The Hindu Business Line : Draft Environmental Policy: Inadequate economic inputs

The Draft Environmental Policy, which is available on the Ministry's Web site till November 30 for comments, makes passing mention of such concepts as incomparable value, cost-benefit analysis, economic efficiency and polluter-pays. But it has not entirely succeeded in incorporating economic inputs.

FOR the first time since its inception, the Ministry of Environment and Forests has come out with a Draft National Environment Policy 2004 (NEP-2004), which is available on the Ministry's Web site (http://envfor.nic.in/) till November 30 for comments.

The feedback is already coming in and many of the critics converge to blame the NEP-2004 for its pronounced slant towards economic parameters. A commentary on the NEP-2004 in the September 25 issue of Economic and Political Weekly charges it with adopting an `anthropocentric and utilitarian view' — nothing but the principles of neoclassical economics. Down to Earth (September 30) quotes critics to describe the NEP-2004 as stressing an `economistic' approach for all solutions.

Such censure leads to the following questions: Has the NEP-2004 really made use of `economic inputs'? If so, is the economics good, adequate and appropriate? Let us investigate these questions more rigorously with a view to suggesting some `economic' improvements in the revised version of the policy.

The NEP-2004 aims mainly at achieving `clean environment', without defining cleanliness in `economic terms'. In `environmental economics', clean environment is defined in terms of the marginal costs and benefits of improving or maintaining environmental quality.

Achieving zero pollution, for example, is not `economically feasible', and `socially optimal pollution control' can be realised at that point where the marginal social cost of controlling pollution is equivalent to the social benefits.

Since there are difficulties in estimating the social costs and benefits, economists suggest setting `politically acceptable scientific standards' and achieving them at the `least cost'.

Therefore, economics insists on the `least-cost' solution to `clean environment' but, as empirical evidence shows, the actual `least cost' of achieving prescribed standards is many times greater than the estimated `least cost'. Now the dilemma is whether pollution should be controlled on the basis of `prescribed standards' or `estimated least cost', or benefits restored.

Since this dilemma is one of the reasons for increased pollution, `cleanliness' requires appropriate `economic' definition, and how that goal is to be achieved should also be spelt out clearly in the revised version of the policy.

The NEP-2004 states that maintaining a healthy environment is not the responsibility of government alone, but also that of every citizen! In economics, there is a lot of theoretical and empirical evidence to show how materially `self-interested' individuals would tend to `ignore' social goals, adopting `free-riding' as the dominant strategy.

Changing human behaviour towards a `social goal' depends mainly on the individuals' incentives and disincentives which, again, depend on the appropriate institutions and economic policies.

Rather than identifying these institutions and policies, the NEP-2004 simply assumes that `individuals' are `responsible citizens' and are `altruistic' towards environment — forgetting that individuals, in general, are `rational economic agents'!

The NEP-2004 frequently makes reference to `market failure' and `policy failure' as the reasons for the current level of environmental deterioration. In India, there is a `deep-rooted policy failure' (rather than market failure) which indeed paved way for the `emergence of strong markets' in the area of environment (such as water), affecting mainly the poor.

Such a policy failure could be attributed to the `non-intervention' of the government in those areas where it is required and `intervention' in those areas where it is not.

As the NEP-2004 argues, the lack of property rights in the environmental arena cannot be the reason for `institutional failure' because even the environmental resources with `well-defined' property rights experience severe negative externality problems (such as land resources).

Similarly, assigning property rights to certain resources (for example, to groundwater) may worsen the situation because of the `public good' nature of these resources. Since the government has a greater `regulatory' responsibility in the area of environment, the NEP-2004 should identify areas of `government failure' and act upon them immediately.

The NEP-2004 coins the concept of `incomparable value' generated by certain types of environmental resources and argues that the decision to protect these resources should not be based on cost-benefit analysis (CBA).

However, ruling out the CBA approach for such resources is not the solution. How can one decide whether a particular resource has `incomparable value' or not, without assessing it through a CBA? Even though the entire resource may generate `incomparable value', economists are always interested in estimating the `marginal value' (measured in terms of `willingness to pay') that could be affected by `a small change' in the quality or quantity of a particular resource.

Moreover, the report stresses the `cost-effectiveness' approach in the case of resources that generate `incomparable value'. However, this approach also requires estimating the social cost of protection, as such cost includes the `opportunity cost' foregone to society.

Also, the Policy does not clearly specify whether the incomparable value refers to `intrinsic value' (non-anthropocentric) or `infinite economic value' (anthropocentric) occurring due to the `irreversible nature' of the resource use. It is also silent about another possible dilemma: Which one of the several environmental resources with `incomparable value' in the economy that should be protected! This is where the CBA plays an important role.

The Policy statement favours `economic instruments' in addressing environmental problems, without identifying the type of instrument for a particular environmental problem with an appropriate institutional set-up. Moreover, the `market-based instruments' have not worked too well in other developing countries and, therefore, the Policy has to clearly spell out how such instruments will be used.

If my memory goes right, the Environment Ministry constituted a `task force' in the mid-1990s to look into the possibility of introducing `market-based instruments' for pollution control in India,

The task force had submitted its report to the Ministry subsequently. Without looking into the recommendations of this report, the NEP-2004 makes fresh reference to market-based instruments!

The Policy describes economic efficiency mainly in terms of the `economic value' of environmental services.

But the gamut of issues involved in `estimating the `non-market' environmental benefits and costs, especially in a developing country context, and their implications for conservation are not discussed at all.

For example, if the marginal willingness to pay (the `economic value') for conserving the resources is lower because of income and other institutional factors, then the kind of decision one has to take is important.

The polluter-pays-principle (PPP) referred to in the Policy requires clarification! Who is to ultimately bear the (social) cost of pollution?

One PPP approach suggests that the price of the polluting commodity should be altered through effluent tax such that the consumers would reduce the consumption of the polluting commodity (depending on the elasticity of demand), leading to reduction in production.

According to PPP, the consumer is the real `polluter' because he is the one who induces the production of a polluting commodity! Many of the polluting commodities in India are being exported and consumed by foreign consumers.

Right now, a lot of subsidy is being given to the export sector to rake in foreign currency, and implementing PPP may affect the `international `competitiveness' of the export industry.

So, the foreign consumers — the `real polluters' — are subsidised. Export subsidy for polluting commodities ultimately makes the `ordinary tax payers in India' pay for pollution control!

Unless there is some structural changes brought out in the macroeconomic policies, the PPP would lead to counter-productive outcomes.

Since the Policy is in favour of implementing the PPP, it has to clearly define the strategy to target the `real polluters' rather than the parties only marginally concerned with pollution.

It should be noted that in advanced developed countries, environmental polices are framed with substantial inputs from economics, apart from other disciplines.

The NEP-2004 also tries to incorporate economic inputs but has not entirely succeeded in doing so. This is because the economics used is preliminary in nature and the economic concepts used lack clarity.

(The author is Assistant Professor in Economics, Institute for Social and Economic Change, Bangalore. Feedback can be sent to venkat@isec.ac.in)

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