Sustainability Science Program

Overview

Governance Innovations for Sustainable Development: Building Public-Private Partnerships for Sustainable Environmental Regulation and Energy Use in India

Overview

The sustainable development problem
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 at an environmental cost.2 Pollution concentrations in many parts of 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 forecasted to increase 3% per year in India and China from 2004-2030, versus only 0.6% annual growth in the OECD countries (Stern 2006). 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, effective regulatory capacity is unlikely to increase by adding additional inspectors; hiring budgets are limited, and the efficacy of inspections alone is questionable. The implementation of self-enforcing schemes, including emissions trading systems and transparency initiatives, thus provides opportunities to help mitigate challenges to effective regulation.

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?

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.

Project Overviews

Using New Technology to Increase Transparency and Improve Environmental Regulation
Michael Greenstone, Rohini Pande, Nicholas Ryan, and Anant Sudarshan

The flagship program of the India Initiative is an evaluation of a pilot Emissions Trading System (ETS) for particulate matter. Market-based regulatory tools such as an 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).

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 (Greenstone and Hanna 2011). In November 2009, the MoEF announced new, more stringent National Ambient Air Quality Standards (NAAQS) to fight this problem, but most Indian cities remain far out of compliance (CPCB 2009; CPCB 2010). The government 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.

This pilot study addresses the practical concerns of designing a market-based mechanism for use in India and other developing countries. The project draws on private-sector expertise in emissions monitoring, data reporting and trading to build a viable trading system in the leading industrial states of Gujarat, Maharashtra and Tamil Nadu. The study will measure the savings in abatement cost due to trading with a randomized controlled trial among plants with high pollutant potential. It will separately estimate the effect of disclosing pollution levels, as measured by continuous emissions monitoring system (CEMS) technology, to the public.

While the primary goal of this program is to protect public health, it also bears directly on industrial energy consumption. Particulate matter is a byproduct of the combustion of solid and liquid fossil fuels. By measuring and regulating particulate matter emissions, this program will affect the energy use of regulated industrial plants. In particular, conserving energy, improving combustion and switching fuel type or source are likely low-cost means of abating particulate matter emissions. The project will run until the middle of 2014. Evaluation will be concurrent and industries will come online as they install CEMS, with early results expected by the end of 2013.

Is There an Energy-Efficiency Gap? Measuring Returns to Efficiency with a Field Experiment in India
Nicholas Ryan

In this multi-year study, researcher Nick Ryan is partnering with government and private consultancies in Gujarat to promote investment in the energy efficiency of energy-intensive industrial plants. They are measuring the costs of and returns on 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.

The treatments have been completed, and the endline survey is two-thirds done. In the upcoming year, the endline will be completed and the study results disseminated, starting at SSP's own seminars at Harvard.

Truth-telling by Third-party Auditors: Evidence from a Randomized Field Experiment in India
Esther Duflo, Michael Greenstone, Rohini Pande, and Nicholas Ryan

This study found widespread misreporting of pollution levels under the third-party audit scheme. The team conducted a large-scale randomized controlled experiment over two years in urban Gujarat, assigning private auditors to firms and paying them from a central pool of funds, thereby removing the conflict of interest. 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). Thus, by aligning the auditors’ incentives with those of the regulators, instead of the firms, researchers were able to improve on the underreporting of pollution and enable more accurate audits. This in turn led plants to reduce pollution. 
The findings of this study are forthcoming in two top economics journals: American Economic Review and Quarterly Journal of Economics. A third article on another treatment arm of the experiment, which increased the frequency of government inspections of polluting plants, is in progress. The findings have been presented at multiple academic and policy forums. Policy briefs based on this research are forthcoming at International Growth Centre and Jameel Poverty Action Lab.
Furthermore, the results from this study have led to interest from the Gujarat State Pollution Control Board in permanently incorporating the results into audit policy, and from the Maharashtra State Pollution Control Board in developing a more systematic and rational way of allocating its monitoring and inspection resources. The Initiative will work with these partners to design and implement policy recommendations based on this study.

Improving Household Energy Efficiency through Information and Incentives
Anant Sudarshan

This study focuses on the effectiveness of information and incentives in curbing household energy use and improving efficiency in urban middle-class households in India. This project is part of an initiative launched in the past year, led by Professor Rohini Pande, that considers transparency as a tool for sustainable development. The provision of report cards and financial incentives is presently ongoing and will continue through the Delhi summer. Early results were presented at the Northeast Universities Development Consortium Conference (NEUDC) at Dartmouth College in November 2012 and at the Indian Council for Research on International Economic Relations (ICRIER) in February 2013.

Can Regulation Reduce Household Use of Polluting Fuels?
Margaret McConnell

This project studies how to make the most effective use of subsidies in encouraging households in Accra, Ghana to change their cooking behaviors from highly polluting traditional fuels to cleaner modern sources. Funded by the Governance Innovations Initiative, this study considers the potential effectiveness of subsidies to modern fuels (such as liquid petroleum gas), especially in urban areas where modern fuels are readily available. The work will provide valuable information to regulators about the effectiveness of fuel subsidies in encouraging the adoption of modern fuels, starting with a better understanding of household decision-making around fuel use. Longitudinal survey work is ongoing, with complete data collection expected by the end of 2013.

Partners
All of the India Initiative 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. J-PAL at IFMR 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), a public interest research and advocacy organization in India working for sustainable and equitable development.

Additionally, in her project on household fuels, Margaret McConnell is working with Innovations for Poverty Action (IPA), an NGO dedicated to conducting randomized evaluations that maintains an office in Ghana staffed with a mix of local and international researchers. Finally, the study on “Improving Household Energy Efficiency through Information and Incentives” was developed with the Orange County Property and Asset Management Society (operated by Jones Langlaselle Inc.).

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

Chen, Y., Ebenstein, A., Greenstone, M., & Li, H. (2010). The Impact of Air Pollution on Life Expectancy: Evidence from China’s Huai River Policy. Mimeo.

Ellerman, A. D. (Ed.). (2000). Markets for Clean Air: The US acid rain program. Cambridge University Press.

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 (accessed 27 June 2012).

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

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

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

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

Greenstone, M., & Hanna, R. (2011). Environmental Regulations, Air and Water pollution, and Infant Mortality in India (No. w17210). National Bureau of Economic Research. Available at http://www.nber.org/papers/w17210.pdf?new_window=1 (accessed 27 August 2013).

Hanna, R., & Oliva, P. (2011). The Effect of Pollution on Labor Supply: Evidence from a natural experiment in Mexico City (No. w17302). National Bureau of Economic Research. Available at http://www.nber.org/papers/w17302.pdf?new_window=1 (accessed 27 August 2013).

Stavins, R. N. (2003). Experience with market-based environmental policy instruments. Handbook of Environmental Economics 1, 355-435.

Stern, N. (2006). Review on the economics of climate change. London HM Treasury.

World Health Organization (2008). Air Quality and Health. Available at http://www.who.int/mediacentre/factsheets/fs313/en/ (accessed 27 June 2012).