harnessing the market for environmental protection
TRANSCRIPT
HARNESSING THE MARKET FOR ENVIRONMENTAL PROTECTION
Shreekant GuptaDelhi School of Economics
CCS ChintanNew Delhi, February 3, 2015
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Outline• Analytical framework• Not the same as free market environmentalism
(FME)• Taxonomy of policies; what are market-based
instruments (MBIs)• Mandate for MBIs• MBI Examples• Environmental Management in India• Prospects for MBIs in India• Whither Coase?
Analytical Framework
Underlying causes of environmental problems• market failure (externalities)
– can arise even in well functioning economies (free markets)
– missing markets and/or undefined property rights• policy failure
– government intervention -- input subsidies, taxes, quotas, licensing and controls, regulations
– inefficient state enterprises
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Free Market Environmentalism• Focuses on improving environmental quality
using property rights and markets.• A political doctrine--central role for free markets,
property rights and tort law.• State encodes, provides and enforces laws which
override or obscure property rights and thus fail to protect them adequately.
• Laws governing class or individual tort claims provide polluters with immunity from tort claims, or interfere with those claims in such a way as to make it difficult to legally sustain them.
• Coase ‘theorem’4
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Taxonomy of Policy Instruments Policies Direct instruments Indirect instruments Market-based instruments (MBIs)
Effluent/emission charges; tradable permits; deposit-refund systems
Input/output taxes and subsidies; differential tax rates
Command and control measures (CAC)
Emission/effluent regulations (source-specific, non-transferable quotas)
Regulation of equipment, processes, inputs, and outputs
Government production or expenditure
Regulatory agency expenditures for cleanup, waste disposal, enforcement
Development of "clean" technologies
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What are Market-Based Instruments?• Several terms used – economic incentives,
economic approaches, market-oriented approaches, market-based incentives/ instruments (MBIs), incentive mechanisms
• Work through the market system to influence the environmental behaviour of economic agents (firms, households) by creating economic incentives/disincentives
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Price-based MBIs• Pollution taxes/charges (aka emission/effluent
taxes/fees/charges)-- internalize the (external) costs of pollution, etc. by charging for the use environmental resources such as ‘clean’ air/water (‘Pigouvian’ after economist A.C. Pigou)
• Other examples: deposit-refund systems; input taxes/product charges; differential tax rates; user and administrative charges; subsidies
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Create transferable/saleable rights for use of environmental resources (air/water) that are assigned/sold/auctioned.
• Tradable permits – a target level of environmental quality is translated into total amount of allowable emissions.
• Regulator allots/sells/ auctions right to emit in the form of permits which can be bought and sold (traded), subject to an overall ceiling of emissions/effluent which has been fixed a priori.
• Not a license to pollute!• Can tighten standards over time by reducing number of
permits
Quantity-based MBIs
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Mandate for MBIs• “National authorities should endeavour to promote the
internalization of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution, with due regard to the public interest and without distorting international trade and investment.” -- Rio Declaration, Principle 16
• “environmental law and regulation are important but cannot alone be expected to deal with the problems of environment and development. Prices, markets and governmental fiscal and economic policies also play a complementary role in shaping attitudes and behaviour towards the environment”-- Agenda 21 (para 8.27)
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National mandate for MBIs
"economic instruments will be investigated to encourage the shift from curative to preventive measures, internalise the costs of pollution and conserve resources, particularly water" – Policy Statement for Abatement of Pollution (para 7.3)
MoEF Task Force to Evaluate for Industrial Pollution Abatement (1995-97)MoEF Task Force on Introduction of Economic Instruments (2002)Chelliah committee to recommend eco-taxes for union budget
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• MBIs have several advantages over CAC notably cost-effectiveness through flexibility, promote technological progress/innovation
• Rich array of MBIs being used by countries around the world – developed and developing. (Fishing quotas – New Zealand, SO2 trading – US, Carbon trading – EU, Effluent charges – Germany, Netherlands, Malaysia.)
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Environmental Management in India
• Command and control (CAC)– set of dos and don’ts– long list of laws – legislate away the
problem • Judicial activism
– constitutional “right to life” => public interest litigation
– legislating from the bench– takeover of executive functions
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Selected environmental legislation in India 1972 Wild Life (Protection) Act 1974 Water (Prevention and Control of Pollution) Act 1977 Water (Prevention and Control of Pollution) Cess Act 1980 Forest (Conservation) Act 1981 Air (Prevention and Control of Pollution) Act 1986 Environment (Protection) Act 1988 Forest (Conservation) (Amendment) Act 1989 Hazardous Wastes (Management and Handling) Rules 1989 Manufacture, Storage and Import of Hazardous Chemical Rules 1989 Manufacture, Use, Import, Export and Storage of Hazardous Micro-organisms, Genetically Engineered Micro-organisms or Cells Rules
1991 Public Liability Insurance Act 1992-93 Environmental (Protection) Rules - "Environmental Statement" 1993 Environmental (Protection) Rules - "Environmental Standards" 1994 Environmental (Protection) Rules - "Environmental Clearance" 1995 National Environment Tribunal Act 1997 National Environment Appellate Authority Act 1998 Bio-Medical Waste (Management and Handling) Rules 1999 Recycled Plastics Manufacture and Usage Rules 2000 Municipal Solid Wastes (Management and Handling) Rules 2000 Ozone Depleting Substances (Regulation) Rules 2000 Noise Pollution (Regulation and Control) Rules 2001 Batteries (Management and Handling) Rules
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Stylized facts – Air and Water Acts
• Command-and-control (CAC) legislation--a set of "dos" and "don'ts" backed by penalties (fines and/or imprisonment)
• Mandate uniform standards—industry-specific or general
• Require best available technology (BAT) and/or equipment mandates
• Standards concentration-based (dilution?)
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Stylized facts (continued)• Do not take into account differences in
abatement costs across firms, both within and across industries
• Same ambient water quality target could be met at a lower cost if firms abated differentially as they would under economic instruments
• No link between ambient environmental quality and emission/effluent standards.
• No distinction between extent of violation of standards
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National Ambient Air Quality Standards g/m3
Type of area Pollutant Averaging timeSensitive Residential Industrial
WHO Norms
1 hour 2000 4000 10000 30000 CO 8 hours 1000 2000 5000 10000 24 hours* 30 80 120 150 NOx Annual ** 15 60 80 - 24 hours 30 80 120 100-150SO2 Annual 15 60 80 40-60 24 hours 0.75 1.00 1.5 - Lead Annual 0.50 0.75 1.0 - 24 hours 100 200 500 150-230SPM Annual 70 140 360 60-90 24 hours 75 100 150 RPM Annual 50 60 120
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Environmental Standards for Thermal Power Plants in India Process
Environmental Parameter
Concentration not to exceed in mg/litre (except for pH)
Condenser cooling waters (once through cooling system)
pH Temperature Free available chlorine
6.5 - 8.5 Not more than 5°C higher than intake water temperature 0.5
Boiler blowdowns Suspended solids Oil and grease Copper (total) Iron (total)
100 20 1.0 1.0
Cooling tower blowdowns Free available chlorine Zinc Chromium (total) Phosphate Other corrosion inhibiting material
0.5 1.0 0.2 5.0 Limit to be established on case by case basis by CPCB for UTs & SPCBs for states
Ash pond effluent pH Suspended solids Oil and grease
6.5-8.5 100 20
Air emissions Particulate matter: (i) > 210 MW capacity (ii) < 210 MW capacity Sulphur dioxide: (i) 500 MW capacity (ii) 200/210 to 500 MW capacity (iii) < 200/210 MW capacity
150 mg/m3 350 mg/m3 Stack height in metres 275 220 H=14(Q)0.3 (Q - emission rate of SO2 in kg/hour)
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“Environmental laws are OK, it is their implementation that is weak”
True/False?• Problems of implementation linked to
design of laws• No flexibility in complying with
standards• No link between source specific
standards and ambient air/water quality• Violation a criminal act
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Is India different?
• Can none of the international experiences with MBIs be replicated in India?
• Possible problems/objections to cap and trade or other MBIs:– Monitoring and enforcement– Shortage of resources (regulatory
agencies)– Large number of small-scale firms
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Is India different? (continued)
• Are these problems any different from those for well-functioning CAC?
• Under CAC distinguish between:– initial compliance (checklist approach to
compliance)– continuing compliance (standards are met on a
regular basis)• In particular, if total emissions targeted
through CAC would monitoring/enforcement requirements be any less?
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Monitoring in a second best world
• Use knowledge of relationship between input/output to estimate emissions – emission intensities. Examples--Industrial Pollution Projection System (IPPS) or Decision Support System (DSS) developed at the World Bank http://www.worldbank.org/nipr/
• Promote self-monitoring by large firms by using default emission rates (that are greater than average rates) Example—NOx charges in Sweden
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Monitoring and enforcement regime - directions for reform
• Shift emphasis from “pseudo-monitoring and enforcement” to monitoring actual discharges
• Amend Air/Water Act to provide for on-the-spot remote monitoring
• The move from criminal offence to administrative fines should go hand in hand with reducing burden of proof (for establishing violation of standards)
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Replace long arm of the law with the even longer arm of the market!