Understanding Market-based Instruments: The Bridge between Development and Environment Protection

Throughout the phase of setting new national and global levels of development, the dynamic economies of the world seem to have downplayed their ecological responsibilities. With more and more industries overwhelming the background, economies have stayed ahead in their development standards but failed dismally in their environmental obligations. The illusion that the economy and the environment are not interlinked should be abolished and replaced with. Both are quite profoundly intertwined that if not well maintained and regulated in consonance, the expenses of sustaining one end up negatively affecting the other.

The realization that explicit incorporation of the environment has to be done in all our realms has hardly been recognized by India. One of the pioneering methods, still mainly in its conceptual and evaluation process in India, is market-based instruments. Since our remedies have to be both economically and environmentally sustainable, market-based instruments seem to be the ideal solution. They are not only value-effective but, via their operation, rather than imposing laws and regulations, they strive to maintain a long-term transition in the conduct of the market and the behaviour and culture of the polluters. Over the years in the name of protecting the environment, we have been planting trees and saving water and creating cumbersome legislations.

Though all this forms a part of the protection cycle, we have failed to understand the fact that pollution today is not just a cause of carelessness and insensitivity to the surrounding, it is a combined effect of all the systems that run parallel while running a country ranging from households to industries.  No single entity can carry the blame and no single entity can carry the burden of improving it, even the government cannot be doing it single handily with laws and policies if they are not well implemented by the public at large. The current costs of maintaining and preserving the environment are more than what can be socially expected. Interplay has to be there between both the public and private sectors. Pollution has to be recognized as a negative externality of our development process. When we realize and settle on this, we move further to incorporating the markets in pollution control. Rather than targeting the effect, we have to target the cause to minimize it.  Markets have to be included in the pollution control process because of the interplay that exists between the two spheres and also due to the fact that inclusion of the environment in markets or vice versa there will be a wider policy objective and two most important pillar of developments will be growing in consonance sustainably.

Moreover, one of the most highlighted principles of modern environmental governance “polluter pays principle” is also not applied when the externalities are so widely spread and therefore the cost is borne by the society as a whole. It’s not just the principle that stands the concern but also the fact that the right to a free and healthy environment under the garb of development is blatantly violated by the state machinery.  This violation has happened so much that the myth that pollution is an inevitable effect of development has become a fact to civil society. The government has to revamp its approach and head towards bolder policies and frameworks. “Market-based instruments are tools and practices that utilize markets, price and other financial and economic incentives and variables to reduce or eliminate unintended environmental impacts”[i]

Through their implementation, an environmentally friendly approach is encouraged. They use market signals and factors to promote the desired practice and a better decision making process in companies and individuals. They strike a balance between the market and the environment. They take into consideration the interests of the industries and individuals as well as the environment.  The idea behind incentives is that there is a presence of flexibility and motivation to the industries and individuals, and to perform better they driven by the need to perform better with minimum negative externality resulting from their process.[ii]

Superior management may not always be efficient and may lead to jittery courses of action. When behaviours and practices shift internally, progress is more consistent and has a long-term effect. Furthermore, market-based instruments not only help to minimize pollution but also help to foster a position of technical development and innovation. They use the powers existing on a marketplace in an appealing way to foster cultural and behavioural change. The two most important characteristics of these instruments are its cost-effectiveness and dynamic incentives for innovation. [iii] They not only help clean up the pollution but also make it easier at the lowest possible cost. Cost efficiency is the most important factor to consider for any policy, programs operate in multiple ways, but those that have the intended results at the lowest cost possible should be preferred, and market tools are those which do so effectively. MBIs use benefits and costs to accomplish that goal. By influencing the cost and price of items they operate for the totality of the good. This refers not only to technology and manufacturing but also to products, services and related activities related to it.[iv] Thus, every aspect and every phase of the industry is environmentally sound and effective. It often creates a sense of responsibility at the most primary level.

If left upon them no industries will never take the painstaking tasks of revamping its process for the sake of pollution, they will stick themselves to the bare minimum levels of protection.  The market forces understand the needs of the industries and the businesses and the incentives are designed and offered in such a way that they create an urge in them to follow it. [v]The firms and the individuals bear the costs themselves rather than transferring it to the society. Conventional approaches are inadequate in aligning the economy workers with sustainable objectives.[vi]

There are broadly three types of market-based instruments, price based Lever behavioural changes by changing the price in existing markets through taxes, subsidies, levies etc, quantity-based lever behaviour change by specifying the amount of new rights and obligations like cap and trade, tradeable permits, etc and market friction-based lever behaviour changes by making private markets work better in interaction with other things through information dissemination, product differentiation, insurance schemes and guidance. India currently has one MBI in each of the above categories. the emission trading schemes that was launched in the states of Gujarat, Maharashtra and Tamil Nadu, “Under this the industries must hold a permit to each unit of particulate that they emit and must comply with the standards of 150 milligrams per cubic metre of particulate matter released in the atmosphere.[vii] Total emissions and held constant and the industries benefit by the reduction in costs of compliance.” The prices of emissions act as incentives and the industries cut back on their emission in the highest possible manner.  Eco-labelling comes under the category of market friction instruments ad it uses information and consumer behaviour to bring the change. Information, when coupled with consumer behaviour, forms one of the most important drivers of the market. [viii]Eco labels work on the principle that environmental protection and mitigating pollution is a “cradle to grave approach”. Abatement of pollution is a journey and not a step; it has to be ensured in all possible realms and in every activity that is being carried out to reach the goal. Under the scheme of eco-label by targeting the end product we ensure an environment-friendly approach in the whole process. Subsidies are a type of price-based market instrument which affect the cost of production and consumption. [ix]Another major source of pollution and the most exploited resources are renewable energy resources such as coal, gas, petroleum etc. In India through schemes like “give it up” and “pradhan mantri ujjwala yojana” electricity, kerosene and LPG are subsidized. However, in its application, the target area is families which fall below the poverty line, if they are not benefitted from it and unscrupulous men and women take advantage of it then the market will be distorted. Moreover, under “deendayal upadhyaya gram jyoti yojana” and “saubhagya scheme” the government aims to achieve universal access to electricity.

With the rising role of the private sector and civil society among the markets, policies which can penetrate and be beneficial in all domains are desired. Programmed and implemented with a powerful political and social will, this will not only strengthen market competitiveness but also will drastically lower the amount of pollution in the environment. Market-based instruments in India are still in the testing phase. Different types of MBIs functions differently and provide a solution. Effective implementation of these instruments will help India achieve new standards of sustainable development. Being still a developing country, this approach will help create long term sustainability on our resources making our industries more environmentally sensitive. The complex nature of the market-based instruments has to be carefully legislated by the government to fill the grey areas in its application. The policies have to be constantly revamped till the desired goal is reached.

[i] Hearth Guntilake & Franklin D De Guzaman, Market Based Approach For Managing The Asian Environment: A Review, ASIAN DEVELOPMENT BANK ECONOMIC, Working Paper Series No 124, (2008).

[ii] Robert Stavins, Market Based Environmental Policies, RESOURCES OF THE FUTURE, (1998).

[iii] Utkur Djanibekov, Grace Villamor, Market Based Instruemnts For Risk Averse Farmers, ENVIRONMENTAL AND DEVELOPMENT ECONOMICS, Cambridge University Press.

[iv] Supra at 3.

[v] intosai, Market Based Instruments For Enviornmental Protection And Management, WORKING PROJECT REPORT INTOSAI, (2016).

[vi] Ying Zhou, Implementing Sustainable Community Plans Through Market Based Instruments, Thesis, UNIVERSITY OF WATERLOO, (2015).

[vii] Peter Sopher, Anthony Mansell, India – A Case Study For Development Of Emission Trading Around The World, Report, INTERNATIONAL EMISSIONS TRADING ASSOCIATION, (2012).

[viii] A.P. Singh, N.S. Raman, U.P. Waghe, Ecomark Scheme In India, 2, International JOURNAL OF PHARMA MEDICINE AND BIOLOGICAL SCIENCES,(2012).

[ix] Rajat Verma, Eco-Taxes: A Comparative Study Of India And China, Working Paper, INSTITUTE FOR SOCIAL AND ECONOMIC CHANGE,(2016).


Tanisha Prashant


Tanisha Prashant is a fourth-year student at Institute of Law, Nirma University (Ahmedabad). Her key interests lie in constitutional and environmental law and she is keen on researching and writing. She can be reached at tanishaprashant22@gmail.com.

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