Overview

Governance Innovations for Sustainable Development: Building Public-Private Partnerships in India

Overview

Environmental externalities from rapid growth, such as air and water pollution, arise from a joint failure of government and industry to create an economy where the most profitable action is also best socially. Can appropriately designed public-private partnerships promote sustainable development in India? The Initiative uses rigorous field studies, conducted in association with Indian regulators and industry partners, to examine how public-private partnerships can enable smart policy design and raise efficiency and compliance with environmental standards. Members of this initiative conduct field trials of innovative environmental policies with the goal of providing rigorous evidence on the effectiveness of these policies. For instance, recently completed work identifies improvements to third party environmental audit mechanisms and in ongoing work we examine how market-based emissions trading system, developed in partnership with India’s Ministry of Environment and Forests and regulatory bodies, can lower abatement costs and air pollutant emissions. This initiative continues the work of the Governance Innovations for Sustainable Development Initiative under Phase II of the Sustainability Science Program, but now moves forward with a targeted focus on India.

The sustainable development problem
Pollution concentrations in India—as in China and other developing countries—are at levels exceeding the highest concentrations recorded in developed countries. Such poor environmental quality shortens lifespans and lowers productivity (Chen et al. 2010; Hanna and Oliva 2011; WHO 2008). Traditional command-and-control regulation, with standards at the plant level, cannot target a level of environmental quality for a whole area. Inefficient combustion of fossil fuels contributes to both local pollution and global climate change that will harm India’s population in the long run. Consumption of coal, a carbon-intensive fuel, is forecast to increase 3% per year in India and China from 2004-2030, versus only 0.6% per year growth in the OECD countries (Stern 2006).

Research questions
How can scarce regulatory resources best be employed to improve environmental quality? Can transparency complement regulation in improving environmental outcomes? Are market-based instruments such as an emissions trading system (ETS) viable given the weaker regulatory institutions of a developing country? Can an ETS for particulate matter outperform traditional command-and-control regulation in lowering plant abatement costs and pollutant emissions? What are the factors that determine the efficiency of energy use in industrial plants and what are the true returns to investment in efficiency? In the absence of a unified global carbon market, what measures can governments take to effectively promote sustainable energy use?

Solving a practical problem of sustainable development
India encapsulates the environmental problems faced by industrializing countries. It has recently been re-categorized from a low income country to a lower middle income country. ¹ However, this economic success has come partly through depreciating, so to speak, the country’s stock of environmental capital.2 Regulatory capacity must be increased to ameliorate the effects of the tradeoff between growth and the environment in India and other fast-industrializing economies. However, additional effective regulatory capacity is unlikely to come by adding more inspectors; hiring budgets are limited, and the efficacy of inspections alone is questionable. So it is of pressing importance to come up with self-enforcing schemes: emissions trading systems and transparency initiatives both come under this heading.

Market-based regulatory tools such as an emission trading system (ETS) can make the trade-off between growth and the environment easier by setting explicit, ambitious environmental goals and meeting them at low economic cost (Ellerman et al. 2000; Stavins 2003). This form of regulation relies on the government to establish an emissions market so that plants face a price for polluting. Such tools have not been widely used in developing countries and rely on a high level of regulatory capacity and transparency. Our pilot of an ETS for particulate matter air pollutants in the leading industrial states of Gujarat, Maharashtra and Tamil Nadu specifically addresses the practical concerns of designing a market-based mechanism for use in India and other developing countries. In the pilot, we draw on private-sector expertise in emissions monitoring, data reporting and trading to build a viable trading system. We will specifically measure the savings in abatement cost due to trading with a randomized controlled trial among plants with high pollutant potential. We will separately estimate the effect of disclosing pollution levels, as measured by continuous emissions monitoring system (CEMS) technology, to the public.

Locally, the pilot emissions trading system will target particulate matter, by far the most problematic pollutant in India (CPCB 2006). India’s average of 206.7 µm/m3 is several times the current national standard of 60 µm/m3. In the most recent year with comparable data, the mean ambient level of total suspended particulates was about five times larger in India than in the U.S. (Greenstone and Hanna 2011). In November 2009, the MoEF announced new, more stringent National Ambient Air Quality Standards, or NAAQS to fight this problem, but most Indian cities remain far out of compliance (CPCB 2009; CPCB 2010). The government, realistically, needs new tools to bring pollution levels under control. The ETS system studied in this research is one tool with a great deal of promise.

On the energy front, we are partnering with government and private consultancies in Gujarat to promote investment in the energy efficiency of energy-intensive industrial plants. We are measuring the returns to these investments using a randomized controlled trial design of the scalable policy tools of detailed energy audits and implementation support. Inducing firms to undertake energy-efficiency investments may be a win-win, or beneficial for both the firms and the public, if such investments save firms money while reducing greenhouse gas emissions.

Finally, we are in the final stages of a project evaluating third-party audit and inspection schemes for industrial plants in urban Gujarat that previously hired their own auditors. In a randomized controlled trial, the team removed the conflict of interest by paying the auditors independently and double-checking their reports. The results were striking: status quo regulation allowed for systematic underreporting of pollution levels, especially just beneath the regulatory standard; however the modified scheme substantially reduced false compliance readings in reports (even those by the same auditors) and led plants to reduce pollution. The results from this study have led to interest from the Gujarat State Pollution Control Board, in permanently incorporating the results of the study into audit policy, and from the Maharashtra State Pollution Control Board, in developing a more systematic and rational way of allocating their monitoring and inspection resources. The Initiative will work with these partners to design and implement policy recommendations based on this study.

Research strategy
The strategy for this research is to conduct rigorous large-scale impact evaluations of innovative policies in close collaboration with government and private partners in India. Through direct involvement of the relevant stakeholders, there are built-in avenues for scale-up if the interventions are proven successful. Partners will also be able to share first-hand with other counterparts about the success of the research, further building a strong policy-impact strategy. We plan for research results to be disseminated at the policy forums discussed below. The plan for the specific research projects is as follows:

Project 1: Viability of Market-Based Instruments
Michael Greenstone, Rohini Pande, Nicholas Ryan, and Anant Sudarshan

The research design of this project will introduce emissions trading systems for suspended particulate matter (SPM) in the three leading Indian industrial states, covering several of the most polluted industrial areas in the country. The implementation of the design will come in several stages. The researchers are working with the regulators, the Ministry of Environment & Forests and State Pollution Control Boards, to define eligibility criteria for emissions trading based on location, sector, and ex ante emissions capacity data. We will fix eligibility criteria in this group and randomly allocate firms into trading and non-trading subgroups. The non-trading sources will be placed on fixed standards for the total mass of SPM emitted and subject to traditional command-and-control regulation. The trading sources will be allowed to trade permits denominated in SPM mass among themselves in order to meet their regulatory obligation, that permits exceed total emissions, for particulates. The research team will collect emissions data, from continuous emissions monitoring systems, and cost and engineering data, from field surveys, at each unit in both groups over the first two years of the new regulation.

The project has made a great deal of progress in designing a viable trading system. The project team has worked with the State Pollution Control Boards and the Central Pollution Control Board to develop detailed technical standards for Continuous Emissions Monitoring Systems (CEMS), which are essential for monitoring pollution emissions at each plant. These systems are now being field-tested and initial results show that particulate matter CEMS accurately match the pollution readings produced by traditional manual sampling methods. This result is important to establishing the reliability of the monitoring on which the emissions market will depend. The State Pollution Control Boards and the research team have also selected the group of plants to which the regulation will apply. We recently submitted a formal Detailed Project Report (DPR) to the Ministry of Environment and Forests for the approval of the project design and budget over the coming three years. This DPR may allow us to greatly leverage the investment that SSP has made in this early-stage research into a viable emissions trading system.

Project 2: Sustainability of Energy Use
Nicolas Ryan

This project team is presently supervising a randomized evaluation of industrial energy audits in Gujarat conducted in partnership with the state government and six private consultancies in a sample of over 400 firms. This trial will produce the first experimental estimates of the private and social returns to industrial energy efficiency. There is a great deal of policy and discussion based on the idea of an energy-efficiency gap between the optimal level of efficiency and the level that firms and consumers actually achieve. If consumers and firms do not invest enough in efficiency, then policy to promote efficiency could have high returns in both lowering energy bills and reducing carbon emissions. This project will measure the real returns on such investments to inform sound policy towards efficiency.

The project is well underway, with treatments three-quarters complete and the endline survey scheduled on a rolling basis over the rest of 2012. The Initiative will support, in part, staff time devoted to survey design and management, analysis of survey data and dissemination of results. The dissemination process will focus on informing the policies of the Gujarat Energy Development Agency (GEDA) and the Bureau of Energy Efficiency (BEE), the agencies responsible for promoting energy efficiency at the state and national levels, respectively. The Bureau of Energy Efficiency has run large audit programs across India but not measured their effects, so this trial will be immediately relevant for national policy.

Project 3: Enforcement of Regulation
Esther Duflo, Michael Greenstone, Rohini Pande, and Nicholas Ryan

The third-party audits and pollution inspection project has completed all fieldwork and is currently in the analysis phase. Early results suggest that it was effective in improving the accuracy of reports from private environmental auditors (Duflo, Greenstone, Pande, Ryan 2011a) and that plants subject to greater scrutiny from improved audits and inspections reduced pollution (Duflo, Greenstone, Pande, Ryan 2011b). Over the next six months, we will be working on the analysis for a draft of the results concerning the intervention of the government. Comparing the efficacy of the public and private interventions is of great policy interest. We are also currently on producing a teaching case study on the third party audits intervention.

New Studies Focusing on Transparency

In the coming years, the India Initiative will continue some of the work started under the Governance Initiative on transparency as a tool for sustainability. This includes a study of sanitation audits and whether transparency of their results (to politicians and to the public) effects public service delivery in Delhi slums, and a study on whether the delivery of household energy-use report cards can cut down on energy wastage in middle-class suburban Delhi homes. These studies are described in detail in the Governance Innovations for Sustainable Development report. This transparency focus also includes Project 2 and the CEMS component of Project 1 mentioned above.

Partners
All of these projects are being conducted in partnership with our in-country research partner, The Abdul Latif Jameel Poverty Action Lab (J-PAL) South Asia at the Institute for Financial Management and Research (IFMR), based in Chennai, India, which is a local research counterpart of the Abdul Latif Jameel Poverty Action Lab (J-PAL), the premier institution undertaking randomized-control evaluations of development projects. The ETS pilot was planned in collaboration with the Indian Ministry of Forests and the Environment (MoEF) and is being conducted with the Central Pollution Control Board, the State Pollution Control Boards of Gujarat, Maharashtra and Tamil Nadu. The energy audits project has been designed in consultation with the Gujarat Energy Development Agency, which is also contributing funding to the treatments, and six private consultancies. The endline survey is being conducted with The Energy and Resources Institute (TERI), New Delhi, one of the most respected environmental NGOs in India. The industrial pollution and inspections project was implemented in partnership with the Gujarat State Pollution Control Board, dozens of local environmental audit firms and several engineering colleges in Gujarat, which did the fieldwork for the endline survey. We are glad to have assembled such a capable and diverse team of Indian partners. The policymakers and staff are fully supportive and engaged with our research and their continued involvement will help to institutionalize the research findings.

We are also working with the Centre for Science and Environment (CSE), which is a public interest research and advocacy organization in India working for sustainable and equitable development.

Endnotes
¹ India was classified as a low income country in 2007, but a lower-middle income country in 2008 (OECD, 2008, 2009). India's GNI per capita in 2009 was $1170 (UNICEF, 2010).
² The Ministry of Environment and Forests (MoEF) estimated that the total annual economic loss caused by air pollution in only 36 cities in India was $2,102 million in 1995.

References
Central Pollution Control Board (2006). Air Quality Trends and Action Plan for Control of Air Pollution from Seventeen Cities. Available at http://www.cpcb.nic.in/upload/NewItems/NewItem_104_airquality17cities-package-.pdf, (last accessed 27 June, 2012).

Central Pollution Control Board. (2009). Ambient Air Quality Standards. Available at http://cpcbenvis.nic.in/airpollution/standard.htm (last accessed 27 June, 2012).

Central Pollution Control Board. (2010). National Air Quality Monitoring Program. Available at http://cpcbenvis.nic.in/airpollution/finding.htm (last accessed 27 June, 2012).

Centre for Science and Environment (CSE) (2009). Turnaround: Reform agenda for India’s environmental regulators.

Chen, Yuyu, Avi Ebenstein, Michael Greenstone and Hongbin Li (2010). The Impact of Air Pollution on Life Expectancy: Evidence from China’s Huai River Policy. Mimeo, MIT.

Duflo, E., M. Greenstone, R. Pande and N. Ryan (2011a). Can Better Incentives Fix a Failed Third-Party Audit Market? Mimeo, MIT.

Duflo, E., M. Greenstone, R. Pande and N. Ryan (2011b). Regulatory Design and the Enforcement of Emission Standards: Experimental Evidence from Gujarat. Mimeo, MIT.

Ellerman, A.D., P.L. Joskow, R. Schmalensee, J. P. Montero and E. Bailey (editors) (2000). Markets for Clean Air: The U.S. Acid Rain Program. Cambridge University Press, New York.

Greenstone, M. and R. Hanna (2011). Environmental Regulations, Air and Water Pollution and Infant Mortality in India. CEEPR Working Paper 2011(14).

Hanna, R. and P. Oliva (2011). The Effect of Pollution on Labor Supply: Evidence from a Natural Experiment in Mexico City. National Bureau of Economic Research Working Paper (17302).

Stavins, R. (2003). Experience with Market-Based Environmental Policy Instruments. Handbook of Environmental Economics, I: 355-435.

Stern, Nicholas (2006). Stern Review on the Economics of Climate Change. Her Majesty’s Treasury, London, UK.
World Health Organization (2008). Air Quality and Health. Available at http://www.who.int/mediacentre/factsheets/fs313/en/ (last accessed 27 June, 2012).

print |