June 2, 2008
Series Editor: Ian Parry
Managing Editor: Felicia Day
Assistant Editors: John Anderson and Adrienne Foerster
Welcome to the RFF Weekly Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.
This week, RFF Senior Fellow Allen Blackman discusses experience with environmental policies in developing countries. Traditional forms of environmental regulation, like technology mandates, have not worked particularly well because the institutions and political will needed to enforce them has been lacking. In response, a number of developing countries have deployed innovative strategies, often inspired by successful policy experiments in industrialized countries. Unfortunately, however, the results have been disappointing in many cases, often owing to the same institutional and political barriers that have undermined conventional regulatory approaches.
Next week's commentary, by Harry de Gorter, will discuss interactions between tax credits and mandates for biofuels.
Environmental Policy Innovations in Developing Countries
After decades of rapid urbanization, population growth, and industrialization, developing countries are now home to many of the world's most severe environmental and natural resource problems. Increasingly, they are crafting regulatory policies to address these problems, relying principally on conventional command-and-control (CAC) approaches: legal mandates requiring firms and farms to take certain actions (such as treating wastewater) and prohibiting them from taking others (like clearing forests). Although some developing countries have made enormous progress, the overall the track record is mixed at best. The reasons are well known. Written regulations are often riddled with gaps and inconsistencies. Environmental regulatory agencies lack funding and trained personnel. Public infrastructure needed to control pollution has yet to be built. Difficult-to-monitor small and informal firms abound. And perhaps most important, the political will to enforce regulations is often limited.
Given this conundrum - grave environmental and natural resource problems matched with ineffectual policies - developing countries are increasingly experimenting with innovative regulatory strategies. The hope is that these "leapfrog" policies will sidestep the institutional and political constraints that have undermined CAC.
The popularity of different policy innovations has waxed and waned over the years. These phases reflect a bandwagon effect: an innovative policy is successfully piloted, often in an industrialized country; this experience stirs attention in international policy and academic circles; bilateral and multilateral aid organizations provide funds for new applications; and so forth. In what follows, I'll provide a brief, admittedly impressionistic sketch of the emerging empirical evidence on these experiments. The bottom line is that the overall track record is at least as uneven as that of CAC.
Influenced by the successful debut of the U.S. sulfur dioxide trading program, environmental policy innovation in developing countries 10 to 15 years ago emphasized economic incentive instruments like tradable permits and emissions fees, policies that provide financial incentives for improved environmental performance without dictating whether or how agents make these improvements. The usual argument for applying such policies is that, in theory, they are more cost-effective than CAC, a critical consideration in poor countries.
Several efforts to set up permit programs for air pollution in developing countries died on the vine. The most advanced applications have been in Chile and a handful of Chinese cities none of which have been particularly successful. Improved air quality in Santiago has been largely due to the construction of new pipelines supplying cheap, clean-burning natural gas. In China, virtually all permit "trades" have been administratively mandated. Although successful in some regions, Colombia's nationwide liquid effluent discharge fee program - arguably the mostly highly touted emissions fee program in a developing country - has been marred by limited implementation in other regions and widespread noncompliance in key economic sectors.
As calls for using economic incentive instruments in developing countries have waned, attention has shifted to other policy innovations, including public disclosure programs like the U.S. Toxic Release Inventory (TRI), that collect, verify, and disseminate information about facility-level environmental performance in order to heighten pressure for pollution control. A decade after the TRI was established, Indonesia launched its Program for Pollution Control, Evaluation and Rating (PROPER) for major sources of water pollution. Research suggests that the program has spurred significant emissions reductions. Subsequently, multilateral lenders backed efforts to replicate the program in China, India, the Philippines, and Vietnam. Although rigorous evaluations of the impact of these programs have yet to appear, two have not outlasted initial infusions of funding and technical assistance. However, preliminary evaluations of the Green Ratings Project, an independently financed and designed public disclosure program in India, echo those of PROPER.
Voluntary regulation is another environmental innovative strategy now receiving considerable attention. The term refers to programs and policies in which polluters voluntarily commit to environmental performance goals either unilaterally, in the context of an agreement with regulators, or within a program administered by regulators or a third party. Like their counterparts in industrialized countries, developing country policymakers are rapidly putting voluntary programs in place. But evaluations of these programs typically fail to find significant environmental impacts. For example, the Colombian Environment Ministry's 2006 evaluation of 47 voluntary agreements in a wide variety of economics sectors concluded that in only 10 cases did industry keep the bulk of its commitments, most of which were procedural, not substantive. In Mexico, an evaluation of four consecutive agreements with the tanning sector over 13 years showed that the agreements had virtually no substantive impact aside from creating the (less and less credible) appearance of forward progress. The record is not uniformly negative, however. Studies show that voluntary agreements in Chile and a national voluntary audit program in Mexico have spurred significant improvements.
Allen Blackman, Senior Fellow, RFF
Blackman received his Ph.D. in Economics from the University of Texas at Austin. He specializes in the economics of the environment in developing countries. In connection with his work, he has conducted research in Latin America and Asia.
In my view, the principal lesson from these policy experiments is that the critical assumption implicit in many environmental policy leapfrog efforts in developing countries - that innovative policies will somehow sidestep the institutional and political constraints that have undermined CAC - has generally turned out to be mistaken. Typically, the same constraints that have bedeviled CAC policies have undercut second- and third-generation policies. For example, tradable permit and emissions fees programs require a strong regulatory institution to reliably measure emissions and either enforce the facility-level caps implied by permit allocations or to collect fees. So it is not at all surprising that these programs have foundered in countries and regions with weak regulators.
Perhaps a bit more surprising is that voluntary regulation has also often fallen flat. Upon reflection, however, research on this instrument predicts this outcome. It suggests that a variety of incentives drive compliance with voluntary commitments including a background threat of mandatory regulation and pressure applied by consumers, capital markets, nongovernmental organizations, and community groups. The problem in many developing countries is that these drivers are relatively anemic.
In several cases where leapfrog experiments have been effective - for example, voluntary agreements in Chile and emissions fees in some parts of Colombia - many of the institutional prerequisites for effective CAC regulation were already in place. An exception appears to be Indonesia's public disclosure program, and to a lesser extent, India's Green Ratings Project.
To sum up, the record of environmental policy innovation in developing countries clearly indicates that cutting-edge policies, by themselves, are not a panacea. With the possible exception of well-designed public disclosure programs, the success of environmental management initiatives generally has less to do with the particular type of policy used than the institutional context in which it is implemented, in the same way that a farm's productivity has less to do with the variety of seeds sown than ensuring the soil has sufficient moisture and nutrients.
The take-home message for policymakers is to be wary of indiscriminate applications of newly popular policy innovations (such as payments for ecosystem services) that promise to circumvent chronic institutional problems. The value of such policies largely depends on whether or not they contribute to, or divert attention from, the hard work of building the requisites of effective environmental management, including strong regulatory institutions, clear consistent written regulations, and the political will for diverting scarce resources to environmental protection.
Views expressed are those of the author. RFF does not take institutional positions on legislative or policy questions.
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