Rapid industrial growth in emerging economies, especially China and India, has greatly improved the living standards of the average citizen but wrought widespread environmental damage. For example, high levels of particulate matter air pollution in urban India are associated with sharply higher mortality, and improper disposal of waste effluent can taint drinking water supplies and affect agricultural productivity. The role of environmental regulation is to contain these externalities. Low institutional capacity or poor implementation, however, may make regulation itself a poor check on environmental harms. A stringent formal regulatory framework that sets acceptable levels of industrial air and water emissions will not be effective if these standards are only weakly enforced in practice. Sustainable development will require a way of monitoring and penalizing industrial pollution so that the firms driving the country’s future growth face private incentives aligned with social benefits. The study will explore three different ways to better achieve this alignment.
The proposed study is a collaborative research project with the pollution control board in one of India’s fastest growing states. We will consider public and private options for improving enforcement of environmental regulation. The public channels are a targeted increase in pollution inspections by the regulator and disclosure of plant-level pollution readings, and the private channel is an improved third-party environmental audit scheme. We are conducting a large-scale field experiment where these interventions will be applied to a random sample of factories with high pollution potential. The randomized trial design will enable us to estimate the causal effect of these monitoring mechanisms on pollution emissions at the factory level. These estimates can play a central role in helping developing countries design effective strategies to achieve sustainable economic growth.
The primary target audience for this study consists of environmental policy makers in the developing world. Our study’s measurements of the efficacy of different methods of industrial pollution control will be particularly applicable to regions with fast industrial growth, which are confronting similar environmental issues. In addition, the environmental audit treatment is designed to measure the response of auditors to incentives for accurate reports. The transparent incentive system and well-defined results, especially auditor accuracy and firm pollution reductions, will enable this project to link audit market structure to outcomes. Knowledge of this link will help design other markets troubled by the same connection between clients and auditors, such as the markets for financial auditors or security rating agencies in the United States.
