Job vs Environment Trade-Off can't be Ignored

Shreekant Gupta
Economic Times, December 2000

The recent events in Delhi with riots against relocation of so-called hazardous and polluting industries reiterates what the greens often forget—namely, the environmental situation in India is extremely nuanced and that there are no simple answers.

Whether the demonstrations were spontaneous or orchestrated is besides the point. What is relevant, however, is that in a poor country the jobs-versus-environment trade-off cannot be ignored.

In such a situation, neither judicial diktat nor bureaucratic command and control, both of which take an all-or-nothing approach to the issue can deliver.

In fact, recent events are a textbook example of what should not be done to curb industrial pollution.

What we often forget is that the goal is to reduce industrial pollution to the point where it is compatible with acceptable levels of air and water quality. The idea is not to eliminate it altogether.

There are three ways to achieve this:

  • use of cleaner inputs (e.g., cleaner natural gas instead of dirtier coal);
  • cleaner production processes, and
  • treatment (i.e., abatement) of emissions produced.

Only the producer knows which one or more of the three approaches is cheaper and more feasible. Neither the judge nor the bureaucrat can or should dictate the manner in which pollution should be abated.

An alternative approach to reduce industrial pollution is through an emissions/effluent tax. Economists have long advocated the use of market-based instruments such as emission taxes to address environmental problems including industrial pollution.

The common element among these instruments is that they work through the market and alter the behaviour of economic agents (such as firms) by changing the nature of incentives/dis-incentives these agents face.

This approach is perhaps the most effective way to reach out and alter the myriad of individual decisions mentioned above. For example, an emissions tax levied at a given rate (in rupees per gram of BOD discharged), irrespective of the nature of the factory would create the flexibility for the owner to decide the least costly manner in which to reduce pollution.

The total tax paid would be equal to the tax rate per gram of pollutant, times the total emissions. To reduce his tax bill the owner could pick one or more of a wide range of options, e.g., use cleaner fuel, improve maintenance, retrofit emission control devices.

All of these measures would fit one of the three categories described above. Under this approach there would be no need to micro-manage individual decisions.

The long arm of the law second best approach environmental taxes can be levied on final products associated with pollution (such as motor vehicles), taxes on goods that are generally used as inputs into a polluting activity (such as coal or chromium), and taxes on polluting substances contained in inputs (such as sulphur in coal).

International experience shows environmental taxes are not difficult to administer, particularly in countries where other taxes are already collected from industries.

At least six OECD countries (Canada, France, Japan, Portugal, Sweden, and the United States) use emission fees. Other countries such as Colombia, Poland and China have also successfully used environmental taxes.

China has had these in place since 1979 and left India light years behind in this regard as in much else.

In sum, there is lot in the toolkit of economists that can be fruitfully used to address urban industrial pollution which has been tried in various countries, rich and poor. How long can we afford to be a glaring exception and pursue ill advised judicial/bureaucratic interventions?

The author is Associate Professor, Delhi School of Economics.

New Delhi, December 5, 2000
Copyright © 2000, The Economic Times
All Rights Reserved.