Key message 3 – Various policy tools are available for tackling pollution, but careful design is crucial.

To tackle air pollution, policymakers in the developed world have turned to market-based incentives and command-and-control instruments. Their peers in the developing world can learn from these experiences and adapt them to their local context.

Market-based incentives 

Market-based incentive systems, such as pollution taxes and tradable pollution permits, are the most cost-effective type of policy instrument used to reduce pollution, at least in theory. Policymakers can set either an optimal price (through a tax) or quantity (through a permit cap) for the target pollutant, and use market dynamics to ensure that the producers with the lowest costs of cutting pollution make the steepest cuts in emissions (Goulder and Parry, 2008). The empirical evidence from the United States (US) suggests that these tools can be effective (Schmalensee and Stavins, 2017).

Nevertheless, institutional weaknesses in developing countries, such as limited resources and low accountability, may make implementation infeasible (Laffont, 2005). India recently launched the world’s first emissions trading system which is projected to reduce particulate emissions by 29% (Greenstone et al., 2019). This programme will provide important lessons for other countries.

Command-and-control policies

Command-and-control measures, such as performance standards and technology mandates, are an alternative, less complex, class of instruments used to tackle pollution. Successful examples include India’s mandate on catalytic converters to reduce auto emissions and the global phase-out of leaded gasoline through an outright ban (OECD/UNEP, 1999).3 Meanwhile, the Mexico Clean Industry Program provides an example of a “hybrid” solution: Regulators implemented a voluntary certification programme together with emissions limits to reduce plant pollution (Foster and Gutierrez, 2013).

It is worth noting that poorly designed command-and-control measures can turn out to be counter-productive. For example, the Mexico City car ban, which keeps each car off the road for one day a week, has had no significant effect on air quality in the city, likely because drivers purchase additional older, “dirtier” vehicles (Davis, 2008). This case demonstrates that policymakers must study the anticipated effects of any policy, such as substitution behaviour, well in advance of rollout. Several additional considerations can make or break pollution regulations, regardless of the policy instrument chosen:

  • Political economy: Corruption and opposition by interest groups can blunt the effectiveness of environmental policy (Burgess et al., 2012; Duflo, Greenstone, et al., 2013; Oliva, 2015). There are several options to address this risk. One is through policy design – for example, policymakers can give emission permits away for free when launching a permit scheme to earn political buy-in from industry groups. Another is by increasing transparency around pollution to increase public pressure on firms and state institutions – more on this below.
  • Zoning: Policymakers should think about imposing zoning restrictions depending on how pollutants disperse in surrounding areas and the affected population densities. Possible solutions include applying different regulations by area or prohibiting “downstream” trades, though these complicate monitoring and enforcement (Goulder and Parry, 2008).
  • Cross-border leakages: Leakages across regulatory borders are particularly problematic where polluters are mobile. Policymakers should coordinate with neighbouring jurisdictions to avoid spillovers. Kahn et al. (2015) show that the central government can play a role by incentivising regions to consider pollution spillovers, based on a natural experiment in China.

Footnotes

  • 3 However, many countries also used differentiated taxes (a market-based incentive) as an interim measure to stimulate consumers to switch to unleaded fuels.