New report of World Bank: Greening Industry: New Roles for Communities, Markets and Governments

In Indonesia, for example, the government has cut industrial water pollution sharply by monitoring factories’ discharges and publicizing their findings in the news media. Colombia and Philippines have recently achieved success in cleaning up their rivers and lakes by imposing charges on factories that pollute. Moreover, during the past two decades, China has used pollution charges and other measures to keep both air and water pollution levels constant-even as economic output has doubled.

“The World Bank has been very fortunate to collaborate with the pioneers of this new approach, in which communities themselves negotiate with polluting factories to achieve the clean air and water that their physical and economic health demand, ” says David Wheeler, a senior World Bank economist and the author of the report. Since 1993, Wheeler and a World Bank team have collaborated closely with pollution regulators in developing countries, such as Brazil, China, Colombia, Indonesia, Mexico and Philippines.

“Greening Industry is really their story-and it is a hopeful story. After six years of research, policy experimentation, and first hand observation, we believe that environmentally sustainable industrial development is within reach,” says Wheeler.

New approach versus old-style enforcement

Greening Industry describes how environmental regulators in developing countries pioneered new approaches after the so-called “command and control” model of pollution control, imported from industrial countries, failed to cut poisonous discharges. Under this approach-still widely used-government regulators set maximum pollution levels and then fine companies that exceed them.

Where enforcement agencies are weak – as they are in many developing countries-companies run little risk of being caught and punished. Therefore, polluting firms which violate regulatory standards have little incentive to clean up their activities, and firms that do respect legal limits have even less incentive to cut their pollution.

To address these limitations, the new approach – as mapped out in Greening Industry – combines market-based incentives and public information disclosure to encourage factory managers to improve their environmental performance while they are pursuing profits.

With the new model, government, communities, and markets all have important roles to play in reducing pollution.
For example, in some countries, local community representatives join government regulators and factory managers at the negotiating table to decide on acceptable pollution levels and set pollution charges accordingly. In other developing countries, public information enables consumers, bankers and stockholders to evaluate a company’s environmental record before deciding whether to buy a product, lend money, or trade the company’s shares.

Indonesia grades polluters by color

Governments now realize that they can increase the influence of communities and stock markets by compiling reliable pollution statistics and reporting them to the public in easily understood forms. In Indonesia’s PROPER program, for example, government officials rank water polluters using color codes: black for factories that make no attempt to control pollution and cause serious damage; red for those which have some pollution control but fall short of compliance; blue for those that meet national standards; and green for those that are much cleaner than required. World class performers will receive a gold rating, but no factory has earned it yet.

Of 187 large polluters rated in a pilot study before PROPER began, two-thirds failed to comply with Indonesian regulations. The remaining third were in compliance, despite the government’s weak enforcement capacity, because they were already responding to pressure from markets and communities. Better information, regulators hoped, would increase the pressure and bring additional plants into compliance.

To increase their leverage, officials organized a high-profile awards ceremony to congratulate five top-ranked ‘green’ factories. Privately, they notified illegally polluting factories of their failing grade and gave them six months to clean up. According to Greening Industry, company executives who had previously ignored regulators started calling to ask how they could improve their ratings. Within 18 months, water pollution from the 187 pilot plants fell by 40 percent.

The Indonesian program has since been expanded, and its success has caught the attention of regulators and NGO’s in Philippines, China, India and Mexico, where similar programs are either planned or underway

The power of public information

Since the poor are less able to protect themselves from industrial pollution, their communities particularly value public information that tells them which companies pollute, and the impact of their discharges on public health. In countries where governments have provided local communities with reliable pollution data, poor people living in the vicinity of offending plants have been able to negotiate better arrangements for compensation and clean-up.

Stock market investors can also be an important ally. Markets may view high pollution levels as evidence that a firm’s operations are inefficient, and may raise concerns about financial liabilities and penalties. On the other hand, research shows that media accounts of good environmental performance, such as investments in cleaner technology, can enhance a firm’s expected profitability and stock value.

In Philippines, share prices for beer-maker San Miguel shot up nearly 60 percent when environmental regulators highlighted the firm’s ‘green’ record and the installation of new pollution control equipment. In Mexico, share prices for paper manufacturer Kimberly Clark fell nearly 50 percent after the government levied substantial fines for violating water pollution regulations.

Pollution charges are another way to create incentives for pollution reduction. Unlike fines, which are often subject to dispute in the courts, regularly-assessed pollution charges can be imposed on companies as a simple cost of doing business that can be reduced by cutting pollution. Experience with pollution charges in Colombia, China and Philippines has shown that managers embrace serious pollution controls when they face recurring and expensive charges for damaging emissions.

These new approaches work because they have a solid economic foundation. Cost-conscious factory managers will generally tolerate pollution up to the point where the expected penalty for pollution becomes greater than the cost of controlling emissions.

At the national level, economic reforms can also reduce pollution. Greater openness to trade can spur commercial access to cleaner technology. Cutting subsidies for raw materials can encourage companies to reduce waste. State-owned enterprises are often heavy polluters, so privatization can often stimulate cleaner production. Countries such as China, India and Brazil have all demonstrated the power of such measures to reduce pollution.

Greening Industry and World Bank policy research

Greening Industry is the seventh report in the World Bank’s Policy Research series, which is designed to bring the results of important new policy research to the attention of policymakers, program administrators, and the wider development community.

Each copy of Greening Industry includes a CD-ROM which provides a large set of reference materials, databases and audio-visual presentations. An Internet version of Greening Industry will be available free of charge at the “New Ideas in Pollution Regulation” website. (http://www.worldbank.org/nipr/). The site includes extensive links to related Internet sites and new software which allows readers to search the report for all references to topics of interest.