Supply-side policies to control industrial pollution

Recently a few private banks jointly organized a training session in Karachi for their sales s on how to market green financing products. It is a good initiative and can work if effectively managed through a robust marketing strategy. To stimulate the demand for green financing products the main challenge is to convince businesses their higher profit without covering the social cost i.e. environmental pollution - can never be ethically their due share. If it is they are convinced, one can hope to create a market for this newly introduced financing product.

Industrial pollution – the main sources of environmental pollution by businesses – pollutes the water with its effluent and contaminates the air with its emissions. Like every country, Pakistan does have legal tools to control it but despite their enforcement, it can’t be controlled beyond a negligible level. Why? Its answer is lengthy and every saner person does know it. Enumerating the reasons here is not the subject matter of this article. Here the main purpose is to discuss how to influence businesses to control the menace of pollution at its source.

There are three sides where industrial pollution can be controlled. The first one is the regulatory side by enforcing the environmental laws in their true spirit. For a developing country like Pakistan hoping to fully exploit this legal tool can be anything but a viable approach. The built-

in weaknesses in the enforcement mechanism are not the only obstacle for this cause. The decades-old custom of allocating a lesser budget for the subject of the environment is another big hurdle. Another hurdle and equally undeniable is the limitations of businesses to comply with green laws. For example, a factory built on a one-acre plot with no space inside or outside its premises cannot install an in-house treatment plant to treat its effluent. A lot of such other limitations do justify the discernible lenient regulatory measures against their noncompliance with the environmental regulations.

The second one is the demand side. If consumers avoid buying products and services from those who don’t comply with green laws then how businesses will achieve their sales targets. It is a candid reality that so far those businesses which are complying with environmental laws are mostly export-based business. So they are bound by their foreign buyers to sell to them products with full environmental compliance. Unfortunately, or fortunately nearly 70% of our local produced is sold locally so its consumers - because of lack of awareness - who never check before buying if the product is green or not. Even the majority of people don’t have a basic concept of what is a green product. They intend to buy the highest quality products and services at a reasonable price. They are not much environmentally responsible to check if the pollution cost is included in the in its price. If it is so, the price will not remain much reasonable for them. Being not-so-rich their preference is lower prices.

Hence because of no pressure from the demand side, the aggregate demand has no role to fetter the rising level of industrial pollution. The beneficiary of its no role is obviously a consumer who enjoys reasonable prices and the ultimate beneficiary is obviously supplier and manufacturer who need not include the social cost in prices and keep earning the same ratio of profit margin.

It means the demand side does not have an environment-focused solution to control the social cost of businesses. The twin blades of law enforcement and public awareness also couldn’t have brought the desired results so far because of deficiencies in the regulatory framework.

The third and final side that is not exercised anywhere around the developing world as yet is managing the social cost through supply-side economics. The supply-side of an economy lift aggregate demand through easing its various policies including monetary and fiscal. In a mixed economy, the government has the option to increase or decrease aggregate supply by offering different incentives and limiting certain benefits. But here again, the main concern of the government is to manage the price level by increasing the aggregate demand thru rising in aggregate supply and vice versa.

On the fiscal policy side, the taxation system needs a big overhaul to incorporate pollution factors in its tax rates and tax base. Tax authorities need to broaden the tax base to cover all those sectors which pollute more. Also, the tax rate of most polluting businesses should be higher to include the cost of pollution in the price. Introducing carbon tax is another option though it is still in its infancy even in the developed world. The other option is incentive-based; to offer easy loans to businesses that intend to install pollution-control equipment or adopt clean production technologies. They should be the target markets of sellers of green financing products.

Handling the issue of social cost through supply-side policies will not raise business costs steeply. Also owing to green banking support traders will not protest at a higher tax rate if the rise in prices is jointly shared by both seller and buyer. Otherwise, in the absence of green financing, they will try to cover their risen cost by escalating the prices to hit the common man already suffering from the pollution of all types.

One may ask that to control industrial pollution instead of supply-side economics why not enforce the polluter pay principle – the one who pollutes will pay its price. Though newly introduced it can also be called a green tool to regulate aggregate supply. For its successful implementation, a spirit of voluntarism is required. So that every polluter self-calculates the social cost of its production activities and submit it into the national kitty. However, voluntarism cannot be easily infused because it is subject to a two-way process. Whom do you expect voluntary role has the right to expect reciprocation from you?