitable distribution of the costs and benefits derived due to use of coal.

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6 Jharia : A Case StudyJharia block is one the key blocks for CIL, India. It accounts for about 6.4% of coal

production by CIL, India. As per the CIL Red Herring Prospectus, the production from

Jharia coal fields over last few years has been 23.62 million tons, 24.14 million tons and

27.45 million tons of raw coal in fiscal 2008, 2009 and 2010 respectively, thus indicating the

high importance of Jharia region in Coal production.

An attempt has been made to determine the externalities on the region due to coal mining,

i.e., costs which are unaccounted in the current pricing regime of coal.

6.1 Methodology Data needed for Jharia block such as total land area, population details etc was

obtained from the state government website.

Estimates of Extractable Coal Reserves and Annual Production from this region were

obtained.

Estimate for Per Capita Loss of Livelihood due to coal mining was obtained from

CSE report “Rich Land and Poor People”.

Total CO2, NO2, SO2 Emissions due to combustion of Each Tonne of Coal was

collected.

Estimates of Emission Trading Prices of these gases were collected.

Total Land Area of Jharia diverted towards coal mining was obtained and was used

for estimation of the Value of Forest Cover lost due to coal mining.

These data were then used to obtain the estimate for various externalities such as Loss of

Forest Cover, Loss of Livelihood and Social cost of emission of these gases.

6.2 Details of Jharia RegionData was gathered on different aspects such as annual production of coal in Jharia,

extractable reserves of coal, value of Forest cover, population size, loss of livelihood etc. This

data was then used to estimate the external costs of coal usage.

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Extractable Reserves and Annual Coal Production from Jharia Block

As per the CIL red Herring Prospectus, The total extractable coal reserves from the Jharia

region have been estimated to be around 1,145,000,000 tonnes. The annual production of coal

from Jharia region in 2010 was around 27,450,000 tonnes.

Loss of Livelihood due to coal Production:

The CSE report, “Rich Lands Poor People”, average per capita loss of income due to coal mining in

the Jharia region was estimated to be around Rs 7250 for landless people and around Rs. 9650 for

land holding families. Thus, we have considered the average of the two for our calculations. Hence,

the average per capita income for the purpose of calculation has been taken as Rs. 8,450.

Value of Forest Cover

The Ministry of Environment and Forests, Government of India in its handbook laying down

guidelines and clarifications says that as a thumb rule, the environmental value of one hectare

of fully stocked forest (density 1.0) would be taken as Rs.126.74 lakhs to accrue over a

period of 50 years [19].

In order to estimate the value of forest cover for each ton of coal production, we can either

assume that all the extractable reserves are mined and determine the costs using the NPV of

forest cover stated above. Alternatively, we can calculate the value accruing from the forest

cover each year and use it with the annual production of coal to determine the cost per ton of

coal mined.

Thus, we estimate the Annual Income obtained from Forest Cover using Annuity for 50 years

and 5% discount Rate, we get:

Annual Value from Forest Cover per Hectare: Rs. 694240.35

(For detail refer Appendix II)

Emissions Per Ton of Coal Burnt

The data for emission of CO2, SO2 and NOx for each tonne of coal burnt have been

considered and are mentioned as below:

CO2(in tonnes) : 1.67

SO2(in tonnes): 0.03

NO2(in tonnes): 0.09

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(Source: http://www.srimaa.com/journal/thermal.htm )

The norms on reduction of emissions have been placed and companies are allowed to reduce

their emission by purchasing the credits from the market. Thus, prevailing prices of various

noxious gases can be considered as an indirect tax on the companies for production of

noxious gases. Many studies have taken such emission prices as a proxy for indirect costs on

environment due production of these gases. Thus, we use a similar approach to determine the

costs of gaseous emission due to coal combustion:

The values for CO2,SO2 and NO2 have been taken from a report by US EPA on CO2,SO2

and NOx allowance prices dated March, 8th, 2010.[16] The average of trading prices

prevailing over past three years have been taken. The prices for CO2 emission was $26 per

tonne, SO2 emission was $245 per tonne and value of NOx emission to be around $1500 per

tonne. The value of dollar has been taken as Rs. 45 for the purpose of conversion.

Emissions Trading Prices Price (in Rs.)

Carbon Dioxide(Rs/ton)[15] 1,170

Sulphur Dioxide[16] 11,025

Nitrogen Dioxide[16] 67,500

Table 8 Emission Trading Prices in Rupees

Thus, to arrive at the cost per ton of coal burnt, we multiply the weight of gas produced per

tonne of coal burnt with the emission prices for the gas.

25

6.3 Calculating Costs of Coal ExternalitiesEnvironmental Pollution

Pollution Costs Price(in Rs./tonne)

Emission per

Ton of Coal

Total Costs

Carbon Dioxide 1,170 1.67 1953.9

Sulphur Dioxide 11,025 0.03 330.75

Nitrogen Dioxide 67,500 0.09 607.5

Total Costs 2,892.15

Table 9 Cost of Air Pollution

Forest Cover & Income Loss

For, arriving at the value of each hectare of forest cover/ each year, refer Appendix II.

Forest Area diverted in the Jharia region for the purpose of coal mining has ben obtained

from the table below:

S No. Cause Affected Area(in

hectare)

Total Area(in

hectare)

1 By Fire 1732 7127

2 By Subsidence 3947

3 By Mining 1268

4 By Excavation 630

(Source: Evaluation of Land Degradation due to coal Mining (2007))

Table 10 Forest Area diverted for coal mining

Two approaches have been considered for determining the value of Forest for each ton of

coal produced.

Option 1:

The following methodology was used:

Income accruing each year from the Forest cover is determined (Refer Appendix II).

Total Annual loss due to diversion of Forest cover is calculated by multiplying the

total area of forest cover with the income accruing from each hectare of land.

The Annual loss is then divided by the annual production of coal to arrive at the value

of forest cover lost for each tonne of coal produced from the region.

Option 2:

26

Total value of Loss of forest due to diversion of Forest cover is calculated by

multiplying the total area of forest cover with the value for each hectare of land.

The above value is then divided by the Total extractable coal reserves of the region to

arrive at value of forest cover lost for each tonne of coal produced.

Forest Cover Option 1 Option 2

Total Area in hectares (A) 7,127

Total Area in

Hectares 7,127

Per Hectare Value of Forest Cover/

year (B) in Rupees

6,94,240.35

Value of Total Area

in Rupees (Area in

Hectare*Value of 1

Hectare) (A)115,043,799,100

Annual Production of Coal (C) in

tonnes 27,450,000

Extractable

Reserves (B) in

tonnes 1,145,000,000

Cost per ton of coal(A*B/C) in Rs 90.12 Cost per ton (A/B) 50.24

Table 11 Forest Cover losses due to Coal Mining

Livelihood/Income Loss

Population 475,341

Assuming 60% employable

population (A) 308,971.65

Annual Per Capita Income Loss (B) 8,450

Total Loss of Income(C=A*B) in Rs 2,60,89,37,500

Annual Production of Coal (D) 27,450,000

Per ton income Lost(E= C/D) in Rs. 95.54

Table 12 Livelihood losses due to coal mining

Miscellaneous Costs

These costs have been collected from various committee report and studies carried out for the

Jharia region.

Rehabilitation costs for People

27

As per a study conducted in Jharia region for rehabilitation of people under Jharia Action

Plan (JAP), the costs of rehabilitation of people has been estimated to be around Rs 5792

crores over 10 years [4].

Costs for dousing out coal fires.

Varying estimates of dousing of coal fires at Jharia region are available, ranging from Rs

4070 crore by Ministry of Coal to Rs 10,000 crores estimated by World Bank.[4].

Rehabilitation Costs (A) (in Rs.) 57,92,00,00,000.00

Dousing of Coal Fire(B) (in Rs.) 40,70,00,00,000.00

Extractable Coal Reserves(in tonnes) 1,14,50,00,000.00

Cost per tonne (A+B / C) 86.13

Finally, we add the figures, loss of forest cover, loss of livelihood, and environment

impact, Rehabilitation costs and costs of dousing of coal fire in order to arrive at the

total cost of externalities for each tonne of coal produced & consumed.

Total Costs of Coal

Rehabilitation Costs & Coal

Fires (in Rs)

86.13 86.13

Environmental Pollution(in Rs) 2892.15 2892.15

Livelihood Losses(in Rs) 95.54 95.54

Forest Cover Loss (in Rs.) 90.12 50.24

Total Costs of Externalities (in

Rs.)

3163.44 3124.06

28

7 LimitationsThe study currently does not account for the following costs:

Loss of native tribes, unique flora & fauna of the region.

There are no suitable measures to assess the costs of these due to very nature of these

resources. Once the delicate ecosystem of these is disturbed, they will be lost forever. They

cannot be restored later. Thus, it is not possible to value these resources though some of the

studies have used “travelling cost method” to value them.

Costs of water pollution.

For each tonne of coal produced, about 5000 litres of water is consumed. However, these

costs have not been included in our assessment of externalities.

Damages due to Coal Fires

In our analysis, we have considered only the costs of dousing out of the coal fires for Jharia

region. Apart from these, there are a number of other damages due to them in form of loss of

coal, impact on environment etc. These costs have not been considered in our analysis.

Healthcare costs of workers

Several people from miners to those living in these regions have a continuous exposure to

coal dust. Most of them suffer from different health related ailments such as Silicosis,

Tuberculosis etc.

29

8 ConclusionThe cost of externalities due to coal usage are almost 3 times in case of coal obtained using

open cast mining and equal to the cost of coal extraction using underground mining. It is

almost 2.5 times the average prevailing prices for coal. Hence, there is an urgent need for

changing the current policy and develop a new policy framework which incorporate these

externality costs in pricing of coal.

If the price of coal reflected the external costs imposed on society by mining and combustion,

investors would be more willing to devote funds to energy sources with more sensitivity to

the environment. An assessment of “True Cost of coal” vis- a- vis costs for other sources of

energy would help in making a fair assessment of energy costs. It may also show that other

sources of energy are not as expensive compared to coal as they currently seem. Thus, there

would be a greater interest & participation from investor community in alternative, less

polluting sources of energy.

These externality costs can be internalised in the pricing of coal by using measures such as

Cap & Trade Pricing, Royalties, making it mandatory for companies to spend a part of their

profit in development of impacted regions etc. A more realistic Cess and Royalty fees should

be imposed on coal with the aim of using money obtained through these in Restoring of

Regions after mining is complete to their initial state and also in Rehabilitation of

communities being displaced due to mining. Even though, such taxes are already in place,

their quantum is too less to provide adequate help to the communities impacted due to coal

usage. As per a study conducted in Jharia region for rehabilitation of people under Jharia

Action Plan (JAP), the costs of rehabilitation of people has been estimated to be around Rs

5792 crores over 10 years. The money generated due to imposition of cess , royalty fees of Rs

6 and Rs 10 respectively is expected to provide only Rs. 350 crores per annum[4], thus

highlighting the inadequacy of the current cess and royalty structures.

The environmental damage costs etc can be recovered using measures such as Cap and

Trading. The current regime of emission trading results in speculative trading in emission

market. Thus, emission trading prices do not correctly reflect the actual costs of pollution due

to the CO2, SO2, NO2 emissions. Hence, instead of following current speculative regimes

such as Carbon trading at spot prices, a proper study needs to be conducted and costs should

be assessed for different states on a case-to case basis.

30

Measure such as new Mines Act, which call for use of 26% of the profit made by mining

companies in development of the local region are a step in right direction.

31

9 Appendix I: Taxes and Externalities as a Percent of Market Price of Fuel

(Source: Environmentally Responsible Energy Pricing, Viscusi, 1993)

Figure 4 Taxes and Externalities as a percentage of Costs

The lower bound of externalities considers only the royalties, taxes currently being imposed

on these resources. The Upper bound of externalities is the estimated cost of externalities as

per the paper by Viscusi.

32

10 Appendix II: Estimating Value of Forest Cover

Calculation for Obtaining Annual Value of Per Hectare of Forest Cover

Time: 50 years

Discount Rate: 5%

Net Present Value = Rs. 12674000

In order to arrive at the value of Per Hectare of Forest each year, we have converted the NPV

of Forest Cover Rs. 126.74 lakhs, as assessed by the MoEF, in to an annuity accruing over 50

years.

The basic assumptions are:

Annuity is discounted at the rate of 5% per annum. It is same rate being used by

MoEF in arriving at the NPV of Forest cover.

The cash flows C0, C1, C2 have been taken as equal for the purpose of calculations

i.e. C0 = C1= C2=C3..=C50

Applying the Formula for NPV, and having cash flows across the year :

NPV= - C0 + C1/(1+r) + C2/(1+r)^2.......+ C50/(1+r)^50

Where

R = discount rate used

C0 = Rs. 126.74.

C1, C2 ....C50 = Cash Flows from Forest cover each year.

On solving for NPV = 0, we obtain Rs. 694240.34.

Annual value of one hectare of forest cover: Rs. 694240.34

33

11 Appendix III: Major Coalfields and Mining centres in India

Figure 5 Major Coalfields in India

34

12 References1. Coal India Red Herring Prospectus.

2. 2nd Indian Coal Summit: Coal: A reliable and competitive source of Energy: PWC,

October 2009

3. Expert Committee Road Map for Coal Sector Reforms: part I: Dec 2005.

http://coal.nic.in/expertreport.pdf

4. Rich Lands & Poor People : CSE 2008

5. Mitigating Environmental and social impacts of coal mining in India: Dr. Gurdeep

Singh, Mining Engineers Journal June 2008

6. Cradle to Grave: The Environmental Impacts from Coal, Clean Air Task Force, 2001

7. Re-thinking Coal’s rule in India, WWF 2007

8. http://www.tehelka.com/story_main27.asp?filename=Cr030307Scorched_earth.asp

9. http://www.navdanya.org/news/99-bhu-swaraj-convention-on-land-grab-and-

resource-grab

10. World Coal Report, ABS Energy 2007.

11. True Costs of Coal-China , Greenpeace 2008

12. “The Social Cost of Coal: A Tale of Market Failure and Market Solution”, Todd. L.

Cherry, September 2002

13. Environmentally Responsible Energy Pricing. : Viscusi.(1993)

14. http://en.wikipedia.org/wiki/Externality

15. Cap and Trade Programs for SO2 and NO: 9th Nov 2007.

16. “Out of this Earth”, Felix Padel, S. Das. Orient Blakswan Publications

17. Coming Clean: The future of coal in Asia Pacific., WWF 2006

18. Evaluation of Land Degradation due to coal mining- A Vibrant Issue, Ruchi Singh,

Prasoon Kumar, Gurdeep Singh, MSECCMI,2007

19. Report Of The Expert Committee on Net Present Value, IEG Delhi-2005

http://iegindia.org/npvreport.pdf