Tradeable Permits To Smoke Out Pollution

The government is aiming to smoke out the demon of pollution through market-based initiatives.

The environment ministry has already drawn up a blueprint that seeks to re-order the existing policy matrix which now relies excessively on policing measures to deter industries from polluting the environment.

The initiative, which is based on the ideas propounded by neo-classical economist A C Pigou back in 1938, suggests a policy prescription that will not only help generate revenues but also deal with the peculiarities of environmental pollution.

Among the market-based initiatives, the most exotic instrument on offer is the tradable emission permit, which will create a market in air or water pollution.

 

This is how it works: the authorities set an overall limit of permissible pollution for a particular airshed or watershed based on the normative standards for the various groups of industries. The permits divide this level between the firms based on norms agreed by policy makers.

Since the permissible aggregate level of pollution is lower than the current level, an artificial scarcity is built into the system and the permits acquire a market value.

Producers who wish to expand must either reduce the pollution from their existing factories by introducing new technology or buy pollution permits from other factories. Thus, the desired reduction in pollution occurs at least cost.

If the authorities wish to tighten the emission standards further, all that they need to do is to repurchase all the permits and issue a fresh batch. This will progressively bring down the permissible levels of pollution and, thereby, insure against environmental degradation. The government could also use a slew of tax-deterrent measures to deal with the problem. Market-based environmental taxes can potentially cover a wide patch from effluent/emission charges for industrial pollution, user fees for municipal solid wastes, taxes on use of agricultural inputs such as fertilisers and pesticides, and carbon taxes.

At present, the water cess which is levied in the country is a pseudo-environmental tax as it is not levied on water pollution but is motivated purely by revenue considerations. The new initiative has been prompted by the realisation that pollution is an activity whose costs are not borne by their producers which, in economic jargon, is described as a negative externality. Instead, it is borne by the population which habitate the surrounding areas.

The authorities realise that the command and control measures, like the present pollution drive pursued by the government, have not been able to distinguish between polluters on the basis of levels of pollution. As a result, it fails to take into account the different levels of investment that each polluter would be required to make to achieve lower emissions.