With Pollution Tax & Tradable Permits, Real Estate Developers May Pollute Less

Delhi has been debating odd-even road space rationing more intensely than evee. Delhi, according to the World Health Organization, is the world's most polluted city. But, automobiles are not the single biggest source of pollution in any major Indian city. Many factor contribute to this. The construction industry plays a major role too. Recognizing this, authorities in Noida, Greater Noida and Yamuna Expressway have decided that developers may soon have to agree to comply with pollution control norms to lease land for construction activities. Why is this important?

The population of Indian cities have been growing at a remarkable pace. With a population of 46 million, the Delhi-National Capital Region (NCR) is the most populous region in India. On a standalone basis, Delhi is 97.5 per cent urbanised, while the rate is merely 42.5 per cent in the NCR.

On a whole, India is urbanising at a fast pace.

In a country where a large fraction of the world's urban population lives, this is inevitable. Even though environmentalists have been claiming that we are running out of food and natural resources, they have been unable to adduce proof so far. Food consumption has grown over the past two centuries. The quality of environment has improved too, especially in the developed world, though many believe that the environment is increasingly becoming polluted.

Cities like Delhi and surrounding regions like Noida and Gurgaon need to make room for more people. This, of course, poses problems that cities cannot ignore. To make room for more people, real estate developers should build more floor space. But, construction activities are a great source of pollution.

Dust in construction sites is seen as a major source of pollutant. There are, of course, ways in which developers can lower pollution. Regularly sprinkling water, covering construction materials and trucks that carry construction materials are reasonable measures that real estate developers can take.

Authorities in Noida, Greater Noida and Yamuna Expressway have decided that developers may soon have to agree to comply with pollution control norms to lease land for construction activities. Dust in construction sites is seen as a major source of pollutant. There are, of course, ways in which developers can lower pollution. Regularly sprinkling water, covering construction materials and trucks that carry construction materials are reasonable measures that real estate developers can take.

But, how can regulatory authorities tackle pollution in construction sites?

There is an agreement among environmental economists and legal theorists that trading pollution permit will lower pollution in cities. But, what does this mean? Real estate developers, factories and other enterprises do not pollute for the sake of polluting the atmosphere. In fact, if they can help it, firms would not like to pollute the atmosphere. Pollution is an unintended consequence of many healthy activities. Some firms find it easier to lower emission of pollutants perhaps because:

1) They have access to superior technology

2) The machinery and raw materials such firms use pollute less

3) They can easily switch to less polluting machinery and raw materials

4) There are certain polluting activities they can cut down because the losses far outweigh the gains. Such firms can be allowed to trade the right to pollute to firms which do not have such advantages. 

For example, authorities in cities like Noida and Gurgaon can estimate the amount of pollutants their cities can absorb. If the city can absorb, for instance a million tonnes of pollutants, authorities can issue permits that allow firms to emit pollutants up to this limit. Authorities can either sell these permit to the highest bidders or hand our permit to construction firms and other polluting firms according to the baseline pollution levels. Firms can trade their permits according to their ability to lower pollution.

How would this help?

The total amount of pollution in cities would remain within the upper limit set by the authorities based on scientific studies. Firms and real estate developers will compete to lower pollutants to lessen their cost of operation. Real estate developers and firms that pollute beyond the limit will be punished or fined. Firms and real estate developers will have strong incentives to lower pollution at the lowest cost possible. This is important, because lowering pollution is costly too. If lowering pollution at construction sites is expensive, it will raise housing prices. Similarly, if lowering pollution in a factory is expensive or time consuming, this will raise the price of consumer goods and factors of production. More importantly, if a useful activity necessarily involved emitting pollutants, law does not unfairly stop this from happening.

Much of the resistance to such policies come from the assumption that real estate developers and firms will be allowed to buy the right to pollute. But, think about this. When a factory, industrial outlet of real estate developer leases land in Noida, in a sense, they are buying the right to pollute. When we pay taxes to municipal corporations for sewerage systems, we are paying for the right to pollute. When we buy cars or fuel, we are buying the right to pollute. When we buy a house, we are buying the right to pollute. But, we do not forbid these activities. The difference is that when firms sell and buy the right to pollute, they will try to lowers the emission of pollutants wherever possible.

There are, certainly, practical constraints involved. For example, it is difficult to measure the emission of pollutants by each real estate developer. This may prove to an extremely costly activity. An alternative to tradable permits is a pollution tax. When real estate developers are taxed according to their level of pollution, they pay taxes according to the level of pollutants they emit. In both cases, however, when authorities tax pollution in a certain city, real estate developers may move to other cities, worsening the overall pollution in the country. A solution would be to implement such a policy on a national level.