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Polluter-pays-principle: Role in the National Resource Efficiency Policy

The draft National Resource Efficiency Policy (NREP) policy enlists a number of market-based and regulatory instruments that can drive resource efficiency. The polluter-pays-principle is one such instrument is that will play a central role in doing so.

The PPP is an internationally recognized market instrument to abate pollution. Historically its application has been rare and often associated with big polluters. As India readies its industries to transition into a more resource efficient future, it will be vital to ensure proper enactment of PPP down to the local level. This article will explore the mechanisms of polluter-pays and its effectiveness in incentivizing resource efficiency in the Indian context.

PPP is a core legal instrument used to implement environmental laws

The Rio Declaration adopted at the UN Conference on Environment and Development in 1972 first introduced the Polluter-pays-Principle at an international level. Principle 16 in the declaration states:

 “National authorities should endeavour to promote the internalization of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution, with due regard to the public interest and without distorting international trade and investment.”

The PPP is primarily legal and an ethical instrument that has been a part of environmental legislation in the European Union. In India landmark cases like M.C. Mehta vs. Union of India in 1986 enacted the PPP holding the polluter liable for damages due to oleum gas leak. Since then, the National Green Tribunal (NGT) uses PPP as one of their core principles to hold state governments and industries responsible for causing environmental and societal harm.

PPP in the context of the draft NREP

The draft policy states that “It is fundamental to ‘get the prices right’ through internalizing environmental costs and implementing the precautionary principle and polluter-pays principle.” In the context of NREP, PPP will be enacted in the form of taxes and marketable permits etc. essentially a combination of market based instruments and command-and-control approaches. As an example, cap-and-trade system which is led by the market requires some regulatory intervention to ensure market does not collapse. In conversation with Mr. Souvik Bhattacharjya, Fellow, TERI and Dr. Shilpi Kapur, Fellow, TERI who are co-authors of the reference report for the draft NREP said that “eventually producers can come up with market mechanisms and create incentives among the consumers that if they participate in a certain program/initiative then they can be paid for their efforts like in a deposit refund system. They will be able to make money with resource efficiency but at the same time incentivizing consumers to participate in those kinds of initiatives”. 

Estimating pollution costs for common pool resources

The true cost of a good or a service can only be determined if the right value is placed on resources used to generate that good/service. In the discussion with Mr. Bhattacharjya & Dr. Kapur, when asked about methodologies for determining costs of those resources they referred to the shadow pricing approach. This is defined as the estimated price put on intangible assets (i.e. resources that do not have a market price). There are a series of assumptions taken into consideration when shadow pricing natural resources, in this case the cost of abatement is assumed to be cost of pollution. Dr Kapur added, “Cost of abatement is what needs to be internalized to the costing structure of the company. What companies are doing currently is that they are just calculating the private production cost”. While there is no blanket methodology to determine the cost, each type of resource will have a specific approach. For example:

  • Air: Cost of shifting to cleaner fuels can be considered as the cost of pollution as well as secondary approach through health as that is cost incurred by society
  • Forest : Cost can be estimated through carbon sink opportunity of the forest cover

The intention of PPP in NREP is to push both consumers and producers

PPP is there not just to discourage producers from overusing, but also to make sure consumers make smarter more efficient choices. When asked if consumers will have to bear the burden of the cost on industries/entities Dr. Kapur responded, “The aim is to incentivize good behavior as well as disincentivize bad behavior. Part of the cost should also be passed on to the consumers which will push good behavior from the consumer side. For producers to implement Extended Producer Responsibility (EPR) they will need support of the consumers”. This can also encourage consumers to explore alternatives and/or maximizing utility of a good or a service.

PPP’s potential effect on sectors covered under NREP

PPP takes on a pragmatic approach to implement resource efficiency

Polluter-pays-principle was popularized as an environmental law signified by legal interventions taken against point source pollution. For NREP, PPP takes on a different form. It is envisioned as a proactive economic policy that holds polluters accountable while imposing charges high enough to prevent it in the future. Since the production and consumption of goods and services involves a large number of players, PPP will be an effective tool when imposed in the form of market instruments. The effort to integrate command-and-control approaches with market based approaches can result in a smooth transition given entities are levied appropriately, enabling them to develop as well as be resource efficient. Initiatives like tradable pollution permits can be a source of revenue for industries and consumers can benefit from deposit refund schemes put in place by those industries.

The call for a national level policy for resource efficiency in India is a requirement if the country wants to develop in a sustainable manner. Using polluter-pays-principle as a central tool in doing so can support economic growth and well as development.

This article is the second part in a series that examines how polluter-pays-principle (PPP) can aid the implementation of NREP. Refer to the earlier article here.