Controlling Industrial Pollution: A New Paradigm

Abstract

Conventional discussions of pollution regulation in developing countries have been too shallow - devoting inordinate attention to the choice of instrument while ignoring the preconditions for applying any instrument effectively. They have also been too narrow - focusing only on the interaction of state and factory, and ignoring the role of the market and the community.

Afsah, Laplante, and Wheeler call for a revised model for the regulation of industrial pollution. They think the traditional emphasis on appropriate instruments, while ultimately correct, is premature, because agencies in most developing countries have too many problems with information and transaction costs to implement any instruments comprehensively. Once regulators have better information, more integrated information systems, more capacity for setting priorities, and a stronger public mandate, it will not be difficult for them to manage pollution more cost-effectively. Overhasty introduction of market-based instruments will not work and will probably discredit those potentially powerful regulatory tools.

The new model of regulation should relegate regulators to their proper place in the scheme of things. Factories' environmental performance is shaped by the interaction of agents with different incentives. The state should play a role in regulating pollution externalities, but the role of the community and market must also be recognized. In the authors' view, appropriate regulation in developing countries should incorporate five key features:

Information intensity. Regulators need reliable data, integrated information systems, and the ability to set priorities that reflect relative costs and benefits. Markets and communities need timely, accurate, public information to assess factories' environmental performance.

Orchestration, not dictation. Potentially high-leverage programs to add to the mix include community environmental education, public disclosure of factory performance ratings, and technical training programs for environmental personnel in polluting factories.

Community control. This should be a current reality, not a goal of future programs. Strengthening central regulatory agencies should not empower them to impose uniform standards on heterogeneous communities under the guise of efficiency. Local variations in regulation are legitimate.

Structured learning. Agencies should initiate pilot projects and build larger programs as lessons from the pilot projects are absorbed.

Adaptive instruments. Newly industrializing economies can experience rapid changes in ambient quality across air- and watersheds. Regulation should focus on adaptation to these rapid changes. Regulators should be empowered to counter environmental degradation by tightening existing regulations, but the system should also minimize disruption for investors. Adjustment rules should be transparent and linked to publicly available data on quality and emissions.

This paper - a product of the Environment, Infrastructure, and Agriculture Division, Policy Research Department - is part of a larger effort in the department to develop more cost-effective approaches to regulation of externalities. The study was funded by the Bank's Research Support Budget under research project The Economics of Industrial Pollution Control in Developing Countries (RPO 680-20).