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

82 Pages Posted: 11 Jun 2016 Last revised: 14 Oct 2019

See all articles by Ann E. Harrison

Ann E. Harrison

University of California, Berkeley; National Bureau of Economic Research (NBER)

Benjamin Hyman

Federal Reserve Bank of New York; Federal Reserve Banks - Federal Reserve Bank of New York

Leslie A. Martin

University of Melbourne - Department of Economics

Shanthi Nataraj

RAND Corporation

Multiple version iconThere are 2 versions of this paper

Date Written: October 11, 2019

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

Harrison, Ann E. and Hyman, Benjamin and Martin, Leslie A. and Nataraj, Shanthi, When Do Firms Go Green? Comparing Command and Control Regulations with Price Incentives in India (October 11, 2019). RAND Working Paper Series WR- 1133. Available at SSRN: https://ssrn.com/abstract=2793561 or http://dx.doi.org/10.2139/ssrn.2793561

Ann E. Harrison (Contact Author)

University of California, Berkeley ( email )

Giannini Hall
Berkeley, CA 94720-3880
United States

National Bureau of Economic Research (NBER)

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Benjamin Hyman

Federal Reserve Bank of New York ( email )

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New York, NY NY 10045
United States

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Leslie A. Martin

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://lesliemartin.org

Shanthi Nataraj

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States
310-393-0411 (Phone)

HOME PAGE: http://www.rand.org/

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