The market is green

The market is the natural ally of the environment. Environmental resources, like other economic resources can be most efficiently allocated if these are brought under the discipline of the marketplace. It is ironic, therefore, that at a time when the economy is being liberalised, rather than creating a market for environmental resources, new restrictions are being imposed on the economy in the name of protecting the environment.

Environmental quality is like a value-added product that becomes economically affordable and technologically viable with economic growth. It is no paradox therefore that the environment is much cleaner and safer in industrially developed countries that adopted a more market-friendly approach, than in centrally planned economies. Clearly, it is policy that is responsible for continued environmental resource depletion or pollution.

Let us take a closer look at some of the policies that have had an impact on our environment. According to the WHO, much more serious than vehicular pollution is the issue of indoor air pollution caused primarily due to poor ventilation and use of firewood, coal and cowdung as fuel in most poor countries.

Energy markets are severely restrained and regulated. As a result, India’s per capita energy consumption is among the lowest, at 1/10th of that in developed countries, and even then there is a substantial shortfall in supply. Energy consumed per unit of goods produced is among the highest–reflecting the inefficiency caused by poverty. Yet, rather than freeing the energy related products market, like lighting and other equipment, we promote the production of inefficient incandescent bulbs, while imposing taxes on the latest and much more efficient compact fluorescent tubes. According to one estimate, replacement of all domestic bulbs by CFLs could at once eliminate the daily shortfall of electricity in Delhi.

(The interesting point to note is that in the past 100 years, energy efficiency of light bulbs have increased nearly 6 times. This was primarily an outcome of relatively competitive market, stimulating the innovative and entrepreneurial spirit, leading to better product. As a result, it contributed to improved environmental quality, as well as better quality of life.)

The story is the same with vehicular pollution. First, state monopoly in the petroleum sector has contributed to poor fuel quality and no variety. Second, the restrictions and taxation policy have ensured that we are saddled with obsolete and polluting automobile technology. The combined effect has been that we have become world leaders in low efficiency, high polluting, and also more accident prone, two-stroke two-wheeler and three-wheeler vehicles.

Let us consider water. Water is life. It has been said that countries may go to war over water in the coming century. Again, the state exercises almost total control over it. The result, over half the people do not have access to safe drinking water, while agriculture and industry continue to consume water most inefficiently. Devoid of any pricing mechanism and a legal market to trade in water rights, water has become the most politicised of all resources.

It is a pity that the idea of a water market is an anathema in India. Around the world, there is an increasing recognition of the role of the market in efficient allocation of water resources. Farmers, for instance, are finding that selling water rights to cities or industries can be more profitable than raising a crop.

The need is to ensure efficient utilisation of environmental resources, like other economic resources, by bringing them under the discipline of the market forces. The market allows the consumer to register his price preference for a particular quality of product, including environmental quality. As the consumer rises up the economic ladder, he is able to afford a better quality of life.

Free trade and open competition provides the necessary incentive to the suppliers of goods and services to continually try to improve their product quality, including environmental quality, at the lowest possible price. Consequently, the economics of the marketplace help create a win-win situation for the consumer, the producer, and the environment.

The environmental cost of restricting the market has become obvious. Let us not succumb to the rising green protectionism from within and without in the name of protecting the environment. By restricting the market, we will only end up obstructing the improvements in environmental quality that we all cherish.