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When do Firms Go Green? Comparing Command and Control Regulations with Price Incentives in India

Author

Listed:
  • Ann Harrison
  • Benjamin Hyman
  • Leslie Martin
  • Shanthi Nataraj

Abstract

There are two commonly accepted views about command-and-control (CAC) environmental regulation. First, CAC delivers environmental outcomes at very high cost. Second, in a developing country with weak regulatory institutions, CACs may not even yield environmental benefits: regulators can force firms to install pollution abatement equipment, but cannot ensure that they use it. We examine India's experience and find evidence that CAC policies achieved substantial environmental benefits at a relatively low cost. Constructing an establishment-level panel from 1998 to 2009, we find that the CAC regulations imposed by India's Supreme Court on 17 cities improved air quality with little effect on establishment productivity. We document a strong effect of deterred entry of high-polluting industries into regulated cities; however little effect on the overall level of manufacturing output, employment, or productivity in those cities. We also find sustained reductions in within-establishment coal use, with no evidence of leakage into other fuels. To benchmark our results, we use variation in coal prices to compare the CAC policies to price incentives. We show that CAC regulations were primarily effective at reducing coal consumption of large urban polluters, while a coal tax is likely to have a broader impact across all establishment types. Our estimated coal price elasticity suggests that a 15-30% excise tax would be needed to generate reductions in coal consumption equivalent to those produced by these CAC policies.

Suggested Citation

  • Ann Harrison & Benjamin Hyman & Leslie Martin & Shanthi Nataraj, 2015. "When do Firms Go Green? Comparing Command and Control Regulations with Price Incentives in India," NBER Working Papers 21763, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21763
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    References listed on IDEAS

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    1. Antonio Estache & Liam Wren-Lewis, 2009. "Toward a Theory of Regulation for Developing Countries: Following Jean-Jacques Laffont's Lead," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 729-770, September.
    2. Leslie A. Martin & Shanthi Nataraj & Ann E. Harrison, 2017. "In with the Big, Out with the Small: Removing Small-Scale Reservations in India," American Economic Review, American Economic Association, vol. 107(2), pages 354-386, February.
    3. Khanna, Madhu & Zilberman, David, 2001. "Adoption of energy efficient technologies and carbon abatement: the electricity generating sector in India," Energy Economics, Elsevier, vol. 23(6), pages 637-658, November.
    4. Ann E. Harrison & Leslie A. Martin & Shanthi Nataraj, 2013. "Learning versus Stealing: How Important Are Market-Share Reallocations to India's Productivity Growth?," World Bank Economic Review, World Bank Group, vol. 27(2), pages 202-228.
    5. Ann E. Harrison & Leslie A. Martin & Shanthi Nataraj, 2013. "Learning versus Stealing: How Important Are Market-Share Reallocations to India's Productivity Growth?," World Bank Economic Review, World Bank Group, pages 202-228.
    6. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    7. Laffont,Jean-Jacques, 2005. "Regulation and Development," Cambridge Books, Cambridge University Press, number 9780521840187, Enero.
    8. Antonio Estache & L. Wren-Lewis, 2008. "Towards a Theory of Regulation for Developing Countries: Following Laffont's Lead," Working Papers ECARES 2008_018, ULB -- Universite Libre de Bruxelles.
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    Citations

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    Cited by:

    1. Arlan Brucal, Inessa Love, Beata Javorcik, 2018. "Energy savings through foreign acquisitions? Evidence from Indonesian manufacturing plants," GRI Working Papers 289, Grantham Research Institute on Climate Change and the Environment.
    2. Yueming Qiu & Shuai Yin & Yi David Wang, 2016. "Peer Effects and Voluntary Green Building Certification," Sustainability, MDPI, Open Access Journal, vol. 8(7), pages 1-15, July.
    3. Puja Singhal, 2018. "Are Emission Performance Standards Effective in Pollution Control? Evidence from the EU's Large Combustion Plant Directive," Discussion Papers of DIW Berlin 1773, DIW Berlin, German Institute for Economic Research.
    4. Puja Singhal, 2018. "Environmental Regulations: Lessons from the Command-and-Control Approach," DIW Roundup: Politik im Fokus 124, DIW Berlin, German Institute for Economic Research.
    5. Götz, Martin, 2018. "Financial constraints and corporate environmental responsibility," SAFE Working Paper Series 241, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    6. Goetz, Martin, 2019. "Financing conditions and toxic emissions," SAFE Working Paper Series 254, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    7. repec:eee:ecolec:v:165:y:2019:i:c:22 is not listed on IDEAS
    8. Brucal, Arlan & Javorcik, Beata & Love, Inessa, 2019. "Good for the environment, good for business: foreign acquisitions and energy intensity," LSE Research Online Documents on Economics 101090, London School of Economics and Political Science, LSE Library.
    9. Inessa Love & Beata Javorcik & Arlan Brucal, 2017. "Pollution Haven or Halo? Evidence from Foreign Acquisitions in Indonesia," 2017 Meeting Papers 306, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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