Market-Based Instruments for Abating Industrial Pollution

In one line

Regulate by price rather than by command, and Indian law already does it in more places than any textbook admits.

In exam wording: a market-based instrument is a regulatory technique which changes the price of polluting rather than prohibiting it, leaving the polluter to decide how much to abate; the principal kinds are taxes and charges, tradable permits or certificates, deposit refund schemes and subsidies or incentives; and Indian environmental law uses all four, in the certificate markets of the waste rules, in environmental compensation, in the repealed water cess and in consent fees.

Command and control, and its limits

Begin here, because a market-based instrument is defined by what it is not.

Command and control is regulation by rule and sanction: a standard is fixed, a consent is required, an inspector samples, and a breach is penalised. Almost the whole of Modules I to IV is command and control.

Its three weaknesses, and each is visible in this book.

It costs the same for everybody. A standard requires every unit to abate to the same level, whatever it costs that unit. A modern plant may abate for a rupee a kilogram and an old one for fifty, and the standard makes both do the same thing, so the total cost of achieving the target is far higher than it needs to be.

It rewards nothing beyond compliance. A unit that could cheaply abate below the standard has no reason to, because the standard is the whole of its duty.

And it depends entirely on enforcement. Module IV is a hundred pages on why that is a problem: delay, capacity, the State as polluter, and a penalty that a large enterprise can budget for.

What a market-based instrument is

The definition. A regulatory technique that makes polluting cost money in proportion to the pollution, and leaves the polluter to decide how much to abate and by what means.

The efficiency argument, and it is worth stating properly because it is the whole case.If every polluter faces the same price per unit of pollution, each will abate up to the point where its own cost of abating exceeds that price, and no further. The unit that can abate cheaply does more; the unit that cannot does less and pays. The target is met at the lowest total cost, and the regulator does not need to know any unit's costs, which it never can.

And the second argument. The incentive is continuous. Under a standard, abatement below the line is worthless. Under a price, every further kilogram abated saves money, so there is a permanent reason to innovate.