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The sustainable development problem
Home to the world’s second largest population and third largest economy, India is emblematic of both the best achievements and greatest challenges of sustainable development. While it has achieved impressive growth over the last quarter century, this economic success has come at an environmental cost. 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.
The India Initiative uses rigorous large-scale field studies, conducted in association with Indian regulators and industry partners, to examine how public-private partnerships can enable smart policy design and enhance efficiency and compliance with environmental standards. This work includes studies on the best ways to monitor and reduce pollution from industrial plants, the costs and benefits of such reductions, the take-up of more energy-efficient technologies, renewable energy growth, and the legal channels and mechanisms necessary to enable effective reform. The Initiative’s work has grown into a sustained, deep collaboration with Indian policy-makers, and the success of this collaboration is now being reflected in policy recommendations, academic publications, and the popular press. Furthermore, because much of the research is testing solutions at-scale with government partners, there are direct channels for successful projects to be quickly adapted into policy.
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?
Results, Progress and Impact to Date
The early projects of the Initiative have been completed and their results on environmental regulation in India are now published in some of the best journals in economics (Duflo, Greenstone, Pande and Ryan, 2013a; 2013b). This research found that altering auditors’ incentives to mitigate the conflict of interest leads auditors to report more truthfully. More important, this means regulations work better and keep people safer. Researchers focused on the regulation of air and water pollution from industrial plants in Gujarat. The Gujarat Pollution Control Board (GPCB) required plants with high pollution potential to hire and pay auditors to check air and water pollution levels three times annually and then submit a yearly report to the GPCB. In the new system, auditors were paid a fixed fee from a central pool of money, a subset of the audits findings were re-examined, and auditors received payments for accurate reports, judged by comparisons with the re-examinations. The results are striking. The rules changes caused the auditors to report more truthfully. In the restructured market, auditors were 80 percent less likely to falsely report a pollution reading as in compliance, and their reported pollution readings were 50 to 70 percent higher than when they were working in the status quo system. Finally, and most importantly, the plants that were required to use the new auditing system significantly reduced their emissions of air and water pollution relative to the plants operating in the status quo system.
This example shows that common-sense changes in incentives allow auditors to report more accurately and regulations to work. But reforms that fail to target the fundamental conflict of interest are unlikely to succeed. This academic work has been covered widely in the popular press including in the New York Times (Greenstone and Pande, 2014), Financial Times (Kelleher, 2013), Quartz (Woody, 2013) and the Wall Street Journal (Wessel, 2013). And in early 2015, the Gujarat Pollution Control Board incorporated recommendations from the research into policy reform for its auditing system (Rosenbaum 2015).
Additionally, the Central Pollution Control Board (CPCB) published guidelines for pollution monitoring—co-authored by Alumni Fellow Anant Sudarshan (CPCB, 2013). These guidelines are now being adopted with state environmental regulators in Gujarat and Maharashtra, India’s two largest industrial states, proceeding with advanced monitoring based on these guidelines. This roll-out of advanced monitoring has been covered with excitement in the Indian press (Bhatt, 2013a; 2013b; Lukose, 2014).
Finally, the efforts of the India Initiative have contributed, among other factors, to greater attention to air pollution in developing countries. A paper coauthored by our SSP team documenting the life expectancy costs of dirty air in India has been published by India’s main academic-policy outlet the Economic and Political Weekly (Greenstone, Nilekani, Pande, Ryan and Sugathan, 2015), and the findings of this research were covered in The New York Times, NPR, Chicago Tribune, Economic Times, International Business Times, the Times of India and NDTV (among many others). India Initiative academics have also published op-ed pieces in the Indian Express and New York Times on policy prescriptions for air pollution (Sudarshan and Ryan, 2014; Greenstone and Pande, 2014).
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 2013). India’s average of 206.7 µm/m3 is several times the current national standard of 60 µm/m3 (Greenstone and Hanna 2014). In November 2009, the Ministry for Environment and Forests (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 and greenhouse gas emissions. 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. Thus from the perspective of an emerging economy, and flipping around the usual terminology, there can be climate co-benefits from reducing local pollution. Finally, and perhaps most importantly, the design of monitoring and regulation for particulates is similar (and in some ways more challenging) than that for carbon dioxide. Therefore, regulating local pollutants will develop the capacity to regulate a broader set of air pollutants, notably greenhouse gases, should the Indian government so choose in the future.
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 now done. In the upcoming year, the team will analyze the study results and begin disseminating the findings. This 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.
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 were published in two of the top economic journals: American Economic Review and Quarterly Journal of Economics. The findings have been presented at multiple academic and policy forums. Policy briefs based on this research are available through International Growth Centre and Jameel Poverty Action Lab (JPAL 2013). Furthermore, the results from this study have led the Gujarat State Pollution Control Board to permanently incorporate the results into audit policy, and the initiative continues to work with the Maharashtra State Pollution Control Board to develop a more systematic and rational way of allocating its monitoring and inspection resources.
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, led by Professor Rohini Pande, that considers transparency as a tool for sustainable development. Report cards and financial incentives were used to investigate the response of household electricity consumption to behavioral nudges. Three instruments to reduce household electricity consumption were compared: (i) nudges using peer comparisons; (ii) comparisons augmented with financial incentives and (iii) price changes. Households were found to respond to both nudges and prices. However peer comparisons became ineffective when prices are high and when paired with incentives. This suggests that consumer response to nudges depends on economic costs. Nudges may also interact negatively with monetary incentives. Portions of this work were presented at the Stanford Institute for Theoretical Economics Summer Workshops in Psychology and Behavioral Economics and the Northeast Universities Development Consortium Conference (NEUDC) at Dartmouth College in November 2012. A research article is currently under peer review.
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 has provided 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.
India Initiative projects are conducted in partnership with Evidence for Policy Design (EPoD), a research and policy program at the Harvard Kennedy School, and our in-country research partners, The Abdul Latif Jameel Poverty Action Lab (J-PAL) South Asia at the Institute for Financial Management and Research (IFMR), based in Chennai, India, and the Energy and Policy Institute of Chicago (EPIC) Centre in Delhi. 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.).
On July 31, 2014, the India Initiative co-hosted a Policy Dialogue in Delhi, India titled “Economic Growth and Environmental Protection through Evidence-Based Policy,” with Evidence for Policy Design (Harvard), the Energy Policy Institute at Chicago and the Institute for Financial Management and Research (Pande and Rosenbaum 2014). The event brought together over 90 attendees, including academics, policymakers (both bureaucrats and politicians), civil society organizations and journalists to discuss the way forward for better environmental regulation in India. Sessions included a keynote discussion with former Minister of Environment and Forests, Jairam Ramesh, journalist and author Bahar Dutt and environmental advocate Ritwick Dutta; panels on data-driven innovations to monitoring and regulation as well as the next generation of environmental regulation; and presentations by India Initiative Lead Rohini Pande and the International Initiative for Impact Evaluation (3ie) Deputy Executive Director Jyotsna Puri. Key findings from the Policy Dialogue include:
On May 28-29, 2012 on San Servolo Island, Venice the workshop, Industrial Pollution, Regulation and Growth: Governance Challenges and Innovations, attracted leading experts from the fields of policy, science, and business for an intensive two-day session (Pande, Ford et al. 2012; Pande, Ryan et al, 2012). The goal was to identify possibilities for innovative regulation of industrial pollution and share evaluation experiences on new innovations, especially on how the government can channel the enterprising potential of the private sector. Major themes that emerged from the sessions included the importance of high-quality data and monitoring, the idea that effective regulation requires multi-stakeholder engagement (government, civil society, and industry), the efficiency potential of market-based mechanisms, and the value in piloting and evaluating new innovations. Our flagship study on the randomized evaluation of a CEMS and ETS in India was the focus of one of the Workshop sessions.
We recently completed the development of a teaching case on the Third Party Audits project, which Professor Rohini Pande will teach in the spring of 2015 at the Harvard Kennedy School. Through this, the school will develop a teaching plan to accompany the case. Additionally, the case study on Continuous Emissions Monitoring Systems is nearing its completion, with final inputs expected in early 2015, as the lessons from CEMS installation baseline are documented. The team plans to develop a broader public interest piece on affecting change with developing country governments. In 2015, the team will conduct a comparative analysis of China and India's experiences with CEMS, which may also develop into a concept note for a cross country forum at HKS.
Bhatt, H. 2013a. In a First, Surat to Run Emission Trading Scheme. Times of India, Surat, June 6.
Bhatt, H. 2013b. 10 Units to Get Emission Monitoring System. Times of India, Surat, December 12.
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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.
Duflo, Esther, Michael Greenstone, Rohini Pande, and Nicholas Ryan. 2013a. Truth Telling by Third-party Auditors and the Response of Polluting Firms: Experiment Evidence from India. Quarterly Journal of Economics, 128(4): 314-9, doi:10.1093/qje/qjt024, first published online: October 9.
Duflo, Esther, Michael Greenstone, Rohini Pande, and Nicholas Ryan. 2013b. What Does Reputation Buy? Differentiation in a Market for Third-Party Auditors. American Economic Review Papers and Proceedings 103(3).
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[Abdul Latif] Jameel Poverty Action Lab. 2013. Truth-telling in third-party audits: Featuring an evaluation by Esther Duflo, Michael Greenstone, Rohini Pande, and Nicholas Ryan, The J-PAL Briefcase. October 2013.
Kelleher, E. 2013. Report Questions Auditors’ Ethics. The Financial Times, October 13.
Lukose, A. 2014. MPCB to Have Online Updates on Industrial Emissions Every 15 Minutes. Indian Express, March 9.
Pande, Rohini and Robert Rosenbaum. 2014. Building Capacity to Use Research Evidence (BCURE): Data and Evidence for Smart Policy Design. Report of a policy dialogue held in Delhi, India on July 31, 2014. Organized by Evidence for Policy Design at Harvard University and IFMR LEAD at the Institute for Financial Management and Research.
Pande, Rohini, Deanna Ford, Nick Ryan and Anant Sudarshan. 2012. Industrial Pollution, Regulation and Growth: Governance Challenges and Innovations – The 2012 San Servolo Workshop on Grand Challenges of Sustainability. Sustainability Science Program Working Paper No. 2012-02. Sustainability Science Program, Kennedy School of Government, Harvard University, Cambridge, MA.
Pande, Rohini, Nick Ryan, Anant Sudarshan and Elizabeth Walker. 2012. Industrial Pollution, Regulation and Growth: Governance Challenges and Innovations – Background Paper for the 2012 San Servolo Workshop on Grand Challenges of Sustainability. Sustainability Science Program Working Paper No. 2012-01. Sustainability Science Program, Kennedy School of Government, Harvard University, Cambridge, MA.
Rosenbaum, Robert. 2015. Gujarat’s Pollution Control authority adopts environmental audit reforms after impact study shows they reduce pollution, Evidence for Policy Design press release, January 28.
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