In the Yale Environmental Performance Index, India ranked last out of 180 countries. Anant Sudarshan examines the broader economic and developmental costs of environmental degradation. Based on the literature and his own empirical work he argues that regulatory stagnation has made it harder to find solutions, with India failing to sufficiently engage with promising innovations in environmental policy. He suggests that environmental governance in India would benefit from more research-policy collaboration and broader disciplinary expertise.

India is severely underperforming on international development indices. The most recent Global Hunger Index ranked the nation 101 out of 116 countries, behind its neighbours Pakistan and Bangladesh. But in early June 2022, we managed to hit rock bottom. On the 2022 Yale University Environmental Performance Index (EPI), in an assessment of 180 countries, India ranked dead last.

The government's response to bad news has largely been to shoot the messenger, but the EPI has several features that make it hard to ignore. First, the ranking is produced by one of the world’s best universities. Second, a country’s score is not mostly determined by subjective assessments of policy and governance but rather by an extraordinarily wide range of environmental outcomes, on most of which India rates very poorly (see Table 1). Third, the data come largely from objective scientific sources – satellite measures of deforestation or air pollution, for instance – rather than small surveys or expert assessments.

Table 1. Category scores for India on the 2022 EPI

COMPONENT	RANK	EPI SCORE	10-YEAR CHANGE
EPI	180	18.9	-0.6
Biodiversity	179	5.8	-0.5
Ecosystem services	97	25	-14.3
Fisheries	42	24.5	-10.4
Acidification	132	54.4	21.3
Agriculture	70	40	1.2
Water resources	112	2.2	-
Air quality	179	7.8	-
Sanitation drinking water	139	19.5	9.6
Heavy metals	174	20.6	4.3
Waste management	151	12.9	0.6
Climate change	165	21.7	-0.9

Note: Each category is built up from multiple indicators (see epi.yale.edu for sources and data downloads).

The economic costs of environmental degradation

Policy conversations about environmental outcomes in India seem to invariably end up with debates about the ‘trade-off’ between getting richer and protecting nature. With an eye on growth, should India worry about how we rank on the EPI?

A starting point to answering this question is to recognise that it assumes a false dichotomy. The implicit assumption that we can meaningfully separate economic wealth from environmental quality has remained remarkably persistent in the face of decades of work making the contrary case¹. Indeed much of this research has been led by one of India’s foremost economists, Partha Dasgupta. Unfortunately, many Indian policymakers and experts still view environmental outcomes through the deadening lens of the Environmental Kuznets Curve, an inverse U-shaped empirical regularity between environmental quality and income, that is based on poorly measured data and makes no claim to causality².

Recent empirical work provides clear causal evidence on the ways in which environmental damages create barriers to continued economic well-being. For instance, research shows that air pollution has led to increased morbidity and shorter lives (Ebenstein et al. 2017). These estimates suggest that Indians would live about three years longer were they to meet their own air quality standards³. The impact of poor air quality on life expectancy is greater than smoking, alcohol, malaria, poor sanitation, or HIV. Poor air quality has also been linked to reduced crop yields (Burney and Ramanathan 2014), lower worker productivity (Chang et al. 2019), and deterioration in cognitive skills and educational outcomes (Bharadwaj et al. 2017).

As a different example, consider biodiversity. The Centre for Science and Environment (CSE) recently estimated that over 90% of the area under biodiversity hotspots in India has been lost (CSE, 2021). The extinction of other species can impose real costs on human beings. In a recent working paper (Eyal and Sudarshan 2022), my coauthor and I found that the near extinction of vultures in India, caused by the chemical diclofenac, may have significantly increased adult mortality through channels such as more rabies and higher water pollution.

When it comes to climate change, India is in the tricky situation of having very low per capita emissions while still being the world’s third largest emitter and highly vulnerable to climate change. Some projections suggest that at current rates of CO₂ emissions, by 2100, more than 1.5 million people could die each year in India from the effects of heat (Greenstone and Jina 2019). Anyone who was caught outdoors during the heatwave earlier this year knows exactly how bad heat stress can be. The costs of future warming are also more insidious and wide-ranging than mortality. A growing body of evidence has shown negative effects on worker productivity (Somanathan et al. 2021) and crop yields (Schlenker and Roberts 2009, Gupta et al. 2016, Zhao et al 2017).

Going by the present debates in the Indian media, cultural revivalism sometimes seems more important than poverty alleviation. If so, a very high existence value⁴ should be placed on ecological endowments. The Chairman of the Economic Advisory Council, the polymathic Bibek Debroy, tells a story about the modern day version of the Kritamala river, where Manu is said to have rescued a small fish, the Matsya Avatara of Hindu God Vishnu, who in turn saved his life (Debroy 2019). By the time it reaches Madurai, this once sacred river has today adopted the unsavoury form of a drain passing near the railway station. A modern day Manu would be hard pressed to find any fish left to rescue.

Why are the outcomes so disappointing?

The point of rankings such as the EPI is to allow comparisons across countries. India is doing worse than those that are growing faster or slower, that are richer or poorer, that are densely populated or sparsely populated. These disastrous environmental outcomes are thus not a consequence of poverty, or capitalism, or over-population. Instead, the outcomes we see are a damning indictment not of the costs of development, but of environmental regulation in India.

The foundation of environmental regulation in India is three pieces of legislation – the Environment Protection Act (1986), the Water Act (1974), and the Air Act (1981). When they were first passed, these were among the strictest and most forward-looking environmental laws in the world. Yet they have proved difficult to implement, are widely ignored, and do not seem to have accomplished their purpose.

Why is this? One reason may be that India’s environmental laws are paradoxically too strict (Ghosh 2016). The penalties for environmental violations are largely criminal, including imprisonment. The use of harsh criminal penalties has meant that regulators must fight their way through a long process in courts to punish polluters, and the result of winning such a battle may then be a punishment that is out of proportion to the crime. These transaction costs force pollution control boards to exercise discretion, while allowing most violations to go unchecked (Duflo et al. 2013, Duflo et al. 2018). Put differently, when the only deterrents are nuclear, there may be no deterrence at all. Figure 1 shows how this plays out in the form of widespread non-compliance.

Figure 1. Emission levels reported by Maharashtra industries

Source: Reproduced from Greenstone et al (2017)
Notes: i) The histogram plots emission levels reported in regulatory tests, based on over 13,200 digitised regulatory inspections data collected as part of a project to design a green ratings scheme for air pollution from Maharashtra industries. ii) The vertical line shows the standard regulatory limit of 150 mg (milligrams)/nm3 although some industries have even more stringent limits. Non-compliance is widespread.

At its worst, this system is a recipe for corruption and regulatory harassment. At its best, it is an unpredictable and costly way of delivering suboptimal environmental outcomes. It has also evolved into a form of regulation that is excessively dependent on the judicial system. Enforcement often requires filing criminal cases, which fail to reach conclusions in courts in any reasonable timeframe. For instance, the CSE estimated there are about two wildlife cases brought to court every day in India, entering a system with a backlog of about 50,000 cases and a clearance rate lower than the entry of new cases (CSE, 2021).

Regulatory cases are not the only way the justice system intervenes. Courts have also had to respond to public interest litigation. The judicial response has all too frequently involved draconian measures. In a pair of famous judgements in 1996 and 2000 for instance, the Supreme Court ordered the sudden closure of thousands of industries across Delhi. Some of these judgements may have contributed to widespread dissatisfaction with environmental protection.

Structural weaknesses in the regulatory system also play a part. India’s pollution control boards are chronically understaffed and underfunded (Greenstone et al. 2017). They also lack broad cross-disciplinary expertise. Technical staff in the pollution control boards are overwhelmingly scientists and engineers. Yet designing and implementing regulation is not an engineering problem. It requires an understanding of incentives, behaviour, and policy design. There are virtually no environmental economists or public health experts amongst India’s regulatory staff.

This myopic view of what makes for good environmental regulators is currently so ingrained in India that the rules for appointing the Chairman of the Central Pollution Control Board require that “he possesses Master’s Degree in science relating to environment or Bachelor's Degree in engineering…”. It is a separate problem of course that the pronoun in question is male.

When it comes to environmental regulation, a 1991 moment⁵ never arrived in India. Our laws have changed little from when they were drafted in the 1970s and 1980s. Built on a command-and-control approach and a system of licenses and clearances enforced by committees and backed by criminal sanctions, they have led to little innovation and disappointing results.

The role of regulatory innovation

If I were reading this piece rather than writing it, this is about the time I’d be hoping for the big reveal, the solution to India’s environmental problems. Unfortunately, there are no catch-all solutions available. There is however, a potentially vast return to experimenting with alternate forms of regulation.

This is a role tailor-made for research-policy collaboration. Politicians and bureaucrats need to recognise that solutions can only be found through regulatory innovation, eventually leading to evidence-driven changes in environmental governance. Meanwhile researchers must take up the challenge of engaging in inter-disciplinary, long-run empirical projects.

There are examples of success following this approach. In my own work (Greenstone et al. 2019), my colleagues and I spent 10 years working with the Gujarat Pollution Control Board to implement India’s first cap and trade market targetting particulate emissions from industry in Surat. The pilot involved a large-scale randomised control trial (RCT) covering over 300 mostly small and medium industries in the textile sector, located in and around the city, and largely burning domestic coal. When the project began, a survey revealed about 80% of plants were emitting above the regulatory limit!

Why did it take 10 years to get a market started? Part of the reason was the need to solve a range of difficult problems – how to monitor emissions and write standards for the technology (Central Pollution Control Board, 2013), how to build a trading platform, how to legally change regulation to allow for a market, and so on. These are not straightforward challenges and required a cross-disciplinary team willing to work for extended periods of time. But another major reason for delays was simply the significant scepticism involved in the broader regulatory system where a culture of research-driven policy innovation did not exist.

The textbook case for emissions markets is straightforward. Allowing plants to trade permits – which entitle them to emit a certain quantum of pollution – reduces costs by letting the market allocate abatement effort differentially across emitters. For instance, a large plant with existing capital investment might be rewarded for reducing pollution by selling permits to small textile units who operate only seasonally and who might find it difficult to make large capital investments. Compliance is enforced using proportional fines, instead of criminal penalties. These fines can be implemented automatically by drawing on an initial deposit.

This does not occur in the present scenario. Large plants might make the minimal effort needed to hit the command-and-control standard, but no more, while numerous smaller plants might choose to violate. Since filing criminal cases against hundreds of polluters is politically and logistically infeasible, regulators restrict themselves to picking a few egregious emitters to penalise.

So how did markets perform in practice? After nearly two years of running the Surat market, early results look encouraging. Plants in the trading scheme cut emissions by about 20% relative to a statistically identical control group⁶. There was no evidence of a significant increase in costs in return for these cuts. There has also been high compliance with the market – plants bought permits and fines were levied when needed (which was rarely).

It is too early to make conclusive statements about long-run outcomes. Yet for now, it appears that the same institutions that seem to struggle with status-quo approaches are able to operate an emissions trading regime. We found that industry was generally supportive, in part because the reliability of the market was preferred to the uncertainty of the existing system. On 5 June (World Environment Day) 2022, the Chief Minister of Gujarat announced that the Surat Emissions Trading Schemes (ETS) will be replicated in other parts of Gujarat.

This project is just one example. There are other high potential ideas which remain untested. Take transport, for instance – there is evidence that Delhi’s ‘odd-even’ scheme cut pollution by reducing the number of cars (Harish et al. 2016), but it did so with an inflexible and difficult to enforce mandate. We know there are better ways of discouraging driving. Placing a charge on driving during high pollution days is technically straightforward to do using radio frequency-identification (RFID) tags on cars (Delhi’s FastTag system is one such example). Yet we have never tried to introduce dynamic pricing of vehicular traffic in an Indian city.

Similarly, on the problem of deforestation and biodiversity loss, evidence suggests that community forest management is cheaper and more effective than top-down centralised control (Somanathan et al. 2009). There are questions about how sustainable this is in the long run, but ecosystem payments could solve that problem. There is empirical evidence from other countries that such payments work (Jayachandran et al. 2017). Yet in India we have remained wedded to a centralised, colonial view of how to protect our forests in the face of terrible results.

Conclusion

Environmental policy is also development policy. Distinguishing between the two, as both policymakers and academics are wont to do, risks missing the motivation for the first, while ignoring a major determinant of the second.

The EPI ranking produced a predictably defensive response from the Ministry of Environment, Forests, and Climate Change. This is both unnecessary and unhelpful. India’s performance is not the fault of any single regime. It is the cumulative consequence of ecological capital that has steadily depreciated over decades, including over the last seven years. For this very reason, it is unlikely that the future will look better without structural changes and innovation in environmental governance.

Notes:

1. See Daily et al. 2000 for an accessible discussion on this.
2. For more on the arguments and evidence around the Environmental Kuznets Curve, see Dasgupta et al. (2002).
3. See the University of Chicago Air Quality Life Index for state-specific estimates and the underlying data.
4. Existence values reflect the benefit people receive from knowing that a particular environmental resource exists. It is an example of non-use value, as they do not require that utility be derived from direct use of the resource; the utility comes from simply knowing the resource exists.
5. India’s foreign reserves fell to an all-time low in 1991, which necessitated the implementation of economic liberalisation, privatisation and globalisation (LPG) reforms. As a result, 1991 became a watershed year in India’s economic history.
6. While the treatment group is exposed to the experimental condition, in this case being regulated using an emissions trading regime, the control group is not and is regulated per the status-quo.

Further Reading

• Bharadwaj, Prashant, Matthew Gibson, Joshua Graff Zivin and Christopher Neilson (2017), “Gray Matters: Fetal Pollution Exposure and Human Capital Formation”, Journal of the Association of Environmental and Resource Economists, 4(2): 505-542.
• Burney, Jennifer and V Ramanathan (2014), “Recent climate and air pollution impacts on Indian agriculture”, PNAS, 111(46): 16319-16324.
• Centre for Science and Environment (2021), State of India's Environment 2021.
• Chang, Tom Y, Joshua Graff Zivin, Tal Gross and Matthew Neidell (2019), “The Effect of Pollution on Worker Productivity: Evidence from Call Center Workers in China”, American Economic Journal: Applied Economics, 11(1): 151-172.
• Daily, Gretchen et al. (2000), “The Value of Nature and the Nature of Value”, Science, 289(5478): 395-396.
• Dasgupta, Susmita, Benoit Laplante, Hua Wang and David Wheeler (2002), “Confronting the Environmental Kuznets Curve”, Journal of Economic Perspectives, 16(1): 147-168.
• Debroy, B (2019), The Bhagavata Purana 2, Penguin.
• Duflo, Esther, Michael Greenstone, Rohini Pande and Nicholas Ryan (2013), “Truth-telling by Third-party Auditors and the Response of Polluting Firms: Experimental Evidence from India”, The Quarterly Journal of Economics, 128(4): 1499-1545.
• Duflo, Esther, Michael Greenstone, Rohini Pande and Nicholas Ryan (2018), “The Value of Regulatory Discretion: Estimates from Environmental Inspections in India”, Econometrica, 86(6): 2123-2160.
• Ebenstein, Avraham, Maoyong Fan, Michael Greenstone and Maigeng Zhou (2017), “New evidence on the impact of sustained exposure to air pollution on life expectancy from China’s Huai River Policy”, PNAS, 114(39): 10384-10389.
• Ebi, Kristie, Jennifer Vanos, Jane W Baldwin, Jesse E Bell, David M Hondula, Nicole A Errett, Katie Hayes, Colleen E Reid, Shubhayu Saha, June Spector and Peter Berry (2021), “Extreme Weather and Climate Change: Population Health and Health System Implications”, Annual Review of Public Health, 42: 293-315.
• Frank, EG and A Sudarshan (2022), ‘The Social Costs of Keystone Species Collapse: Evidence From The Decline of Vultures in India’, Working Paper.
• Greenstone, M, S Harish, R Pande, and A Sudarshan (2017), ‘The Solvable Challenge of Air Pollution in India’, India Policy Forum 2017-18, National Council of Applied Economic Research.
• Greenstone, M, R Pande, N Ryan and A Sudarshan (2019), ‘The Surat Emissions Trading Scheme: A First Look at the World’s First Particulate Trading System’, White Paper.
• Gupta, Ridhima, E Somanathan and Sagnik Dey (2017), “Global warming and local air pollution have reduced wheat yields in India”, Climatic Change, 140: 593-604.
• Harish, S, A Sudarshan, M Greenstone and R Pande (2016), ‘Clearing the air on Delhi’s odd-even program’, Working Paper.
• Jayachandra, Seema, Joost De Laat, Eric F Lambin, Charlotte Y Stanton, Robin Audy and Nancy E Thomas (2017), “Cash for carbon: A randomized trial of payments for ecosystem services to reduce deforestation”, Science, 357(6348): 267-273.
• Schlenker, Wolfram and Michael J Roberts (2009), “Nonlinear temperature effects indicate severe damages to U.S. crop yields under climate change”, PNAS, 106(37): 15594-15598.
• Somanathan, E, R Prabhakar and Bhupendra Singh Mehta (2009), “Decentralization for cost-effective conservation”, PNAS, 106(11): 4143-4147.
• Somanathan, E, Rohini Somanathan, Anant Sudarshan and Meenu Tewari (2021), “The Impact of Temperature on Productivity and Labor Supply: Evidence from Indian Manufacturing”, Journal of Political Economy, 129(6): 1797-1827.
• Zhao, Chuang, Bing Liu, Shilong Piao and Senthold Asseng (2017), “Temperature increase reduces global yields of major crops in four independent estimates”, PNAS, 114(35): 9326-9331.