Key message 4 – Policymakers need to innovate, tailoring traditional tools to their local market context.

The diversity of issues across contexts and the important interaction effects between them mean that there is no one-size-fits-all policy approach. Nevertheless, several broad directions for policy emerge from the growing literature on environmental policy in the developing world.

1. Provide increased information and transparency. Informational asymmetries can be particularly acute in developing countries, where citizens face poor education systems and a lack of clear communications by authorities about health hazards (Greenstone and Jack, 2015). Communications campaigns can increase willingness to pay for a cleaner environment, which can translate into growing demand for regulations and increased pressure on governments to implement effective policies.

Greenstone and Hanna (2014) argue that this dynamic helps explain why air pollution regulations instituted in India since the 1970s have had a significant effect on reducing pollution levels, while those for water pollution have not. Improving transparency on the producer side may also help reduce pollution levels by enabling those affected to push for lower emissions. Building on an IGC project, an ongoing campaign aims to test this by implementing a public star-rating programme for large plants in Maharashtra, India.

Finally, new monitoring technology can help with enforcement. In another IGC-funded project, Duflo et al. (2018) show that a continuous emissions monitoring system (CEMS), providing improved information about emissions, can significantly reduce pollution levels. As the costs of the technology fall, more authorities should consider mandating the use of these monitoring systems by large polluters.

2. Improve incentives for monitoring and enforcement.  Existing emissions control systems are often corrupted in developing countries. In Mexico City, Oliva (2015) shows that widespread cheating compromises the effectiveness of car emissions regulations and is not easily addressed by increased enforcement or penalties. Nevertheless, in other cases, some straightforward interventions can be effective in reducing pollution (see box below).

3. Improve credit and land-titling markets. Addressing imperfect credit and property title markets can also help increase willingness to pay for environmental quality. Studies in Rwanda and Bangladesh show that introducing more secure land titles and relaxing credit constraints, respectively, leads to increased investments in environmental protection (Ali, Deininger, and Goldstein, 2014; Guiteras et al., 2015). State institutions and microfinance lenders could play an important role in addressing these issues.

However, policymakers should beware of harmful interaction effects between market failures. For example, the presence of both credit constraints and environmental externalities can mean that increasing credit leads to more environmental degradation. Assuncao et al. (2013) find that credit constraints actually lowered deforestation rates in Brazil by limiting investments in farm animals requiring grazing land. This highlights the importance of policymakers working with researchers to estimate the effects of policy and staying open to changing course once those effects become clear.

Box 1: Improving monitoring and enforcement: Evidence from two IGC studies in India

Monitoring and enforcement of pollution standards is costly, particularly in developing countries where regulators tend to have low capacity, weak incentives, and limited technology. Nevertheless, targeted interventions to address specific market failures can reduce pollution at an acceptable cost.

In an IGC study, Duflo et al. (2013) showed that reforms to the environmental audit system can yield significant benefits. To address conflicts of interest by third-party environmental auditors in Gujarat, India, the researchers tested the effects of several targeted changes to the audit system, including randomising assignments and paying auditors from a central pool. They found that these led to significantly higher reductions in plant emissions at a reasonable cost – tentative estimates put the cost-benefit ratio at one to five.

In a related IGC study also in Gujarat, Duflo et al. (2018) examined the effects of regulator discretion and information on emissions. The researchers ran an experiment increasing resources for inspections and removing inspector discretion over which plants to check. They found that inspector discretion leads to three times more emissions reductions than random allocation, and that providing perfect information through technology (CEMS) leads to a further 30% emissions reduction. In other words, discretion is good, but good information is also important.