 Good morning to all of you, I am glad to be back with you, today therefore I am going to talk about how do we design, how do we design an environmental policy especially keeping in mind the industrial pollution control. So when I say industrial pollution control I actually by this term industry it refers to very broad spectrum is not specifically for chemical industry or automobile industry except it is wide spectrum of industries including services and several other players formal informal organized unorganized and all of it. So how do we design and how do we ensure it is going to be effective and what lessons do we draw from experience of other countries exemplize something that what we are going to be saying. So but before I begin I see some you know hands being raised so I thought maybe one or two quick questions I can take up especially the number of questions that have come up you know in the moodle. So if there is any specific point that you want me to address in this particular context please let me know. Knowledge Institute Sreelam. Yes that is the artificial minerals which is induced into the water. For the portable drinking water will it be safe for the consuming? As I told at the beginning I am an economist so from the safety point of view you need to ask the scientists I guess to be tested in the laboratories. I am only familiar with all the desalination plant that is there in Tamil Nadu and other places where they are converting even sea water into you know portable water but I do not know the chemical content in what is added to the water etc. I am not familiar with that. In the nuclear power plant nuclear waste are sealed and deep in the buried in the sea. So how long will it be safe sir? Well as long as we do not encounter problems like what Fukushima had I guess they are safe but the problem comes our eyes were opened when Fukushima faced tsunami. So it is basically I mean there is no alternative that is why they actually are dumping into the sea. So how long they can be preserved there etc is a million dollar question. I do not think even the scientists are able to answer that but if there are no tsunamis I guess we are all safe. Yeah Kannanda Institute. Sir I have a question that there are villages in India like Raleh Gaon, Siddhi and Telonia and Rajasthan also which are very successful examples of sustainable development and they have been running for quite some time now so it is not something new but why this thing is not replicating in other parts of the country are there economic hurdles, another kind of problems that are coming in the way. Good question actually you know we have not really spent much time in you know making it public or making people aware of such best practices. I mentioned to you in my talk yesterday there are two Thalukas in Pune district Velha and Puranda where I have seen one of the best design of approaches to sustainable development. They have what is called you know panchang of the panchayat. So where every action taken by the local government as well as by the farmers is already documented when to do what they strictly follow that and that has resulted in some of the best practices. But how much effort we are putting in to document this and make it you know available for others to emulate is a big question because there are several such you know sporadic examples of best practices in India. So it is important that others so they could be local concern so it is not really you know one size fits all or you copy and paste from what is done in one region to other region etc. But one has to really understand the local realities and accordingly modify make suitable adjustments to suit the local requirements. I think that should be that is the most challenging thing especially with the divergence between different villages within the same district as well as across different states in India. Okay so now we you know get back to the discussion that I slated for today. Then we will give some time for discussion again on this either immediately after the this talk or just before the next talk. So as I mentioned earlier we are going to be talking about how to design an environmental policy especially keeping in mind industrial pollution control. Okay how do we do that what exactly are the options available etc. Now I mentioned about this yesterday also but I did not really call it a straight off. The problem here the root cause of all this issue why we are discussing this is how we also presented to students is because of the trade-off. So what is the trade-off that we face which is faced by almost every society and across you know the globe the trade-off is by and large between in terms of the relationship between environmental goals and industrial competitiveness. So people think that if you are fulfilling environmental regulations you become less competitive because you are to have alternative path to you know compete in the in the marketplace so that may sort of pull you down when compared to someone else who did not have to fulfill all these norms. Now so usually therefore they say it involves the trade-off is because there is a difference between social benefits and private costs. Now because when you talk about environment achieving these goals of environment we are basically talking about achieving improving social benefits or increasing social benefits. But when you are othering to these norms basically you may end up in increasing private costs. So the trade-off is between maximizing social benefits or minimizing private costs. Every private industries would like to minimize the cost of production so that they stay put in efficiency and competitiveness whereas the state would like the government would like them to fulfill environmental regulations which may result in better social benefit. So can we formulate a policy whereby we do not it does not necessarily result in increasing private cost and at the same time helps you to achieve social benefit is something is what exactly we are going to be seeing it is tough but let us make an attempt. So basically the issue here is how to balance society's desire for environmental protection with the economic burden on the industry the place on the industry because the industry will fear the burden the brunt of it by you know contributing to the bearing the cost of environmental regulations meeting the regulations. So if you think of a static world static in the sense where we do not really talk too much in terms of technological progress fast innovations etc. Where firms have already made their cost minimizing choices they already are given technology how do they try to maximize efficiency is what they tend to do. So if you bring in a new exogenous factor like you know othering to environmental regulation it inevitably increases cost and will also tend to reduce therefore the market share of the domestic companies whereas it do it may do in their economy but if all the firms will have to necessarily do that it does not affect you in local market so much but it does affect your competitiveness in the global market in open economy where you compete as against firms coming from countries where which do not have similar regulations. So therefore from day one there is a from day one of implemented of the regulation that firms from the countries which are where there is a strict enforcement of regulation will have will face an unfavorable situation when compared to firms that come from countries which do not have regulatory framework to follow. So that is that is where the distinction begins. If you recollect a quick example I will tell you is the debate between say Hyundai and Maruti in the 1990s when Supreme Court said you have to strictly follow the Euro 1 norm Euro 2 emission norm etc which most of the automobile companies in India you know were not aware of and not really following before that after that there is a faced you know implementation which did result in increase in cost initially they were only worried about it subsequently they internalize the cost so that they could stay put in competition this is against when the MNCs came they all came with all the Euro Euro 2 Euro 3 norms being fulfilled because this is the mandatory requirement in their countries. So but how do we sort of regulate the environmental behaviour of firms or industries there are number of instruments available for environmental protection from in the hands of government or policy makers. Now since the problem of pollution is usually attributed to the divergence between social and marginal cost and also private marginal cost we see how exactly we can try to minimize both. So opinions on the nature and extent of state intervention what rail government should play etc you know definitely vary it varies from country to country and also from region to region within a country also. The available policy options range from a very strict command and control regime which is also called the stick where the government can use a stick etc a kind of instruments to market based instrument which are by and large in form of taxes incentives and you know several shops given to firms to other to this. Okay what exactly are they maybe we will see it in a while. So in a in a sense therefore the policy options can be classified into two the command and control regime or the market based instruments but market based are usually through the taxes and subsidies government introduces from time to time whereas command and control regime are basically standard fixation which are highly inflexible and it usually uses in Polish Raj okay but here tax and subsidies can actually you know give me introduce in the form of fiscal policy announced along the budget which are mostly market based instruments and can incentivize firm to fulfill the emission norms so we should definitely keep that also in mind whether we should sort of you know we use the stick obviously basically provide incentive for the firm to for the good behavior. Now how exactly we mix policy instruments chosen from varies from country to country depending upon a number of factors what are these factors first of all what are the goal what are the goals the goals of development are goals are very important every country will have to keep on growing but some are relatively lower end of the segment in terms of economic development therefore they are to definitely economic development rapid economic development is could be their objective whereas for already advanced countries where the capital income is very high their goal could be in terms of stepping up the economic growth rate GDP growth rate second important factor countries also vary across different stages of development therefore they say look initially we may have to compromise on some emission because you know we are yet to achieve development but once you achieve development then we will have more and more environmental concern is something they may have so also varies from country to country in terms stages of development. Thirdly countries also check whether they have the institutional capabilities to implement if they design a policy for example in India we have land reform formulated in 1950s but we failed accepting in abolition of the Amrindhari system we have by and large failed in most states in terms of implementing it because basically the institutional capability was lacking and that is also holding to in the case of emissions also because that is why there is a large difference between states in terms of ability to attract investment in terms of ability to regulate pollution also finally it also depends on the political preferences what are the what do the people in power want do they want for example currently the slogan is make in India the previous government would have talked about maximizing the growth rate or distributional justice so there are several preferences so we have to say do environmental regulation also figure in their preferences how much important they want to give it to that etc so that will govern the actual mix of policy instruments they will use etc so there are number of studies in our research we have reviewed which have examined the effectiveness of these instruments for environmental protection and especially from an Indian perspective number of the studies have done and they come up with very very you know wide range of interesting results so these studies are by and large said that economic instruments for regulating the behavior of firms or industries can be broadly classified into direct and indirect instruments what exactly are the direct and indirect direct instruments indirect instruments is what we will try to see now the direct economic instruments are pollution taxes, pollution charges, emission trading rights, deposit defense system, performance based, performance bond and strict liability for pollution etc whereas the indirect economic instruments are taxes on outputs or inputs of pollution activities, fiscal incentives such as you know rebates on excise, custom duty, accelerated depreciation allowance, subsidies etc on including you know on effluent treatment plan, subsidies for efficient effluent treatment plan, eco certification of products in environmental audit are all examples of indirect economic instruments so a combination of both can definitely be used and we have seen different countries using a variety of these instruments so what do these economic instruments try to do basically they try to alter the costs and benefits and provide signals to polluters to internalize the environmental costs in their decision making and make them behave in a socially acceptable or desirable manner this is what they try to do otherwise you have complete freedom to decide what you want do what you want produce and sell whatever quantity you want or various commodities etc but these economic instruments are basically trying to reduce your the regularity of behavior now they provide incentives to polluters to search for these cause options of complying with the regulation and whereas command and control regime if you depend more and more on have been widely used in many countries to regulate emissions so basically they want to strictly regulate emulation not really you know doing much in terms of providing incentives for them to search for alternate technologies. Now let me give an example here one of the examples that most countries have been using is what is called pollution charges but pollution how is it done pollution charge is one of the most important instrument used by federal means central as well as local governments in order to regulate the optimal level of pollution in different countries an ideal pollution charge system must consist of three aspects a large lump sum charge to cover firm relative cost a charge system on the waste water discharge and the per unit charge for each pollutant in the affluent in the affluent in excess of the prescribed limits so it has three components one is you are running an industry chemical plant a large sum you have to pay because we are going to spend money in treating the water which where you are going to emit release all the emissions then but that does not give a right to emit whatever you want a charge system on the quantum of waste water in charge there will also be there so there is a lump sum tax lump sum charge as well as per unit charge and thirdly there is also per unit charge for each polluter we may have different kinds of pollutant you may be affecting VOD pH factor number of all this so in the affluent in excess of the prescribed limit for all this they will be so pollution charge is a combination of all three the incentive system have been promoted by economies as against the command and control regime because they said this will basically become cost effective alternative to and also it it it it is an alternative technological restrictions and other forms of inflexible command and control regime regulations so the idea behind economic incentives to increase or raise the cost of environmental shaking by allowing the producer to the flexibility to find the least cost the pollution control challenge so if we leave it to the producer to find out what is the best strategy for themselves we do not really say this is what you should do objective is to reduce your pollution now how to reduce the pollution you have to search for alternative technologies that is a that is sort of a direction given by these incentives by increasing the cost of shirking specifically on the shirkers the producer has a private incentive to provide socially optimal level of pollution so because there is a cost attached to shirking therefore if there is a private incentive because you can save on this cost if you are able to regulate on your emissions there are three kinds of incentives which are by a large used by number of countries and these incentives incentives are broadly grouped into three categories one is the price rationing secondly is the quantity rationing and third one is what is called the liability rules we will take a quick look at what are the three various incentives as this one indicates price we talk about how does it influence the price secondly quantity how much it is and third one in terms of liability rules okay. Price rationing increases the cost of shirking by setting a charge tax or subsidy on producer behavior or products emissions or equivalent charges are example of price rationing where you are trying to influence the cost you are trying to influence the price because you have to pay the cost or every producer will definitely try to pass on this cost increase cost to the buyers so I try to raise now prices specifically for the polluting industries so there are taxes on commodities product charges tax and commodities all examples here that you pay a sub tax on oil you pay excess excess duty additional duty on cigarettes for instance there are number of product charges that are very very popular around the world there are also tax on you know oil in other countries as well as against quantity rationing where you are trying to regulate people's behavior by saying how much quantity you are allowed to buy or sell rationing is how exactly you try to again I can say it is something like the fire price shops which used to sell earlier that 5 kilos of sugar is what is allowed to particular family of four so a month so if you want to consume the 5 kilos you will get the ration price through the fire price shop that does not mean that you need to consume only 5 kilos of sugar a month if you want to consume more you buy from the open market so you pay a higher price that premium you are paying for the pollution something akin to that you know again quantity we sort of restriction and we will give only 2 kilos of 5 kilos a month and the money if you want you can you have to definitely pay much more and then that quantity will not be say again how much of cement was sold to the quota and how much outside and and the like so they provide incentive to producers with you know low pollution control cost to reduce pollution and sell their excess permits to producer with high control cost so quantity here the tradeable for carbon trading is an example of quantity rationing how it came because then the the emission that you have not released for business association whatever you have saved you are given a certificate and that certificate you can trade with others to make money yes but this will be bought by people who are unable to reduce the emissions so you get a price for that so that is again indirectly you are trying to get some money so quantity rationing can also be coming in that as again this price and quantity rationing the government can also come up with what is called liability rules which tells you what is socially acceptable benchmark of behavior so if the producer violates the benchmark he or she suffers from financial consequences there are number of financial consequences that countries have come up with one is called non-compliance fee deposit refund system and performance bonds so basically these are all you know the charges that you pay to the government you get back the money if you comply if you do not comply you forfeit the money it is like a fixed deposit you are given with the pollution regulating authority liability rules are also especially used in most polluting industry in around many many countries in the world so these are the three possible options that is available there so theoretically any economic incentive is used to alter producers pollution control challenge so the tax is such in such a way that marginal benefit equals to marginal cost the point where they intersect you fix the tax rate but the charge provides the incentive for the producer to increase his level of control until the private optimal level of control equals the social optimal so when you talk about marginal cost equal to marginal benefit we try to fix it at such a level where the social marginal cost equals social marginal benefit private marginal cost equals private marginal benefit that is the point if tax is fixed called so called pigovian tax or what is basically given by a c pigov in the 1920s itself but the problem here if those things theoretically are so simple to argue then why do we encounter problem problems we normally encounter in implementing them because typically the incentives are set too low to induce producers to increase pollution control to the social optimal why because it is not simply for one individual this incentive has to be given to all the producers and also many producers think that this is another instrument through which they are raising taxes rather than for changing their behavior so when there is an education says that you and I pay we normally check whether this particular money extra money that is collected from us is directly spent on education if not we may be unhappy even this education says same way but that is why then that is in fact government is calling it as education says because they want to collect it especially for education and people do not feel bad about giving these additional tax they could have easily included in the tax rate itself but that will send a give a wrong message saying that we are tampering with the rates so we do not want to tamper with the rates but additionally there is a need for our government to spend more on education therefore we want to have a sense on education similarly there are sense on several other factors also now so this after the tax payer or pollution the payment to people are making you know industry which are making the pollution charges etc if they are convinced that the money is going to be used for you know cleaning the environment for the betterment of the society in which they live they may not be unhappy doing it but if that is not going to be used for that purpose and it is going to be used for any other purposes they may not really be truly coming forward to share this information so it creates several kinds of problem. The problem therefore arises because how much of information the government has in order to successfully implement an incentive system so that you achieve the socially optimal level problem comes is in what we call in economics as a classic problem of asymmetric information information flow is asymmetric and this especially because of two kinds of issues one is the kind of moral hazard other one is the kind of adverse selection both of them will play an important role in design and success of the economic incentive scene. Moral hazard happens when an individual how does an individual behave when he knows his actions are not going to be monitored. As against situation how does he or she behave when their actions are going to be monitored. Let me give an example you might have seen these documentaries that are shown in Rudarshan long back where a king wants to know how honest citizens are. King invites people to say I want everyone to pour a pot full of milk into a large earthenware nobody can see the earthenware contained inside but they will have to pour it from the back. So many wise people wise men think that look everybody is going to pour milk how will the king know if I pour a pot of water instead of milk. So, some people pour water at the end of the day the king comes to inspect and finds that 80 percent of the earthenware contains water and only 20 percent of the milk obviously is become completely unusable. If the other way round one can possibly use 80 milk 20 water but 80 water 20 milk is saying how the good deeds of 20 have been wiped out by the bad deeds of 80. So, this people know when there are no CCTV cameras there are no way you can be monitored. So, this is there is an incentive for you to get into model as a problem and this is a serious problem with respect to environmental pollution also how do we tackle that. Alternatively they could also be situation of adverse selection we all know using a plastic bag is bad and it is important that we carry a bag to the marketplace to buy vegetable fruits and others. We tell the shopkeeper we do not need your bag we got a you know jute bag or cloth bag from which you will or even a old reusable reusable plastic bag whereby we bring in etc. Now, suppose knowing that we should not do that we still go and say you know I came directly from office I did not go home to pick up this bag so I sort of bring it once in a while is okay but if you bring regularly all the plastic bag we sort of say this is an adverse selection adverse selection here happens because of convenience but sometime adverse selection takes place because it is costlier to use a cloth bag because sometime you would have bought vegetable worth for 100 rupees and you would have forgotten to carry a bag. So, if you go to next shop and want to buy a bag bag will cost you 30 rupees you will wonder should I spend 30% of the vegetable cost on this bag because I have another bag at home just that I did not bring it. So, you end up in using the plastic bag given by the shopkeeper which also leads to adverse selection how much of policing how much of regulation can you do all this when individuals do not have the incentives because of moral hazard and adverse selection. So, when there is moral hazard and adverse selection market is bound to fail and the transaction does not have full information about either the action or type of the second person. Now, type can imply the unknown quality of commodity or the hidden characteristic of an agent such an inherent intelligence. So, asymmetric information therefore exists when an injury knows more about the level of precautionary behavior than the insurance. It is a very classic problem with respect to insurance also and the insurance policies are being sold to us the companies also take risk. We want to pass on our risk to them by buying these policies but companies also take risk. Suppose 5% of the people who buy insurance policies hide the information that they are suffering from terminal diseases and then insurance company have to shallow this money then most of the companies will wind up and go they cannot survive. They cannot take more than 2% you know the risk factor etc. Even 5% therefore say they most of them will have to wind up and go. So, there is a moral hazard problem that many of us face and therefore the market as a result if that is what communities do then they will stop giving insurance. But now we want to insurance to come in number of aspects. So, that is why there are so many stings and restrictions and conditionalities that I am not favoring the company and just saying that most of them they are due because of the moral hazard and adverse selection problem that exists among societies. So, without complete information markets will be incomplete and therefore can fail to allocate resources effectively. So, moral hazard adverse selection are two kinds of problem and moral hazard or incentive problem arises when the action of one person is unobservable to the second person whereas adverse selection exists when one person cannot identify the type of character of the second person. When it comes to environmental assets how does it affect? How does the moral hazard affect? Firstly, when the regulator cannot monitor actions an individual has an incentive to shirk on pollution environment. Since he bears all the costs of such environment this is only a share of the benefit. I am only one among the 100 households living in this area, but by polluting more I am getting more profits. So, should I look at it from the benefit of one among the 100 households living in this area who enjoy the benefit of clean air or should I look at it in terms of private maximum benefit by polluting more when I produce more. So, there is a moral hazard problem especially when you know that my actions are going not going to be monitored. So, indulge in environmental shirking and likely to occur when an individual pays the cost of a wait but only receives a share of the total benefit. This is bound to happen. In most cases we pay the cost but we only receive a share of the benefit because benefit should be shared among several people several households. So, this will go on until the economic incentive to reduce his or her effort to control pollution below the standard set with regulators and resulting in too few resources devoted for this and end up in having high pollution. So, therefore, we must definitely see how to tackle the problem of moral hazard. Secondly, when the private market cannot monitor actions, the state has to come into play. So, insurance company will withdraw from the pollution liability market because the provision of insurance will also affect the individual's incentive to take precautions. What kind of insurance that people of Bhopal get when there is a gas leak? So, given that accidental speeds of storage of pollution can create potential financial liabilities, a firm would like to pay less or pay pass this is less this covers agent. Therefore, there is a tradeoff between risk bearing and incentives. So, market for pollution liability influence therefore will be incomplete as insurance happen to reduce information range and of the better informed individual. So, it is only those companies which are very well informed which will come into play. So, most others will withdraw from this. In dealing with adverse selection, it is a problem of development of eco products that are produced and practices with practices that are less sample to the environment. So, sustainable production of products from topical products for example is a commonly promoted alternative to clear cutting activities. The problem with eco products is many of us use, but not really completely because while they may be you know perceived to high quality some consumers given the production process, these products may also be more expensive as a result of the lack of scale economies. And therefore, the fact that development is not subsidizing is production also nobody subsidizing. If you see most of the eco friendly product, they are much more priced than the normal product. We get tempted when the toys available in India we say one car is sold for 40 rupees and now China dumps four cars for 40 rupees. It is normal for children child to break the car. So, we get tempted to buy four cars for 40 rupees because we can give child will definitely break the car while playing. So, now this will make sure that we run it for a month because every week you can give a new colored car to your child. So, there is an insult, but the problem is that you have four cars broken to be disposed of as against one in the past. So, that is where the money that you are spending is same. So, if the buyer cannot distinguish eco products from the same product produced from standard practices, here she will have no incentive to pay the extra premium. If the high quality high price producers do not think the consumers will pay the premium, then they will withdraw from the market as happened in most cases. And the process will go on and on until the market for all the non all the eco product collapses. So, unless there can be some acceptable warranty to verify the production practices the market price of products will be inefficient with the problem of adverse selection. So, we have to sort of educate people, motivate and inform them about the use of it. No, let me let me give you example see way back in 1996 when I was I lived in Maastricht in Netherlands for a few months. The companies that you know sell you drinking water or juices just to give it to you in a thick plastic bottle. And they say that if the price of the say let me give an example, so price of that is say 3 rupees bottle of water. They say when you return, if you return the bottle to us after consuming the water you will get back 1 rupee. Obviously next time you go to buy the water I will return all the old bottles and get this 1 rupee reduced and buy water for 2 rupees. So, at the end of the day when I was returning I got money for all the bottles that I have returned. Now, here people say whether you return or not nobody wants to take it back even your what you call Kabadiwala or Bangar also do not want to take it. So, then what do you do? You have to definitely dispose it off. Now, this is included in the cost by the company itself, but they do not want you to throw it all around the city. So, they want to collect it themselves and a number of them are reused. They recollect the days when we used to buy milk through the vending machines where we used to take a barter from home and you know a utensil from home and fill it up in all the coin vending machines or even before that we used to buy it in bottles. Every day we go back with the empty bottle, get the new bottles and return the bottle next day and exchange it again. Most of us use only milk that are packed in satchels that is plastic. We know it is bad, it has to be recycled, it has to be you know processed etcetera, the waste has to be processed etcetera. Still we use it convenience, convenience is not simply and sometimes therefore, it results in high cost. Suppose, you have to do the other way around it is most in tetra packed, milks are costlier than the one in the plastic satchels. So, definitely adverse selection is a problem and we will create too much of issue with respect to providing incentives. How do we judge which instrument will be more useful and what should be used? So, there are number of instruments. I have only given you an example of one or two, but there are variety of instruments used across the globe to regulate pollution behavior of industries or individuals. It is important that there are four criteria through which you can evaluate. One is how effective these instruments have been in reducing pollution, in influencing pollution behavior. You cannot say you will not look at the efficiency because it has to be cost efficient. Imagine a time late 1970s or early 80s in India where the cost of collecting income tax for higher than the total income as a revenue collector. People used to wonder, you know I used to wonder when I was a child, why is then this tax is imposed and collected from people? If the cost of collecting is more than the revenue collector, of course it was based on cannons of tax session which is basically equity principle. But over a period of time now the revenue has increased several times than the cost. It has to be efficient. The system should be able to support itself and some surplus generated for cleaning. Efficiency is also important. Thirdly, it should be equitably implemented not meant only for some citizens, simply for everybody. Fourthly, you must introduce some sort of flexibility in that system. Flexibility not to be misinterpreted, but flexibility definitely is required in order to make sure that it will function. Anything that is inflexible will collapse sooner or later. So for example, regardless of whichever instrument is making a theoretical appeal to you, an incentive system will fail if it is ineffective in reducing pollution damage and if it is unacceptably inefficient in accomplishing these goals or violate social norms of equity or lacks the flexibility to charge with shifting economic technological and to change with shifting economic technological and environmental conditions or it should be changed. Now apart from the theoretical factors, there are also four important practical conditions for the use of economic incentives that is by and large looked at by several countries. Firstly, what is the information base? Do you have an idea who are the polluters and do you have the administrative capability to regulate them? Here I should say there is a PhD thesis that I guided. I am looking at the efficiency of chemical plants located in and around mobile. We wanted to see what is the magnitude of, there are regulations are very clear. The idea was to look at the impact of NMR regulation on the efficiency of firms in these areas. We have also published couple of papers based on this study. So when you went to them, basically we went to the Maharashtra Pollution Control Board office in Mumbai. We asked them, can you share us information? Can you tell us the details? Day to day information about emissions are collected at the plant level on all the plants, from all the plants. So and what kind of, see one thing that we are trying to recommend at the end of the day, if all that information is collected, regulated everything is fine, we have the administrative capacity. Now you also will have to see how effectively it is implemented. It is effectively implemented. But are the firms able to cope with the market situation in spite of while othering to the regulations? That is something is not in the mandate of this particular pollution control activity. So that is the mandate elsewhere to which I am going to come to. So practical condition is fulfilled. But same question has to be asked across different locations, across different states in India, etc. So do they have the information base? Do they have the administrative capacity? Yes, they appear to be having as strictly with respect to this particular industry that we surveyed. But this is something that need to be checked. Secondly, the legal structure. What kind of legal structure? If that is going to take 30 years for you to, you know, resolve the dispute, then obviously the firm will be happy to take you to the court and they continue the business and pollute the environment for the next 30 years. What kind of legal structure do we have? So can we really be able to implement and give fast judgment and all that? Thirdly, are the industries operating in a monopolistic market or operating in a competitive market? Because the behavior will be very different. Because if there are monopoly and you say no business, then obviously the product will not be available. But if there is competitive market, then somebody will try to compete with other, supersede the other. So we are going to look at the competitive market case very soon, just today. And fourthly, is it politically feasible? There is no point in formulating a policy if you think there is no political will to implement it. It is not, we are not preparing it to maintain it in the records alone. Therefore, to sum up on this part, the effectiveness of all the instruments, incentive schemes that we, I mean different countries have been formulating and using, practicing, etc. depend on acquiring information. Most important factor here is information. Information on what? On the behavioral types are adjusting the optimal incentive to reduce, on the behavioral types. And also, adjusting the optimal incentive to reduce the potential information limits, gathered by those who are being regulated. Because sometimes they get to know information before the ordinance is promulgated. So it is enough to know that what kind of behavior that the industries are going to have. Accordingly, you can formulate your policy. If you do it, it will be very, very effective and useful, etc. So the constant worry for the policy maker, therefore, in this context is, would complying with these regulations result and reduce competitiveness of these industries in the marketplace. Because that is not the objective. The objective here is not to sort of create a monopoly situation where only one firm is able to fulfill all the norms. Others go out of fray because they are not able to fulfill the norms. We do not want to disturb the competitiveness. Secondly, are we getting into a situation where inefficient regulation combined with adverse impact on competitiveness? Because regulation can also be inefficient. You are not able to achieve the desired result. In that case, you have a combination of two worst combination that it affects their competitiveness. It also is highly inefficient. No policy maker would like to have to be in that situation. So given this paradox, we are suggesting an alternative method which is also being accepted in most places. But you must have the right mindset to accept this. It does not unfortunately come in a big way in India, but we hope that will come. So I am basically in the next ten minutes or so. I just want to quickly tell you what exactly is being proposed here. And much of this, what I am going to say is based on some research that we carried out as well as a view of exhaustive literature review of studies done around the world. As faculties of engineering and technology and sciences in a number of these colleges, you would know that there is a shift in paradigm that has taken place in the last 20-30 years. Shift in paradigm with respect to what? How do you define industrial competitiveness? So it is no longer simply you are talking about static and achieving allocative or distributive efficiency in a static model. Now everybody is talking about dynamic competitiveness. And everyone is also talking about globally competitive, international competitive. How do you become globally competitive? By and large based on innovation. The best companies you talk about today, you name some, you will definitely say that these companies are all known for the technological expertise for the innovativeness. There are companies which regularly introduce new products and new processes to the system. Apple, Sony for instance. I am just giving some examples. Like that several industries, they keep coming, may need to constantly innovate. That is exactly how they establish the supremacy in the marketplace. So therefore, your competitiveness is known. You maintain your competitiveness more through innovation. Now therefore, your competitiveness of the industry level by and large arises from superior productivity. Either in terms of lower cost because you are operating on a large scale than the rivals or your ability to offer products with superior value that justify a premium price. Either of them should be there. So people are ready to pay a higher price for Apple products because they think it is superior technology. Otherwise, we are not fools to pay them so much money for their cell phones. Again, when you can buy a laptop for 20,000 rupees, people end up in weighing 60,000 to delt because they expect it to be of better quality. Similar configuration. Configuration may be similar. Mobile phone which most of us use today are examples here. Therefore, we define the competitiveness basically depends on this. So, what do the empirical findings say? So, detailed case studies, empirical analysis of hundreds of industries based in number of countries show that the international comparative companies are not those which use cheap inputs or produce only large scale, but those with the capacity to improve and innovate continually. Some of the companies spend huge amounts on R&D. Some MNCs have set up R&D laboratories in India because they wanted to. They saw a huge potential in scientifically technical skilled manpower in India. Instead of hiring them and taking them to New York or London, we are going to place them right in India and look at your R&D centre here because these days you can share knowledge in the cyberspace the way we are doing now, which does not depend on the inefficiency or efficiency at the port level because this knowledge transfer can take place over cyberspace where what you require is only a good internal connection. So, therefore, innovation plays a very important role and everyone tries to keep on shifting the ways for innovation and this technology change is so fast in variety of industries now. Should we not be aware of this? Should the environment regulators not be aware of this? This is the way how we can make our students think. How can you be part of this and achieve environmental efficiency as well? Is what a taxonomy that I thought I would quickly share with you. So, Michael Porter long back talked about what is called innovative offsets. Whenever there is a crisis, he says innovation will take a Shumpeter first talk about 1943 what he called it the process of creative destruction. So, a properly designed environmental standard can trigger innovation that may partially or more than fully offset the cost of complying with them. Such innovation can not only lower the net cost of meeting environmental regulation, but also even lead to absolute advantage over firms even in other countries not subject to similar regulations. So, then you become globally accommodative. So, they are able to meet all the norms is only those who are able to meet the norms are able to go to other locations. So, innovation offsets will be common because reducing pollution in other is often coincident with improving the productivity with which resources are used. So, I am spending money on innovation R and D and trying to search for new technologies better process etcetera because regulator wants me to reduce the pollution. But in the process I come up with a better process on your innovation then I tend to become more competitive than before. So, this is an indirect benefit that I am getting because the search of technology that I have in the gene because of being divided directed by the regulation. So, that is what people call it as innovative offsets that they have come. So, such innovative efforts can definitely be subsidized. So, some of the some of the countries in the world extend support to their companies which are directing expenditure on R and D for especially when they are searching for environmental benign technologies. It is very difficult to obtain information. So, if you do not have the company if you do not have trust on your industries you will not do that. But most countries do have they trust their industries and they work together the best example I would think of not about environment, but before that in terms of achieving competitive efficiency was Japan. The R and D laboratories were set up Japanese government enable R and D joint R and D laboratory being set up by Aligopolistic companies and state also played a role together. They will compete in the market, but they will do the innovation together. We have not heard of such a such thing in India accepting in sporadic case of automobile association doing it or textile association doing it in couple places. These are some of the incentives, these are some of the schemes that we need to come up with strictly with respect to the pollution offsets. So, there are benefits that firms can derive from environmental regulations, can actually benefit from properly crafted environmental regulations and by stimulating innovation strict environmental regulation can actually enhance combativeness. So, then firm there is an incentive for firms to participate and compete in the world. Doesn't the problem of private cost and social benefit coming to play again? Are we talking about social benefits or we are talking about private cost? Yes, we are talking about private cost, but the argument is that whatever the level of social benefits are these costs are far higher than they need to be. Therefore, the focus will shift and the private cost will become private benefit if they become more competitive, they get higher market share. So, others will also emulate them etc. So, therefore, the policy should focus on relaxing the trade-off between competitiveness and environmental, rather than accepting it as given. Don't take it as given, try to see how exactly we can relax the trade-off. Promote competitiveness and see how exactly it can achieve environmental efficiency. Of course, once you start doing it, there are ways of analyzing regulation also on industrial governance. It is a what do you mean by what are the indicators of industrial governance? Can we really have a framework? Is it possible to measure the cost of environmental regulation and the likes are some of the questions. So, let us look at some of it. So, what are the indicators of governance? Standard theory says, especially based on phase of international trade says, nations are driven to trade either because of absolute advantage or comparative advantage. They will require to talk about comparative advantage. Hester and Arlene talk about resource endowments. Then people talk about wage differentials between countries. Then they talk about relative costs, you know, producing the commodity or the exchange rate as the basis for competitiveness. All that is of the past. Theoretically, all of them are very well established and proved. But what we are saying now is it is important to come up with alternative indicator of competitiveness. How many of you know that US is worried about trade with India because they actually have one of the largest source of imports for US is India. We normally do not get into such minute details and trade data and most of these imports are of high-tech industries also. We import but we also export and US import is coming large chunk from India apart from other countries. So, the trade balance in India is a big worry for them. So, coming back, therefore it is important to look at the change in net exports of certain commodities to production of which is highly regulated and with comparison between exports of these commodities and others produce under less regulated conditions. So, let us look at that. What are the industries? What are the commodities for which industries have to face regulation and what is this for which they do not have to face regulation? And how are we faring with respect to each of the commodity? The product wise trade data is available in all the ports in India. May not be made public but if the research is asked, they may be made available. So, let us decompose and try to see what happens and if there is a change, positive change in the exports of commodities from industries which have to other to more stringent regulations, animal regulations and others that is a very positive thing. Then we are becoming trade regulation is helping you to become globally competitive. The same thing can be looked for imports also. Are we getting or the MNC is dumping the pollution intensive commodities on our markets and exporting and selling only the animal and animal products in their own economies. One can examine that. Secondly, the extent to which the locus of production of pollution intensive goods are shifted from countries with stringent regulation towards those with less. So, David Wheeler in about 15 years ago came up with the working paper of the World Bank. It says the developing countries are going and going and attracting more and more MNCs to common industries in their countries. But in their craze, in the competition to bring in more and more FDI, are they racing to the bottom with respect to environment? Are the MNCs relocating their most pollution intensive industries to developing countries? That comparison can also be made. But the study concludes saying that for most countries that is not true. That is because they are not shifting the industries pollution intensive industries from developed to developed countries. So, that need to be examined. So, examined quite sometime back. That is also something that we need to look at. Thirdly, if regulation is reducing the attractiveness of a country as locus for investment countering that your regulation is doing it, then there should be a relative increase in the overall overseas investment of firms from that country in highly regulated industries. Is that really taking place? We are investing overseas. Our companies are buying companies elsewhere, new greenfields, projects are there. But are they on environmentally unsound industries? That is again another question that we have to look at. If it is so, then our industries are driven out by regulation. But there is no evidence of industry being driven out because of regulation. Industries are driven out in India because of policy, paralysis and other factors not necessarily in terms of regulation. So, therefore, the focus can be more on fundamental link between environmental compliance cost, productivity, investment and the ultimate social cost of regulation. So, the productivity effect of regulation and the social cost of regulation is something that is what we are going to be looking at, not simply in terms of which character, which investment will work more efficiently, etc. The linkage is complex. We should be aware of that because the economic adjustment to regulation is highly complex. And it is also not possible to simply estimate these different aspects. So, but still it is worth making the effort. So, let me try and see how exactly it can be done as a research agenda. You may not share with your students, but for those who are who are interested in seeing how it is exactly done. Quickly in two minutes, I will tell you. Regulation usually affects commodities of firm in terms of cost of production, both directly through its own expenditure on pollution reduction and indirectly through the higher price it may pay for the certain factors of production that are affected by regulation. So, regulation can reduce cost for some firms or industries by lowering input prices or by increasing the productivity of the inputs. Such benefits to industry could take the firm, for example, of reduced cost to produce the food processing industry while its supplies of intake water are less brutal. Well, there are costs of animal regulation range from budget cost to administer and animal cost, animal loss and regulations to over to capital and operating expenditure of certain regulatory compliance. All that is referred to required. So, government plays a very important role. But what role does the government play? One of monitoring, one of enforcement. That is the role. The role is just in terms of because they are a watchdog. Compliance expenditure for a firm is in the form of capital, permanent change, new equipment that is being bought. It is also in the form of operational expenditure. New raw materials are going to be consumed, changes in some of the practices, employing people who are aware of this. But there are also other direct costs, legal and transactional costs for formulating and implementing. Firms also will have to incur shifting management focus, cost attached to that. And they could even sometime face disruption in production. So, those costs also will have to be met included in the firm's cost. There are some negative costs also, which definitely will have to come take into account natural resource inputs if they are going to be using, become cost clear. Health of the workers, they need to definitely take care. And sometime they have not been having stimulated innovation. Now, they have to start working on innovation. So, they could be in terms of that. But the benefits are there are global effects. They could go for product substitution to environmental and technology. They could go for, I mean it could also discourage investment in polluting industries and also retarded innovation in number of factors. So, all that can be, reengineering etcetera can be got about in this. There are transition costs that they need to be definitely looking at. One is a part of unemployment that may take place because of technological changes or shifts. Some of the capital may also become obsolete. But when the automobile industry switch over from batch method to conveyor belt system, obviously some of them become obsolete for example. So, one need to definitely look at them as transition costs. And finally, they also need to look at what is called social impact. Is a loss of job mostly to middle class? Or are they gaining from this? What are the implications for economic security? All that need to be assessed. So, that is why economical and social impact analysis are extremely important in the context of that. So, the therefore, the shift from or the link from regulation to promoting innovation can be introduced only when the regulator tries to understand how does innovation offset occur. They could be in early mover advantage in international market. And you need to redesign your environmental regulation to increase innovation. So, here the offsets are brought about by companies simply by learning how to deal with the pollution once it occurs. Including the processing of toxic material emissions. How to reduce the amount of toxic or harmful material generated. How to improve secondary treatment. All that is can help them. These sort of innovation reduce the cost of complaints, but change is nothing else. So, the second form of innovation offsets can be brought broadly divided into product and process offsets. It can also be brought about. Where product offsets occur when environmental regulation produces not just less pollution, but also creates better performing or higher quality products. Safer products, lower product cost, perhaps for material substitution or less packaging. Product with higher use here or scape value because of ease in recycling or disassembly or lower cost of product before for users etcetera. Crosses offsets are you know occur when environmental regulation not only lead to reduced pollution, but also result in higher resource productivity. Higher process yields, less downtime through more careful monitoring and maintenance, material saving on the light. So, reduce material shortage and handling of cost, handling cost, conversion of waste into valuable forms, reduce water waste disposal cost or safer workplace condition can also be examples of this. But several developing countries or emerging economies can have an advantage of being an early mover because there is a shifting world demand in the direction of valuing low pollution energy efficient products and resource efficient products with higher ratio of scape value. Many companies are using innovation to command price premiums for green products and open up new market segments. It is not simply one of quality alone between what is exported, what is told in domestic economy etcetera. It is also in terms of this labeling and other into the norms etcetera. So, can we, can our industries be encouraged to reap the benefit of being early mover? Can be done only if you are willing to redesign your regulation. Regulation, regulators should not think, the mindset will have to change. Our job is to encourage innovation and not simply to enforce the regulations that we are going to have. Indirectly they are imposing but at the same time they should be focusing more and more on innovation. Is it really possible? Of course it is possible. Provided you are clear in terms of the goals and you are ready to be flexible in your approach to this also. There are issues with respect to seeding and spreading of environmental innovations that could definitely be done. The state can invest so that private sector will also invest in this. Why do not we start with using all the CSR libraries which can provide a think tank to all the industries and let the best practices or new innovation, new process be published or publicized so that others can easily taken over. It is very important that we sort of seed and spread environmental innovations in our country. The more and more the sooner you do it better for you instead of just waiting and say I will only use this stick. So it is also important that the regulatory coordination takes place. So in one of the meetings you know when I said I was invited to make a presentation to you know for a taxonomy how exactly it can be done and based on some presentation the in some of the offices of Central Pollution Control Board were there. When I say you have to incentivize pollution abatement strategies, innovation that have enabled firms to reduce pollution etc. Some of them asked me back saying that are you saying that we should reward the polluters. I am not saying we should reward the polluters. I am only saying that we should reward the people who are helping us to reduce the pollution. So then they come back and saying that is not the role of the regulator. It is the role of the regulator to certify that these firms have fulfilled the norms. Then only you can do it. So it has serious implications for industrialization. What kind of industrialization that we have been having. So growth in output will favor a shift from pollution intensity to non-pollution intensity. Look for economy and energy consumption per unit of output will also decline therefore less pollution. Once you start doing it it can become an instrument of global economic policy because you already moved away from inward looking to outward looking. So the role of state is reduced in economic affairs especially as a direct economic agent but you can support privatization of major sectors of national economies that has been done. So we are trying to remove impediments to international flow of capital and supporting the formation of domestic capital market. So deregulation, the forming domestic labor market and all part of this structural adjustment program is also being done in many developing countries. So there are elemental impact of such legislation program. Again positive and negative elemental impacts are there, direct and indirect also there. So external adjustments, exchange rate policy, production effects all that is possible direct environmental impact and in terms of trade liberalization also has been focused here. With respect to each of the sector there are impacts on it. Now there are direct environmental impacts in terms of internal adjustments, fiscal policy, monetary policy all this are playing an important role. There are also indirect economic environmental impacts, social impacts, labor market, social services, poverty and the like. Each of it will definitely be taken into account and also on the institutions. What is the capacity of civil society? Government, institutional capacity, etc. So what action do we need therefore take? It is important that we tell them to internalize externalities for efficiency. Pollution is a problem of externalities. Here use economic instruments, taxes and permits. You also define property rights. Who has the right? Do people have a right to pollute or do people have a right to consume fresh air? It is important that we empower people for equity so that they will be able to bring the defaulters to book. It is important that we involve people, make them participate for enforceability, educate and awareness for consensus is also important here and right to information for timely action cannot be denied. And the moment you make the rules and regulations transparent the success is almost sort of assured. So that is the taxonomy that I thought I would propose since this is an idea is to sort of make you think so that whatever you want to share with your students you make appropriate changes and do that. So thank you for your attention. Now I can have a discussion for about 15 minutes. Thank you sir sir. I am from West Bengal as you can see. The thing is like there are certain areas in West Bengal which were extremely strong in industrial factories etc which were mainly manufacturing units. But as of may say for the past decade or so there are many units which have stopped functioning due to perhaps lack of modernization or labour problems. But sir those companies those small scale industries are there polluting the atmosphere at extremely low level like a three-story building to be surrounded by smoke at a very peak hour of say 11 am in the morning whereas school is running. Sir the thing is like the regulatory authorities are all there but I guess it should be better if there could be an apolitical theme since from the centre. Exactly in the way that a monitoring is done at a say at a sporadic time period of any arbitrary time period where they just move down and find out who are the lawbreakers. Sir the situation in this area mainly Hauda and the adjoining areas in this district the situation is real sir. How could this problem be addressed sir from the central point of view? No actually you know this is the regulations are promulgated both by the central as well as by the state governments. It is the responsibility of both but eventually when it comes to enforcement at the state level it becomes the responsibility of the state government. So we have one CPCB and several you know state level pollution control boards central pollution control board and state level pollution control boards. Now my point is specifically with this example or other cases the regulators will have to continually monitor and identify people who are not othering to the norms. The one way of doing it is by incentivizing those who are already meeting the norms. Not all of them can equally can need necessarily be you know equally bad. So my point here is that the regulator plays an important role. So the norms if the norms are very clear you know you cannot say state government unable to do therefore you have to shift it to central government etc. Everyone has to perform their you know their roles then only we can succeed in a federal structure like us. So the regulator at this state level will have to definitely. Now the thing is if information about this is made public so that people can participate stakeholders can participate that will also make a very important difference. In order for the incentive system to work like you know supporting innovation etc. people's participation is very important. How many of us are willing to sort of you know support a movement for you know clean air? Good afternoon sir. So my question is what does it mean to say that resources are scarce and what does that scarcity have to do with the environment? Obviously you know when you say resources are scarce in the relative terms you know it is all in relative terms. How much we would like to have and how much we actually have and if the moment you have scarcity then efficiency of using it definitely comes into being. It is true for water it is true for clean air and the like. Resources are definitely scarce in terms of human to meeting the human needs and aspirations. How to give the cost value to the intangible components in the intangible environment components in computing IEC? No most of the thing that we talked about yesterday are tangible things not really intangibles. For intangible you have to bring in what is called economics we teach a concept called shadow prices which is very difficult to do it it is not easy. So we are talking more in terms of tangibles not really intangibles. Let us do the tangibles first properly then we will talk about the intangibles. Sir environmental impacts are more economical manner why we intended to use the products which are energy efficient and on 5 star rating we so called. So government should some policy to enhance the use of 5 star products so use less energy and harm less to environments. I agree that is exactly what I am trying to indirectly say that you know it should be other with pricing should be other way around taxes should be other way around there are tax subs given but then the cost of protection of them are quite high that is why they price high that is what the industry is saying. But I agree with you that the incentive should be given for those which comply environmental regulations and also reduce energy consumption rather than those which are not at all energy efficient. We are from Bly Institute of Technology and my question is in your opinion what is a bigger issue on the path of sustainable development? It is economics or it is a political will? Well I guess you know it is I guess it is more economics. Political will come if we can justify it economically. Our politicians are not bad so definitely they will you know turn around accept it if we can justify economically. So on economical parameter we should discuss more when we talk about sustainable development. I agree. Shall we conclude it like this? I definitely agree it is important that we understand it more improve the awareness then automatically it will get popular acceptability among the politicians also. Our question is there sir how much political feasibility role of point it is important to help economy of our nation which helps also to make good environment. See it is important to achieve economic development because nowhere no I would like to say we should compromise on that. It is very very important to achieve high rates of economic development and very soon but if it is possible to adopt environmentally benign practices in the process of achieving the development why not? So why do not we search for it? So I am not saying we should wait for these new innovations to come for the economic development to have but as we proceed on development path if we can also simultaneously search for better technologies we should definitely support it. Myself from Dronachary College of Engineering in Gurgaon sir my question is on water pollution in the last session it was mentioned that more efficient the treatment more cost to public because this question is related to economics also that is why I am asking to you more effective treatment more cost to public. I want to mention here sir industries are discharging quality water in the rivers. If more efficient techniques exist and why we don't impose these techniques to the industry so that efficiently treated water will be discharged in the river. If we discharge collected water in the river and after that we plan to clean the rivers by investing north of rupees. So I want to know from you why the water should be treated by the efficient techniques before entering in the river. At the same time why the air polluted air should not be treated efficiently before entering in the atmosphere. Where is the LACNA? Why this is not actually forcefully implemented? That is the biggest problem this is the biggest problem that our industries face and regulators also face. So very often what happens is they are unable to spot where exactly the pollution is emitting from either water or air. So once you are not able to identify the location and become very difficult to enforce it comes back to the problem of moral hazard as I told you earlier. So it is to avoid the moral hazard problem that the government I am recommending incentivizing the polluters so that you know there is appropriate action appropriate you know behavior that comes from them to in response to the incentives. After all in economics we strongly believe that people do respond to incentives. So it is that which is becoming because there are costs attached to meeting the regulations emission norms. So that is where we need to sort of understand and also try to help if possible the industries to cope with this. We should not look at them only as victims or you know culprits who are indulging in such behavior. So yeah we will wind up now. Thank you for the questions. We will meet again at 1.30 after lunch.