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Accounting for unsustainable mineral extraction in Madhya Pradesh and West Bengal Draft Final Report Prepared for Central Statistical Organization Project Report No. 2003 RD 62 The Energy and Resources Institute July 2006 Accounting for unsustainable mineral extraction in Madhya Pradesh and West Bengal Final Report Prepared for Central Statistical Organization Project Report No.2003 RD 62 www .teriin.org The Energy and Resources Institute © The Energy and Resources Institute 2006 Suggested format for citation T E R I. 2006 Accounting for unsustainable mineral extraction in Madhya Pradesh and West Bengal New Delhi: The Energy and Resources Institute. 135 pp. [Project Report No. 2003 RD 62] For more information Project Monitoring Cell TERI Darbari Seth Block IH C Complex, Lodhi Road New Delhi – 110 003 India Tel . 2468 2100 or 2468 2111 E-mail pmc@teri.res.in Fax 2468 2144 or 2468 2145 Web www.teriin.org India +91 • Delhi (0) 11 Acknowledgements The project team would like to thank the Central Statistical Organisation for the opportunity to undertake this study and their cooperation during th e project. We gratefully acknowledge the support received from officials of the Ministry of Environment and Forests; Indian Bureau of Mines; Bureau of Applied Economics and Statistics, West Bengal; and Directorate of Economics and Statistics, Madhya Pradesh. This study has benefited immensely from the valuable information provided by Eastern Coalfields Limited, Northern Coalfields Limited and regional offices of the Central Mine Planning and Design Institute Limited. We are also grateful to them for facilitating field visits which helped us better understand environmental issues in m ining areas. We are indebted to Mr S K Chand, Fellow, TERI and Mr P V Sridharan, Visiting Senior Fellow, TERI for their guidance in the course of this project. We also wish to thank members of the Technical Monitoring Committee constituted by CSO to periodically review the project. Last but not the least, we are grateful to a number of colleagues at TERI for their advice and inputs. Special mention is due to Ms. Preety Bhandari, Director, Policy Analysis Division for her constant encouragement. Project team Ms Divya Datt (Principal Investigator ) Associate Fellow, Policy Analysis Division Mr Anand Murugesan Research Associate, Policy Analysis Division Mr Souvik Bhattacharjya Research Associate, Policy Analysis Division Ms Susmita Sahu PhD scholar, TERI School of Advanced Studies Ms Kiran Shivpuri Secretary, Policy Analysis Division Title of the chapter 1 Table of Contents Chapter 1: Introduction ……………………………………………………………1 Chapter 2: Survey of literature: accounting for minerals and environmental degradation…..…………………………………………………..2 Introduction …..…………………………………………………………………………………………2 National accounts a nd sustainability ..………………………………………………………..2 Valuation of mineral depletion…........ ………………………………………………………….4 Valuation of environmental degradation ………….…………………………………………7 Conclusion……………………………………………………………………………………………….11 References……………………………………………………………………………………………….11 Chapter 3: Coal sector in India …………………………………………… …….15 Introduction …..………………………………………………………………………………………. 1 5 Coal quality: grading classification …………………………………………………………. 1 5 Structure of the industry…………….. …………………………………………………………. 1 8 Coal pricing ………………..…………….. …………………………………………………………. 20 Demand and supply scenario .…….. …………………………………………………………. 22 Conclusion…………………. …………….. …………………………………………………………. 28 References…………………. …………….. …………………………………………………………. 28 Annexure 1: Gradewise basic price of coal……..…………………………………………. 30 Chapter 4: Physical accounts for coal resources ..………………… ……31 Classification of coal resources.….. …………………………………………………………..31 Physical accounts for coal in Madhya Pradesh and West Bengal ……………..…..38 Conclusion……………………………….. ………………………………………………………… 45 References……………………………….. ………………………………………………………… 45 Annexure 1: Field guidelines for adoption of United Nations Framework Classification .……….. ………………………………………………………… 46 Annexure 2: Availability of coking and non -coking coal in Madhya Pradesh and West Bengal ….. …………………………………………………………. 52 Chapter 5 : Valuation of mineral resources ………………………….. .....56 Valuing mineral assets: conceptual issues ..………………………………………………. 57 Net present value method ……………………………………………………..………………..58 Valuing coal in Madhya Pradesh and West Bengal ……………………….. …………..59 Input distance function for estimating shadow price of inputs …..…………68 Adjusting the mining sector SDP for depletion ……………………………………..7 2 Summary and conclusion …………………………………………………………………..7 4 References ………………………………………………………………………………………..7 5 Annexure 1: Perpetual Inventory Model to determine the capital stock …..76 Chapter 6: Coal mining and the environment: impact and abatement measures ………………………………………… 77 Introduction ………………………………………………………………………………………77 Environmental policy and legislation for the mining sector in India ……….77 Environmental issues at different phases of mining ………………………………78 Impacts of mining on resources…………………………………………………………..81 Environmental protection and mitigati on measures in coal mining………..87 References…………………………………………………………………………………………9 7 Annexure 1: CPCB environmental standards for coal mines……………………9 8 Chapter 7 : Environmental costs of coal mining …………………….101 Introduction ……………………………………………………………………………………. ..101 Methodology for the derivation of environmental costs…………………………103 Estimates of environmental costs- analysis and results………………………….107 Sensitivity analysis …………………………………………………………. …………………114 Adjusting the mining sector SDP ……………………………………………………… …115 Conclusion……………………………………………………………………………………… …116 Annexure 1 : Distance function approach for arriving at environmental costs ………………………………………………………..11 8 Annexure 2: Mines for which environmental costs were sought… …………..120 Annexure 3: Questionnaire for collecting environmental costs incurred by companies ……………………………………………124 Annexure 4 : Descriptive statistics of sensitivity analysis ……………………….126 Annexure 5: Framework for classifying environmental protection expenditure in mining.…………………………………….127 Chapter 8: Summary and way ahead……………… …………………….129 Summary…….……………………………………………………………………………………..129 Data issues……………………………………………………………….…………………………132 Policy applications………………………………………………………………………………13 3 Future research………………………………………………………………………………..…134 C HAPTER 1 Introduction This study aims to estimate the extent of and value the depletion of mineral resources and environmental costs of mining in two states of India - Madhya Pradesh and West Bengal. The study was commissioned by the Central Statistical Organization with the objective of developing a methodology and data framework for accounting for unsustainable mineral extraction in the country, which can be used to supplement and/or adjust the conventional national income accounts. At a broad level, the study was guided by the United Nations System of Integrated Economic and Environmental Accounting, the UNSEEA. However, a review of the literature on natural resource accounting and valuation of sub soil assets in particular, was undertaken at the outset to draw and build on specific studies done in this area. There is a range of metallic, non -metallic and fuel minerals being mined in the two states. While Madhya Pradesh ranks high in the country in the production of copper concentrates, diamond, limestone and pyrophyllite, West Bengal leads in the production of apatite. In both states, however, coal production accounts for the lion’s share of the value of total mineral production. In 2002/03, coal accounted for about 85% and 98% of the total value of mineral production in MP and WB respectively . The states make up for about 7.5% and 11% of the total coal resources available in the country , respectively . Therefore, the study decided to focus on the coal sector in both states. The next chapter presents a review of the literature on the subject. The following chapters provide an overview of the coal industry in the country, followed by a discussion of the trends in coal availability (i.e. asset accounts for coal resources) in physical and monetary terms. The next two chapters document the environmental impacts of coal mining and propose and illustrate a methodology for placing a value on these. The final chapter summarizes the main results and discusses data gaps, future research ideas and policy implications of such an exercise. It is hoped that the project will be useful in furthering methodological research and identifying information gaps in the area of natural resource accounting for sub-soil assets. C HAPTER 2 Survey of literature: accounting for minerals and environmental degradation Introduction Economic growth is widely considered as one of the means for enhancing social welfare. Economic activity could however, be unsustainable and welfare reducing for several reasons. Many countries are therefore increasing their efforts towards addressing the problems with the existing system of national accounts, commonly used to indicate the level of economic activity and development in the country. This chapt er surveys current and past views on natural resource accounting integrating the costs of resource depletion and degradation in conventional economic aggregates- both theoretical developments and work attempting to apply some of these theories in different countries, with a focus on mineral resources. The chapter also discusses methods to integrate economic and environmental accounts as suggested by the UN SEEA (United Nations System for integrated Environmental and Economic Accounting), particularly for mineral resources and environmental degradation. The survey is organized as follows. It begins with a brief discussion on the need for national income accounting and for incorporating sustainability concerns within it. Section 2 describes the theory of v aluing depletion of natural resources and discusses some papers which lay the groundwork for its application. In section 3, the efforts towards accounting for degradation are surveyed, along with a discussion on defensive expenditures. The section also looks into the development of environmental protection expenditure accounts by countries. While discussing both depletion and degradation, the related SEEA approaches are examined in detail. National accounts and sustainability Since early 1930’s economists and policy makers have felt the need for an integrated accounting system for an economy. Dasgupta and Mäler (2000) list three reasons for an interest in the national income accounts. 1) Society requires an index of aggregate economic activity, 2) it is desirable to have an index of social welfare for spatial and temporal comparisons and for evaluating policy, and 3) academics have been seeking an index of sustainable income. As a result, national accounting measures were developed in the 40’s and 50’s as an indicator of economic activity for guiding macroeconomic policies. GDP (gross domestic product) was devised and considered to be the T E R I Report No. 2003 RD 62 3 Accounting for unsustainable mineral extraction in MP and WB indicator of the value of total goods and services generated in an economy. Alongside, the NDP (net domestic product) w as formulated, obtained by deducting the depreciation of fixed or manmade capital from GDP. It became a measure of sustainable income as it gave an estimate of the maximum value that could be consumed while staying as well off at the end of the period as in the beginning. Samuelson (1981) and Weitzman (1976) contended that NNP was the best measure of welfare under the standard national income accounting framework. In time it was recognized that such a measure captured economic concerns of employment, outpu t and consumption but not sustainability concerns of the environment or natural resources. It did not account for depletion of natural resources or environmental damage resulting from economic activity. Economists have since argued that calculated change in GDP bears little relation to real growth, particularly in resourcebased economies. Specifically, they have argued that it is not possible to determine from the national accounts whether an economy is genuinely growing or merely living off its capital (Repetto 1986; 1989). Early studies in the field pointed two sources of difficulty in the SNA. One is the non -imputation of the value of environmental goods and services (Peskin 1981; Hueting 1987; Repetto 1989). The other is the absence of any allowance for depreciation, depletion or degradation of environmental assets (Harrison 1989; Elf Serafy 1989; El Serafy and Lutz 1989). El Serafy and Lutz (1989) pointed out that GDP was essentially a short -term measure of economic activity for which exchange occured in monetary terms. It was of limited usefulness to gauge long -term sustainable growth; partly because natural resource depletion and degradation were being ignored under current practices. Similarly, Bartelmus and Tongeren (1994) emphasized the need for inclusion of natural resource degradation in national income accounting: Conventional national accounts in their assessment neglected the new scarcities of natural resources that threatened the sustained productivity of the economy and the degradation of environmental quality, mainly from pollution and consequences of human health and welfare. Thus, exclusion of environmental degradation from NDP gives an overestimation of the growth rate of the economy and future consumption possibilities. Environmental and natural resources make an important contribution to long -term economic performance and can be considered economic assets, even when they do not enter the market transactions directly. When economic policy decisions are based on the omission of environmental costs, including the value of natural resource depletion, economic activities can be encouraged to the detriment of the environment and natural resource base. 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