Going Green(er): Planning the Next Era of Environmental Regulation in IndiaPublished: October 21, 2010 in India Knowledge@Wharton
Barely a week passes without controversy for Jairam Ramesh, India's environment and forests minister. In late September, when a speeding train killed seven elephants in India's eastern state of West Bengal, Ramesh criticized the railway ministry with failing to do enough to prevent such tragedies (150 elephants have died in similar accidents since 1987). A series of meetings were hurriedly convened between top-level railway, forests and environment officials to find solutions.
The same week, Ramesh was able to persuade the developers of a new international airport near Mumbai to agree to modify their project in an effort to preserve 400 acres of mangroves and prevent the diversion of two rivers. This week, the environment ministry will send experts to study the new site plan; approval is expected to come within a month, according to The Economic Times newspaper. Media reports suggest that Ramesh may be moved out of his current post in a routine ministerial reshuffle expected this month. In the meantime, however, he is also at odds with Uttar Pradesh's chief minister over the renaming of a tiger sanctuary.
For his actions in stalling or stopping numerous other mining, power and manufacturing projects, critics have branded Ramesh an overzealous "Dr. No". Many environmentalists applaud him, however, for creating a model for sustainable economic development. To gain more widespread buy-in, however, experts say Ramesh and other Indian policy makers must employ transparency and flexibility in building framework for future regulation.
The U.K.-based Vedanta Group headed by Anil Agarwal is among those facing the brunt of the new push for environmental protection. In late September, the Madras High Court ordered Vedanta Group firm Sterlite Industries to close down its copper smelter in Tuticorin, Tamil Nadu, citing environmental violations (the decision was later stayed by the Supreme Court). In August, Ramesh's ministry denied environmental clearance for Vedanta's Rs. 37,440 crore (US$8.14 billion, at the exchange rate of Rs. 46 to a dollar) proposed project to mine bauxite from the Niyamgiri hills in India's eastern state of Orissa. The ministry cited the rights of tribal people in the hills to preserve their ecological environs. That same month, the ministry also cited environmental violations as it held up approval for a US$1.7 billion expansion project at Vedanta's existing alumina refinery at Lanjigarh in the region. The refinery had hoped to use the Niyamgiri bauxite as raw material. The ministry has rejected Vedanta's subsequent defense of its Lanjigarh expansion proposal.
In total, Ramesh has halted 64 projects and held up 469 due to environmental concerns, according to media reports. Those projects include a US$10.9 billion steel plant proposed by Korea's Posco and two US$2.2 billion power projects -- one by fellow Member of Parliament Naveen Jindal's Jindal Power and the other by Nagarjuna Power. Among his cabinet ministerial colleagues lined up against Ramesh is Praful Patel, who heads the civil aviation portfolio. Patel has long publicly criticized Ramesh's ministry for holding up environmental approvals for the much-needed second international airport near Mumbai, although the recent attempts at compromise could break that impasse. "I have zero friends in government," Ramesh told reporters a few months ago as he battled a controversy over permitting genetically-modified brinjal (eggplant) seeds in India, a plan that was later canceled.
While environmentalists have applauded Ramesh's ability to take on powerful industrial groups over questionable projects, they have also accused him of inaction in some cases. One of those cases is the proposed expansion of Orissa's Dhamra Port, a joint venture of Tata Steel and Larsen & Toubro (L&T). Environmental group Greenpeace has urged Ramesh to deny clearance for the project, which they claim threatens one of the world's largest nesting grounds for Olive Ridley turtles and could destroy mangroves in the region. "Since taking office a year ago, Ramesh has clearly stated that his job is to enforce the country's environmental laws without fear or favor, and that big business will not be allowed to flout green laws with impunity. If he means this, he must direct his officials to immediately take a stand ... on the forest act violation by Dhamra port," Ashish Fernandes, Oceans Campaigner with Greenpeace India, said in a news release.
Indian industry needs "a strong regulator" like Ramesh because "the opposite is terrible," notes R.N. Mukhija, L&T's director and president of operations, adding that ill-conceived projects have earned a bad reputation for the country. "We require such people so that a strong message is sent, but he should also be practical." For example, the proposed Navi Mumbai airport project has lost valuable time while awaiting environmental clearances, he says.
Despite some of the more controversial projects, many large Indian conglomerates are undertaking efforts to become more environmentally friendly, according to Gireesh Shrimali, professor of information systems at the Indian School of Business in Hyderabad, who cites a "Green Business Survey 2009-2010" his school conducted in partnership with the Financial Express newspaper and Emergent Ventures India, a climate-change advisory services firm. The survey covered nine sectors including power & utilities, oil & gas, mining, steel, cement and banking. About 83% of the respondent companies considered climate change an important issue and reported having a mechanism to track mitigation initiatives; the survey covered about 70% of the top 100 Indian companies, Shrimali says. It ranked companies based on factors including management of water and waste, purchase of renewable energy and carbon dioxide emissions.
"In some ways what is happening in India is pleasantly surprising," Shrimali notes. "A lot of these [initiatives] were driven by the private sector even before the government became active. In a lot of countries it happens because the government is pushing for it." What he finds notable is that the companies surveyed "were doing reasonably well" in responding to climate change in the absence in India of "classical drivers" such as a general public awareness, government legislation, consumer demand or a push from competitive forces.
According to Adi Godrej, chairman of the Mumbai-based Godrej Group, environmentally friendly business and industrial practices "typically save cost, don't add cost, if properly implemented." He cites his group-wide efforts to cut carbon-dioxide emissions, a partnership with the Confederation of Indian Industry (CII) for a "green business center" in Hyderabad and other initiatives as moves to incorporate sustainable practices into the business.
Environment vs. Development
But instilling increased environmental responsibility in industrial projects has no short cuts, according to Michael Wara, a law professor and research fellow at Stanford University's Freeman Spogli Institute for International Studies, who specializes in environmental law and policy. "This is a process. Whatever gains are made tend to be incremental," he notes. In the U.S., he says, that process has played out over the past 50 years in promoting clean water and clean air, especially from sources like large industrial facilities, large power plants and sewage treatment plants.
India could learn from those experiences, which required a change of mindset, according to Wara. "Before World War II, pollution was perceived as a good thing, as a sign of economic development and a sign of wealth creation," he says. "But you get to the point where you recognize that we can have a lot of that wealth and pay a relatively small cost to avoid a lot of the harms from pollution. The harms get significant enough when they outweigh that marginal additional wealth that not eliminating them might create. And it seems like it is happening in parts of India and also in parts of China right now."
Shrimali sees big opportunities in India's agricultural sector: "Electricity is given [to farmers] at one-sixth cost and they are running motors that are really inefficient," he notes. The Bureau of Energy Efficiency "is trying to replace those [less efficient] motors." He also commends the Energy Star labeling program of the Bureau of Energy Efficiency that covers washing machines, refrigerators and air-conditioners. "It is a market-transformation technology and a lot of manufacturers have signed up."
A common misconception is that being environmentally friendly means increased cost, Shrimali points out. "The assumption is you have to give up something to get something. In many cases this is not true." Stanford's Wara agrees. "The opposition on the part of industry to additional costs isn't going to go away," he says. "It is not realistic to think that large industries that have a profit motive are going to suddenly say, 'Okay, we are going to clean up our act.'" He says that change of heart may occur in exceptional cases where there is "brand value" for the industry to appear clean or green. "We continue to have lots of opposition from the electric power industry and heavy industry like steel and cement when it comes to cleaning up their act in air pollution," he adds.
Two lessons stand out for India from the U.S. experience in promoting environmental awareness, according to Wara. "The process of laying down rules and enforcing them needs to [take into account the] opposition," he notes. "Think creatively about how to defuse it and how to overcome it." One approach the U.S. has used to good effect is to enforce regulations only on new plants, but Wara says that strategy works best in rapidly growing industries where older plants would represent "a very small proportion of the total in 10-15 years."
Godrej says business partners of Indian companies in the developed world would like what they see with Indian efforts to raise environmental awareness, but adds, "We should not be lectured by the West." He describes the U.S. as "probably the least environmentally concerned country," and says per capita carbon emissions in India are comparatively much lower.
The U.S. Example
India could learn a thing or two from the U.S. about making regulation cost-effective, according to Wara. "Where we have made the biggest gains and had the highest levels of compliance are in programs that created a lot of flexibility for industry and didn't rely on regulators knowing everything in order to specify what industry should or should not do," he says. One strong example he points to is the route the U.S. took to introduce unleaded gasoline (phased in from the 1980s, culminating in a total ban on use in vehicles in 1996). "The way that was done was to set an overall standard for industry, and allow the refineries to trade lead credits," Wara notes. "What this did was to help the smaller refineries to transition more slowly and allow the larger refineries to make the capital investments to switch over to unleaded gasoline -- to over-comply and then sell credits to the smaller refineries." This strategy, he adds, "very effectively defused opposition because it created a compliance pathway that everyone [agreed] with."
Flexibility in regulation also played into the success of the "acid rain trading program" introduced with the 1990 Clean Air Act that aimed at reducing sulfur dioxide and nitrogen oxide levels in the atmosphere, according to Wara. "This is probably relevant in the Indian sense -- it had 100% compliance and no litigation," he says. The acid rain trading program "defused the opposition" because it allowed flexibility in how polluting industries could comply with the new regulations; it also fostered innovation, he adds. Companies could employ a variety of measures including use of scrubbers to reduce sulfur content in their coal or buying low-sulfur coal. "If there is one lesson from the U.S. experience, it is to create programs that are cost-effective and create flexibility. That has to be paired with strong enforcement, so that no one's cheating with compliance in the market. That takes practice, skill and resources. Therein lies the challenge."
Wara advises Indian policy makers also to "pick your targets of regulation carefully," adding that the U.S. has benefitted from such an approach. The U.S. Environmental Protection Agency found numerous sources of pollution -- including cars, trucks, power plants and heavy industry, he says. But it chose to go after heavy industry and the power plants "because those facilities were limited in number as compared to cars, or in the water pollution context, as compared to farms," he adds. "That radically simplifies the compliance and enforcement problem. It also limits the universe of political opposition that could make it hard to later go after the other targets."
But Satyajit Majumdar, professor at the School of Management and Labour Studies at the Tata Institute of Social Sciences in Mumbai, argues that Ramesh has opened up a debate that was never addressed logically." She noted that India needs development "but not at any cost. We need to understand that agencies with muscle and money do not get undue advantages. If Ramesh has gone too far, let the people of this country prove him wrong." Rajesh Chakrabarti, a finance professor at ISB, agrees. "[Ramesh] is absolutely on the right track. Environmental responsibility is going to hurt some businesses in the short term, [and] there can be no two ways about it," he says. "We have a greater responsibility towards future generations of Indians as well as our poor and tribals than we do to private enterprise."
Communicating a Strategy
According to Majumdar, India needs to clearly articulate its environmental policies to attract foreign investors. "We need to communicate to the investors that we are not against technology and development [and that] we are for inclusive and sustainable growth," he says. "The problem is our inconsistency; politicians change their language when they are outside the government. First, we need a clear answer to what we mean by development. They are ready to invest elsewhere if they do not find our policies investment friendly." At the same time, India "should not become a dumping ground for outdated and [environmentally] unfriendly technology and business models," he warns. "We need to give a message to the world community that we have our own contexts and hence our own choices and we need to work together to solve our problems."
Chakrabarti says the current move towards more stringent environment controls will not hurt India's investment appeal. "If done fairly and transparently, it will actually improve the investment climate," he notes. "All surveys say today that the biggest challenges to investment in India are infrastructure, corruption and red tape, not environmentalism. The quick fortunes of new businesses in India today thrive on public property from minerals to airwaves."It might help Indian policy makers like Ramesh to look at what lies ahead as they drive industry towards greater environmental awareness and responsibility, according to Wara. The U.S. has reached a stage where it has for the most part won over the big sources of pollution like power plants and industrial facilities, but the bulk of its pollution now is more widely dispersed -- and thus harder to eradicate. "[There are] cars and fertilizer from fields running off into streams rather than a giant smokestack spewing nitrogen oxide into the atmosphere, or an industrial facility dumping polluted water into a stream out of a pipe," he points out. "It's easy to regulate pipes and smokestacks; it's much harder to regulate fields and storm water drainage. We're at the point now where we are really struggling with how we deal with this broad area of pollution problems. India is early in this process."