When do Firms Go Green? Comparing Price Incentives with Command and Control Regulations in India

Ann Harrison, Haas School of Business; Benjamin Hyman, Federal Reserve Bank of New York; Leslie Martin, University of Melbourne; and Nataraj Shanthi, RAND Corporation

Abstract: India has a multitude of environmental regulations but a history of poor enforcement. Between 1996 and 2004, India’s Supreme Court required 17 cities to enact action plans to reduce air pollution through a variety of command-and-control (CAC) environmental regulations. We compare the impact of these regulations with the impact of changes in coal prices on establishment-level pollution abatement, coal consumption, and productivity growth. While both CAC regulations and higher coal prices resulted in improved air quality, they operated through different channels. CAC regulations primarily increased the share of large establishments investing in pollution control equipment, and reduced the entry of new establishments. In contrast, higher coal prices reduced the intensive margin of coal use within all establishments, with price elasticities similar to those found in the United States. In terms of productivity, CAC regulations imposed a much higher cost on large establishments. Although CAC regulations were effective at increasing the number of large polluters that invest in“end-of-pipe” treatments, we provide evidence that price-based policies reduced the use of inputs with negative externalities across all firms.

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