Can environmental regulations reduce pollution in developing countries? The stakes for the answer to this question are high. Pollution concentrations in India, China, and other developing countries are at levels that exceed the highest concentrations recorded in developed countries. Further, there is compelling evidence that pollution kills people prematurely and otherwise harms health (Ransom and Pope 1995; Chay and Greenstone 2003; Almond et al. 2010). Yet, there is great skepticism that complex environmental laws can be successfully enforced in many developing countries due to poor funding for regulators and corruption. This project will produce rigorous evidence on how politically-feasible changes in regulation can reduce pollution in India, an important developing-world context. The study uses a unique, large-scale randomized experiment conducted in one of India's fastest-growing and most polluted industrial states to evaluate the efficacy of improvements in two common instruments - inspections by state regulators and private third-party environmental audits - at reducing plant-level pollution. These improvements were designed and the evaluation is being conducted jointly with the environmental regulator. The context of the study and direct partnership with the regulator ensure high external validity and the ability to scale successful project findings to other Indian states. The estimated causal effects of regulation on pollution levels will be the first experimental evidence on these questions, which have been studied extensively in the United States (e.g., Chay and Greenstone 2005; Greenstone 2004), and much less in rapidly industrializing countries. We will also estimate the costs of increased environmental compliance for plants and whether plant-level regulation generates spillover effects. The project will also study the political economy of the regulatory process. The PI's will examine how increasing the independence of auditors from audited industrial plants changes the accuracy of audit information. Administrative data from the files of the regulator will help identify when and why violations lead to sanctions. This will shed light on the limits to pollution enforcement in a developing-country context. Broader Impacts: The project will have broader impacts on the design of environmental regulation in the developing world. The results will have a direct bearing on the best regulatory structure for Gujarat and other Indian states and therefore an indirect bearing on the air and water quality of over a billion Indian citizens. National environmental policymakers have already expressed interest in using the project's findings and have begun the dissemination process by hosting a conference for state regulators to share ideas on environmental regulation. The project's impact is also applicable to other contexts, such as health and finance, where hird-party audits are part of the regulatory system The research project is associated with mentoring of graduate and master?s students in the United States. It will also improve infrastructure for research and education in India, by strengthening relationships between the U.S.-based PIs, Indian researchers and local project partners, including governmental and non-governmental bodies, working in the environmental sector in India. The implementation of the project itself will expand the availability of environmental information, and the results and newly-generated dataset will be disseminated broadly, to both academic and popular audiences.
To keep our air clean and head off financial crises, it is not enough to pass stringent laws regulating factories and banks—these laws need to be reliably enforced. Implementing regulations can be especially hard in developing countries. In India, the context of our research, environmental laws are very strong on paper, yet more than 660 million people are exposed to dangerously high air pollution. Our project "Regulating Industrial Pollution: Experimental Evidence from India" studied how environmental regulation might be better enforced, both by governments and by private, third-party auditors. The tools of government inspections and audits are commonly used across the world. For example, the financial results of US public companies are audited by third-parties, and their securities are rated by credit ratings agencies, and the US EPA inspects firms for environmental compliance. Yet we do not understand how to make these enforcement mechanisms work reliably. We used a large-scale policy experiment in one of India’s fastest-growing industrial states, Gujarat, to evaluate whether improvements in state inspections and private third-party audits reduced pollution from industrial plants. These improvements were designed, executed, and evaluated jointly with the state’s environmental regulator. In a sample of nearly 1000 industrial plants, the regulator tried out improvements in both means of enforcement on an experimental basis for some treatment plants. For audits, environmental auditors were made independent of client plants, by assigning auditors to plants, and their reports cross-checked in the field to ensure accuracy. For inspections, the regulator ensured that treatment plants were inspected much more often. The study findings show that information is one constraint to better environmental compliance. Making third-party auditors independent greatly improves the quality of their reports. In the old system, auditors commonly reported that dirty plants were compliant with pollution standards. Under the new system, false reporting by auditors to the regulator fell by about 80 percent. When regulators received more accurate information about plant pollution levels, plants responded by cutting pollution. Increasing the frequency of environmental inspection also modestly improves compliance with pollution standards. However, our study of the inspection process finds that these improvements are costly since they require that many additional plants be inspected and threatened, to get a few plants to clean up. This study has had significant academic and policy impacts. On the academic side, it has led to four well-cited papers of interest for economists and policy-makers working on the design of regulation. On the policy side, the state of Gujarat began implementing random assignment of auditors and central payment of all third-party pollution audits in January, and other Indian states are considering similar measures. The findings have also drawn attention from US regulators in both the environmental and financial spheres, as well as wide attention in the popular press. In 2013, the Wall Street Journal published a full-length article on the audit study, focusing on implications for reforms to US financial regulation. A. Academic Duflo, E., M. Greenstone, R.Pande, and N. Ryan. 2013a. What Does Reputation Buy? Differentiation in a Market for Third-Party Auditors. American Economic Review, Papers and Proceedings, 103(3): 314-19. Duflo, E., M. Greenstone, R.Pande, and N. Ryan. 2013b. Truth-telling by Third-party Auditors and the Response of Polluting Firms: Experimental Evidence from India. Quarterly Journal of Economics, 128 (4): 1499 – 1545. Duflo, E., M. Greenstone, R.Pande, and N. Ryan. 2014. The Value of Regulatory Discretion: Estimates from Environmental Inspections in India. National Bureau of Economic Research Working Paper No. 20590: www.nber.org/papers/w20590 Greenstone, M.,J. Nilekani, R. Pande, N. Ryan, A. Sudarshan, and A. Sugathan. 2014. "Lower Pollution, Longer Lives: Life Expectancy Gains If India Reduced Particulate Matter to Air-Quality Standards." Accepted, Economic and Political Weekly. B. Policy Abdul Latif Jameel Poverty Action Lab. 2013. Truth-Telling in Third-Party Audits. J-PAL Policy Briefcase: www.povertyactionlab.org/publication/truth-telling-third-party-audits Duflo, E., M. Greenstone, R.Pande, and N. Ryan. 2013c. Truth-telling by Third-party Auditors and the Response of Polluting Firms: Experimental Evidence from India. 3ie Impact Evaluation Report 10: www.3ieimpact.org/media/filer_public/2013/10/19/ie_10_gujarat_pollution_final.pdf Greenstone, M., R. Madhok, R. Pande, and H. Shah. 2013. Water pollution and public health in India: The potential for a market-friendly approach. Health and South Asia, Cambridge, MA: Harvard South Asia Institute: 61-65 C. Popular Economist. 2015. Indian Winter: Narendra Modi should learn from China’s mistakes before it’s too late. February 7, 2015. www.economist.com/news/leaders/21642172-narendra-modi-should-learn-chinas-mistakes-its-too-late-indian-winter Ghosh, P. 2010. Tamil Nadu, Gujarat to have pilot emissions trading scheme. Live Mint, December 23, 2010. www.livemint.com/Politics/stnlPYzumLErSKxGAyD5WI/Tamil-Nadu-Gujarat-to-have-pilot-emissions-trading-scheme.html Greenstone, M. and R. Pande. 2014. India’s Particulate Problem. The New York Times, February 9th, 2014. www.nytimes.com/2014/02/10/opinion/indias-particulate-problem.html?_r=0. Greenstone, M. 2013. See Red Flags, Hear Red Flags. The New York Times, December 6th, 2013. www.nytimes.com/2013/12/08/opinion/sunday/see-red-flags-hear-red-flags.html Ryan, N. and A. Sudarshan. 2014. The Right to Clean Air. Indian Express, February 6th, 2014. http://indianexpress.com/article/opinion/columns/the-right-to-clean-air/. Wessel, David. 2013. Paying Auditors for Honest Appraisals. Wall Street Journal, July 17th, 2013. www.wsj.com/articles/SB10001424127887324263404578611392640896694
