Environmental Improvement Through Economic Incentives

Subsidies and incentives. Payments, tax reliefs, accelerated depreciation, concessional finance or preferential tariffs for cleaner behaviour. Indian examples include support for renewable generation, incentives for electric vehicles and concessional finance for pollution control equipment. The weakness is that a subsidy pays a polluter not to pollute, which reverses the polluter pays principle and puts the cost back on the public.

Deposit-refund and liability instruments. A sum paid up front and returned on proper disposal, or a financial guarantee taken before an activity begins. Extended producer responsibility under the plastic waste and electronic waste rules belongs here, as does the requirement of insurance under the Public Liability Insurance Act 1991 and the practice of taking a bank guarantee before a clearance.

Worked example

A cluster of two hundred small dyeing units discharges effluent into a common drain. Each is too small to afford a treatment plant, too numerous to inspect, and quick to reopen under a new name if closed.

Under command and control the regulator must inspect two hundred units, prove a breach in each, prosecute, and be met with closure orders that produce two hundred new units. This is the actual position in several Indian industrial clusters.

Under an economic instrument three things become possible. A charge on water drawn or on effluent discharged makes the cost of pollution visible to each unit continuously, without an inspection. A common effluent treatment plant funded by a levy on the cluster converts a problem nobody can solve individually into one that can be solved collectively. And a deposit taken at the time of registration, refundable on verified compliance, gives a unit something to lose that does not disappear when it changes its name.

And the limit. None of that works without measurement. A charge per unit of effluent needs the units measured, and if the measurement is as weak as the inspection, the instrument fails for the same reason the standard did.

What has actually been used in India

Adopted: the water cess, fuel and coal levies, renewable and energy efficiency certificates, subsidies and tax incentives for cleaner technology, extended producer responsibility in the waste rules, insurance under the Act of 1991, and bank guarantees attached to clearances.

Trialled: particulate emissions trading in some States.

Not adopted: any general pollution tax, and any comprehensive carbon price.

The policy support. The Policy Statement for Abatement of Pollution 1992 was the first Indian policy document to speak of economic instruments alongside regulation, and the National Environment Policy 2006 goes considerably further, treating the use of economic instruments as a principle of policy.

The criticisms

A price can look like a licence. If a firm may pollute on payment, the moral force of the prohibition is lost. The answer is that the instrument sits alongside absolute liability, which is not a price agreed in advance.

Distribution. A charge is regressive if it falls on a good the poor consume, and an emissions market can concentrate pollution where the permits end up, which is an environmental justice objection.

Measurement. Every instrument depends on measuring what is being priced, and weak monitoring defeats a charge exactly as it defeats a standard.

Political difficulty. A visible price is politically harder to impose than an invisible standard, which is much of why India has more standards than prices.

Quick revision

• Four instruments: taxes and charges, tradable permits, subsidies and incentives, and deposit-refund and liability instruments.
• Command and control fails because it needs detection, gives no incentive to beat the standard, ignores differences in abatement cost, and is slow to change. It is right where no amount of the substance is acceptable.
• Water (Prevention and Control of Pollution) Cess Act 1977: a cess on water consumed by specified industries, with a rebate for those installing treatment plants. The clearest Indian example of a charge.
• Extended producer responsibility in the plastic and electronic waste rules, and insurance under the Public Liability Insurance Act 1991, are the deposit and liability family.
• Rio Principle 16 and the National Environment Policy 2006 are the policy support.
• Criticisms: it can look like a licence, it can be regressive and concentrate pollution, it depends on measurement, and a visible price is politically harder than an invisible standard.

Test yourself

1. Give four reasons why command and control regulation under-performs, and one case in which it is nevertheless right.

It requires a regulator to detect each breach; it gives a plant just inside the standard no incentive to do better; it makes every plant do the same thing regardless of what abatement costs each of them; and changing a standard requires an amendment. It is right where the substance is so dangerous that no quantity is acceptable, where the harm is local and concentrated, and where a price would operate as a licence.

2. Name the four families of economic instrument with an Indian example of each.

Taxes and charges, illustrated by the water cess under the Act of 1977 with its rebate for installing treatment. Tradable permits, illustrated by the particulate emissions trading trialled in some States and by the renewable and energy saving certificate mechanisms. Subsidies and incentives, illustrated by support for renewable generation and concessional finance for pollution control equipment. And deposit-refund and liability instruments, illustrated by extended producer responsibility in the waste rules and by insurance under the Public Liability Insurance Act 1991.

3. What is the weakness common to every economic instrument, and why does it matter in India?

That each depends on measuring the thing being priced. A charge per unit of effluent needs the effluent measured, and where monitoring capacity is weak the instrument fails for the same reason that a standard fails. That is the central constraint on their use in India.

4. What is the objection that a price is a licence to pollute, and what is the answer to it?

The objection is that a firm which may pollute on payment treats pollution as a cost of business, and the moral force of the prohibition is lost. The answer is that in Indian law an economic instrument does not stand alone: absolute liability sits behind it, so the sum payable if harm occurs is not a price agreed in advance and is not limited by what the polluter would have been willing to pay.