Economic instruments work best for the environment

A paradox of economic development versus environmental conservation lingers as things fall apart due to a missing integrated development approach in government policies. The Niti Aayog sets the high targets of economic growth through various five-year plans and budgetary provisions. The Ministry of Forests, Environment and Climate Change (MoEFCC) formulates and implements various environmental policies through the central and state Pollution Control Boards and Forest Departments to effectively manage environmental resources. In reality, economic and environmental goals are set apart, making environmental costs exceed the economic benefits.

The fact is that the economy and the natural environment are interlinked in such a way that every economic action has some effect on the environment and, in turn, every environmental change can impact the economy. It is universally accepted that economic forces are the root causes for environmental degradation. However, at the same time, it is also well accepted that economics has the best possible solution for many environmental problems through Pigouvian Taxes and Ronald Coase’s Social Cost as a policy measure. They are popularly known as Economic Instruments (EIs).

Thus, economic and environmental policies should act together to avoid unsustainable development. Though many environmental legislations and policies have helped mitigation of environmental resource degradation in India, degradation of air and water continues to pose a threat to sustainable development. Environmental issues become more complex in nature with interaction of various sectors of the economy under globalisation, demanding a variety of instruments to deal with them.

Economic policies led by market forces have placed high demand on resources, making the planet unlivable. Environmental policies have become redundant and burdensome in the process of economic development. Therefore, India’s environmental policies must be acclimatised to use effective economic instruments along with limited Command and Control (CaC) policies.

Environmental degradation has already imposed high costs on the society, harming the economic wellbeing of people in both urban and rural areas. Therefore, prevention and mitigation of environmental degradation with support of EIs is inevitable to make economic development a sustainable proposition.

Economists strongly recommend market-based instruments for achieving environmental objectives. Over the last five decades, several EIs have been evolved to deal with environmental problems and internalising negative externalities by imposing cost on the polluter and extending subsidies for positive externalities, particularly to encourage research and development in backstop technologies.

EIs, the solution

Economic Instruments are also used as a means of enhancing the capacity of governments to deal with environmental and developmental issues in a cost-effective manner and also raising government revenue, influencing consumption and production patterns, redistributing wealth and discouraging undesirable industrial behaviour and promoting technological innovation.

EIs also strongly influence the behavior of economic agents on environmental implications of the goods and services they produce, distribute and consume. EIs are seen to be the driving force for economic development vis-à-vis environmental conservation. They have direct or strong influence in shaping the behaviour of the institutions in the long run towards realising a green economy as they play a potent role in reducing environmental abatement costs and open new revenue streams for the government.

Deforestation, pollution of air, water bodies, destruction of biodiversity continue to impact societal welfare as society bears the social cost of environmental degradation. Governments can effectively use EIs to bridge the gap between private cost and social cost to society. The polluter-pays principle, developed as an economic instrument, can effectively bring behavioural changes in society, that is by compensating the victim of pollution by imposing reasonable tax on the polluter. EIs can be price-based, quantity-based instruments or hybrid instruments.

In the recent state budget, the Government of Karnataka imposed high road tax to reduce air pollution and traffic congestion and incentivised use of electric buses and electric vehicles to reduce air pollution in Bengaluru.

If one goes by the history of India’s environmental policies, regulatory controls or Command and Control policies of 1960s and 1970s dominate even today. Polluters compulsorily need to comply with standards such as ambient quality, emission or discharge, process and product standards and technologies prescribed by the central and state Pollution Control Boards. The Command and Control approach uses draconian controls or bans against non-compliance. The CaC policy suffers from many weaknesses and its effective enforcement often leads to a great number of controls, and corruption. Regulation is also proved to be costly to enforce.

Therefore, economic instruments are broadly based on economic principle like taxes, subsidies, property rights, marketable permits, user charges, etc., to deal with detrimental and beneficial environmental externalities in production and consumption. Industry produces goods by using environmental resources as input and also discharges polluting substances into the environment by taking into account only its private cost of production, ignoring the social cost of environmental pollution, as long as these environmental resources are not properly priced.

Despite the fact that the application of these economic instruments started in European countries way back in 1972 in the form of the Polluter Pays Principle (PPP) recommended by the OECD Council, in India their application is highly limited due to lack of integrated economic and environmental approach.

(The writer is Professor, Centre for Economic Studies and Policy, ISEC, Bengaluru)