Paris agreement has turned out to be a non-cooperative game for emission control. None of the developed countries stepped forward to be the social planners as free-riding is associated with the same. Hence, a country-specific emission control measure is suggested to maintain the surface temperature increase within 2-degree Celsius by 2100. In this context, most of the countries are looking at India’s policy measure. Despite being one of the top three global emitters, they are eligible for the funds for emission control from developed countries. In 2019, India emitted 2.62 billion tons of CO2, around 7 per cent of the global CO2 emission. This requires an urgent mitigation effort for emission control. In this context, we address the following research questions:

Explain the energy efficiency of firms in the manufacturing sector of India;
Analyze the carbon-productivity at the firm level;
Estimate the social cost of carbon and link it with domestic and international policies.

The traditional neoclassical economic model considers good output in the production analysis and excludes the bad output, leading to a socially inefficient outcome. We fill the existing literature by developing a model of emission control under a partial equilibrium framework. The model includes tax policy and the role of technological advancement in the context of recent production technologies. We use data from the Centre for Monitoring Indian Economy (CMIE), Prowess IQ, and Ministry of Environment, Forest, and Climate Change (MoEF&CC) from 1998 to 2019 and validate the hypotheses of the proposed model.



We conclude that energy efficiency cannot be a sufficient proxy for emission control as it fails to address firm heterogeneity. Our findings further suggest that carbon productivity depends on R&D efficiency, embodied technology, environmental tax, total factor productivity, and export intensity at the firm level. However, R&D intensity and energy mix are the main drivers in controlling firm-level emissions. Further, we link the policy intervention, such as carbon pricing, with the Paris goal. Our empirical findings suggest that cap-and-trade has helped emission control for the less emitting sector, which is helpful for long-run energy policy. At the firm level, the energy dependency is slowly shifting to renewable energy sources. Price reforms will help attain 2-degree pathways with complementary policies for achieving the baseline case as the best fissile scenario for India’s manufacturing sector.



Keyword: Energy efficiency; carbon productivity; carbon pricing; Paris goal; manufacturing sector; firm-level; India