Scope and Challenges in Implementing Market-Based Solutions to

Environmental Problems in the Indian Context.

1. Abstract

Based on a comprehensive literature review, this paper examines the potential scope and
challenges of relying solely on market-based instruments to address environmental problems
in India. The study compares the experiences of various countries that have successfully
implemented four most commonly used market-based instruments, namely effluent charges,
tradable permits, emission trading and carbon tax, and identifies key lessons that India can
learn to overcome its own challenges. Out of the four instruments included in the study, effluent
charges turned out as a more desirable solution for water pollution only when they are paired
with subsidies to the small and scattered industries for installation of advanced water treatment
mechanisms. The paper concludes that a single policy instrument is not enough for dealing
with complex environmental problems that developing countries like India are facing.
Keywords: market-based instruments, command and control model, carbon tax, tradable
permits

2. Introduction

Environment is an essential part of any production process, be it as a source of raw material or

as an ‘ideal’ place for waste disposal. When the environment as a resource is freely available
to the capitalists for exploitation, it leads to unwanted consequences like overuse and
environmental pollution. Starting from the contamination of river Ganga to depletion of
groundwater level in the state of Punjab, there are numerous examples which indicate the fact
that unregulated exploitation of natural resources leads to severe and often irreversible
consequences for both the environment and human populations.

1
As the environment is also seen as a factor of production along with land, labour and capital
inputs, it becomes crucial to assign a positive price on the use of the environment, for the firms
to consider it as an input cost when maximising their profits. “When this price is set properly,
the optimal quantity of pollution is reached” (Marion G, 1990). Since the price of most of the
environmental goods are not determined in the market by itself, the best way to assign a price
is through Market based instruments (MBIs).

MBIs for the management of environmental resources are policy interventions that provide
incentives for producers and consumers to change their behaviour towards a more efficient use
of resources, and reduce the negative impacts on the environment (Jessica C et. al, 2021). These
market-based solutions seek to rectify market failure resulting from externalities such as
pollution, by internalising the external cost of production or consumption activities (Wikipedia,
2023). This can be achieved through instruments like pollution taxes or charges, tradable
permits, subsidies, deposit-refund systems etc.

Prior to the proliferation of market-based instruments in the 1990s, the traditional and most
common approach followed by the governments across the world, to address pollution-related
problems was using command and control (CAC) types of regulations. “This approach consists
of enforcement of laws and regulations, prescribing the objectives, standards and technology
that producers must comply with” (Jean P. Barde, 2000). Jean Phillip Barde in his book on
“Environmental Policy and Policy Instruments” highlights four common forms of standards
under CAC approach: (a)Ambient quality standards specifying the characteristics of the
receiving environment. (b) Emission discharge standards specifying the maximum amount of
pollutants the firm may emit. (c) Process standards defining the type of technology to be used
or the production processes to be employed, and (d) Product standard specifying the type of
goods they may produce.

Under the Clean Air Act, the Environmental Protection Agency (EPA) of the United States sets
National Ambient Air Quality Standards (NAAQS) on atmospheric concentration of six
common and harmful pollutants also known as "criteria pollutants". These are ozone (O 3 ),
carbon monoxide (CO), atmospheric particulate matter (PM10 /PM2.5 ), nitrogen dioxide (NO 2 ),
sulphur dioxide (SO 2 ), and lead (Pb) (NAAQS Table | US EPA, 2024). In India, ambient air
quality standards were set by the Central Pollution Control Board (CPCB) in 1982. These were
later revised in 2009 and include maximum permissible limits for pollutants same as

2
that of the US, along with five additional sources of pollutants like Ammonia (NH 3 ), Benzene
(C6 H 6 ), Benzo(a)Pyrene (BaP), Arsenic(As), Nickel (Ni) to protect public health and the
environment. These pollutants are emitted from various sources as industrial processes,
vehicular emissions, electricity generation, mining, burning crop residue, etc. However for
many Indian cities, air quality levels, particularly PM10 and PM2.5 exceeds the set limits. As
per a report published by the Central Pollution Control Board on “National Ambient Air
Quality Status and Trends 2019”, percentage of cities exceeding NAAQS for
Residential/Industrial/Rural areas with respect to NO 2 is 9%, PM2.5 is 33% and PM10 is 77%
and for Ecologically sensitive areas, SO 2 is 20%, NO2 is 40%, PM10 and PM2.5 is 100% on an
annual average basis. Hence, enforcement and effectiveness of these standards in India is a
challenging task due to rising population, multiple pollution sources and rapid urbanisation.

To control the emissions from coal-based thermal power plants, emissions standards were
introduced in 1994 by the Ministry of Environment and Forests (MoEF). These emission
standards were later revised in 2015 to further clamp down on the limits for PM, NOx, SO2
and other pollutants along with more stringent guidelines for new firms and phased
implementation deadlines for existing plants to comply with the new standards. The emission
standards were revised again in 2015 to further tighten the limits for PM, SO2, NOx, and other
pollutants. This revision included stricter norms for new plants and the existing firm had to
encounter phased implementation deadlines and adhere to the new standards. The target was
to cut particulate matter emission by at least 40 percent from 2017 onward, and reduce their
water consumption by nearly a third.

It is often due to the high cost of meeting standards, lack of incentives and the long and
protracted process by which new standards are put into place, industries prefer getting into
bargaining and negotiations with the politicians and bureaucrats. This often results in delays,
as it can be seen from the thermal power plant case where the deadlines for compliance have
been extended multiple times. “After taking into consideration the technical challenges and
time required for installation of Flue Gas Desulfurizer (FGD) and other technologies to meet
the new emission limits, MoEFCC decided to push the deadlines to 2022-2024” (Pachouri &
Saxena, 2020). Thus, it is clear that CAC regulations can prove to be inefficient.

An alternative approach to the traditional regulations is market-based solutions. “Economists

find these instruments to be more cost-effective and flexible as compared to CAC

3
regulations” (Marion G, 1990). However, while market-based solutions have potential, there
might arise significant limitations and challenges in the Indian context. Hence the objective
of this paper is to examine the potential scope and challenges of relying solely on market-
based instruments to address environmental problems in India. The paper also compares the
experiences of various countries that have successfully implemented the four most commonly
used market-based instruments, namely effluent charges, tradable permits, emission trading
and carbon tax, and identifies key lessons that India can learn to overcome its own challenges.

Section 3 gives an overview of the existing literature on scope and challenges of various market
based instruments, Section 4, critically analyses the impact of different market-based
instruments in different countries including India and summarises the key benefits and
challenges that any developing country might face while implementing these instruments.
Section 5 gives policy recommendations based on the international experiences. Section 6
concludes the study along with scope for future analysis. Section 7 is dedicated to references
used in the study.

3. Literature review

Attempts have been made to assess the impact of various market-based instruments across the
world. Studies have identified the limitations in the implementation of these instruments in
different countries. This paper highlights a few of those limitations in context of four most
commonly used instruments: effluent charges, water tradable permits, cap-and-trade (emission
trading) system and carbon tax and tries to identify key issues with implementing these market
based instruments in the Indian context.

Recently, two important market-driven economic instruments, namely, effluent charges and
transferable emission permits, have emerged as cost effective measures for controlling
environmental pollution (Nayak & Srivastava, 2021). Effluent charges are set based on the
quality or quantity of waste released into the environment. However, “there exists no
significant difference between an idealised effluent charge system and an idealised standards
system” (Brown & Johnson, 1984). This implies that if the policy makers have adequate
information then they would set the standard at that point where the marginal cost of

4
pollution abatement equals the marginal benefit to society. The same criteria would have been
followed by a polluting firm while deciding its level of emission in case of an emission charge.
Hence, in an ideal scenario, both instruments would have resulted in the same outcome.
However, the real world scenario can be completely different from the ideal theoretical
framework.

“Pollution or effluent charges is an important element toward the realisation of the “polluter
pays” principle when it is based on estimates of marginal damage cost” (Kraemer, R. A. et al.,
2004). When a charge is levied, pollution is no longer free of cost as the social cost is
internalised by the firms. The producer bears the cost of pollution and hence is induced to
reduce the amount of discharge, also incentivising him to come up with new technology for
pollution abatement. However, this policy instrument is not free of problems. Way back in the
1970s, based on the historical evidence from various countries, Giovanna M. Longo (1970)
noted a list of problems that governments might face while administering a system of effluent
charges and maximising its effectiveness, some of which are still true in the Indian context.
Firstly, if the effluent charge system is to be implemented at the local level, limits placed by
the law on municipal jurisdictional power may reduce the impact of the program. Secondly,
administering an effluent charge program on a local level is extremely difficult to realise.
Perhaps the greater obstacle for implementation of an effluent charge is political acceptability.
Additionally, (Kraemer, R. A. et al., 2004) highlights the difficulties in designing an optimal
pollution charge as it requires enormous amounts of scientific data and information on pollution
damages.

Most developing countries (like India) prefer regulating water pollution primarily through the
use of standards and direct infrastructure investments (like Common Effluent Treatment Plants
(CETPs) or sewage treatment facilities), rather than market-based policy instruments.
Olmstead et al. (2019) identifies four core challenges that developing countries face when
controlling for water pollution through instruments. These are: availability of data, imperfect
monitoring, enforcement and compliance, rent seeking, decentralised regulation and
multijurisdictional spillovers.

A study by Kumar et al. (2000) particularly identified the key challenges that India is facing in
terms of water management. First comes the non availability of adequate scientific data

5
needed for allocating a water budget, planning and decision making. Secondly, we have the
institutional challenges in terms of effectiveness in responding to local water scarcity problems,
ability to design and implement a comprehensive water management system, Capability to
ensure sustainable resource use and equitable distribution resolving conflicts. They suggest that
“improvement in the institutional framework can help find sustainable solutions to water
management problems. Institutional mechanisms such as market based property rights systems
may be useful in managing renewable common pool water resources.” However, institutional
changes are often controversial.

Tradable discharge permit used in water management and pollution control is considered to be
one of the challenging market-based instruments in terms of both designing and
implementation (Kraemer, R. A. et al., 2004). Hence, the use of tradable permits has remained
limited to advanced economies like the US and Australia. “These nations benefited through a
solid scientific understanding of the pollution problems, pre-existing monitoring infrastructure
and enforcement capacities.” Some of the key factors as identified by Kraemer,
R. A. et al. (2004) for implementation of tradable permits are: acceptance of the emission rights
and accompanying trading rules along with an effective administrative and legal
establishments. “These can be seen as a prerequisite for a functioning trading system”. Reliable
data collection and monitoring mechanisms can provide a solid base for trading. Administrative
problems such as restrictions to trade or long approval procedures may reduce the willingness
to trade. “Technical obstacles can be in the form of insufficient knowledge of the behaviour of
trading firms and changes in the pollution load in the water body.” These were a few
administrative barriers in implementation of a successful trading system. However, questions
still arise on the effectiveness of trading as an instrument in reducing water pollution. Their
study also highlights how tradable permits may not produce the desired results. Its impact may
vary based on where and when pollution occurs. A trading permit that shifts water use spatially
or temporally must account for its consequences on other water users and ecosystems, which
is hard to achieve. “Trading of pollution rights could create pollution “hot spots,” and hence
limit its feasibility in certain areas.”

When it comes to the use of market-based instruments in reducing greenhouse gas emissions,
the two most common approaches used by governments worldwide are cap-and-trade schemes
and carbon taxes. A cap-and-trade (or Emissions trading) scheme reduces emissions by putting
a limit (or cap) on the quantity of carbon dioxide that can be emitted and then

6
allocating tradable emission permits (allowances). These permits can be bought and sold in an
allowance market, and hence the name “market-based”. “Limits ensure that emissions do not
exceed the targeted levels and the tradable permits provide flexibility for individual firms
(emission sources) to set their own compliance path ” (US EPA, 2023). On the other hand, a
carbon tax is levied on the producer of raw materials of fossil fuel which effectively raises the
price of the fossil fuels relative to their carbon content.

“Carbon taxes are simple to implement, encourage green investments and energy conservation
and generate revenues for the government which can be used to cut other taxes, assist the poor
or boost productive investments” (IMF, 2022). It can also be extended to other greenhouse
gases such as methane or nitrogen oxides. The fundamental difference between the two
instruments is that, “carbon tax is a price instrument which provides certainty about the carbon
price but not the quantity of emission reduced, whereas an emission trading system is a quantity
instrument, which offers certainty about the quantity of emission reduced but not the price”
(Pillay & Buys, 2013). Both the approaches operate on the “polluter pays” principle,
encouraging a switch towards more sustainable sources of energy and also reducing emissions-
intensive activities (IMF, 2022). According to a report by the World Bank, as of August 2022,
68 direct carbon pricing instruments were operating in 46 countries around the world.

Studies have focused on the aspect of inequality when it comes to Market-Based solutions for
reducing GHG emissions. A study by Shammin & Bullard (2009) on the “Impact of cap-
and-trade policies for reducing GHG on U.S. households” confirms that conventional cap-and-
trade policy is regressive and the cost of reducing GHG emissions will fall disproportionately
on low income groups. Another study on the US, “The Impact of a Carbon Tax on Inequality”
by Fremstad and Paul (2019) utilised household data to assess the distributional impact of
carbon tax policies. Their results also highlight the fact that carbon tax disproportionately
burdens people at the bottom of the distribution. However they suggest that the policy can be
made progressive by returning the carbon tax revenues to the public in equal lump-sum
payments. “This can address both climate change and inequality simultaneously”.

A bunch of literature also compares market-based and non market-based instruments. Jiang et
al. (2023) in their study on “The Impact of Market and Non-Market-Based Environmental

7
Policy Instruments on Firms’ Sustainable Technological Innovation: Evidence from Chinese
Firms'' utilised the DID method to estimate the impact of the Chinese environmental protection
tax which was implemented in 2018 taking data of the years 2015 to 2017 as the control group.
Their findings indicate that market-based instruments such as environmental pollution tax
facilitates sustainable technological innovation (STI) by internalising the environmental costs
borne by society and adjusting production and product costs of firms using price instruments.
The study also reveals that non-market-based policy instruments are negatively related to STI
as it depresses R&D activities leading to unsustainable innovation. Finally, a combination of
the two instruments can create a positive impact on firms’ STI.

4. Analysis

4.1. Market-based instruments: International Experience

4.1.1 Tradable water permits in the US and Australia

Existing literature suggests that the “US pioneered in introducing formal water markets at a
country level in the area of water allocation.” (Venkatachalam L., n.d.-b). However the nature
and intensity of these markets differ for different states depending on the scarcity of water and
existence of the law facilitating the trade. It is seen that, in the US, water trade mainly takes
place in between agriculture and the urban sector. Australia is another country which has been
successful in adopting a tradable water system. A study by Holley & Sinclair (2018) critically
reviewed Australia’s cap and trade instrument. Their findings reveal that the “cap and trade
scheme is not fully effective due to seven key flaws, namely a lack of robust regulatory
framework, challenges in addressing universality of impact and source, limited data accuracy
in water accounting, doubtful over environmental benefits achieved, lack of accounting for
social impacts in a broader sense, windfall gains, and limited operation across the country.”

4.1.2 European Union's Emissions Trading System (EU ETS)

The European Union's Emissions Trading System (EU ETS) is the world's first and biggest
international emissions trading system to combat climate change. [25] “It was launched in 2005
by allocating tradable emission permits to more than 12,000 industrial plants and power stations
across 31 countries.” Currently it is in its fourth phase (2021-2030). A study by Dechezleprêtre
et al. (2023) investigates the impact of EU ETS on carbon emission and economic performance.
Their findings suggest that the introduction of ETS contributed to a

8
significant reduction in carbon emissions of around 10% in the first two trading phases (2005-
12). Also regarding the firms’ performance, results indicate that EU ETS led to a statistically
significant increase in revenue and fixed assets, but did not have a statistically significant
impact on the number of employees and profit of the regulated firms. They concluded that
“Emissions Trading System induced the regulated companies to increase investment which led
to increased productivity. Hence, EU ETS led to a significant reduction in carbon emissions
without negatively affecting the economic performance of the firms and the competitiveness
of the European industry.”

4.1.3 Comparison between cap-and-trade and carbon tax schemes from a South African
perspective
For developing countries, a study on “Climate Change: A Comparison Of Market-Based
Instruments From A South African Perspective” by Pillay & Buys (2013) compares the key
characteristics between cap-and-trade and carbon tax schemes considering their effectiveness
in the global context. They evaluated and listed a set of factors that they identified as
challenging for implementation of cap-and-trade schemes in South Africa. These factors
include “credibility of the emission cap, the allocation of permits, need for a competitive market
to facilitate trading, tax implications, price uncertainty, the need for new financial regulations
and administrative capacity as well as the non-transparency of distributional incidence”. All
these factors reflect the difficulty in the implementation of a cap-and-trade (emission trading)
system for developing countries.

4.1.4 : Use of market-based instruments over traditional CAC model in China

As per a report by the BP’s Statistical Review of World Energy, based on 2019 data, China
stands out as the world’s biggest emitter of CO 2 , contributing to 29% of the world's emissions,
followed by USA (15%) and India (7%). Clearly, the command -and-control measures in China
are not that effective in reducing emission. Dong et al. (2017) in their study attempted to predict
the possible impact of a carbon tax on carbon reduction and GDP. They developed a novel CGE
modelling for 30 Chinese provinces to evaluate carbon tax effects. Results suggest that
implementation of a carbon tax can effectively reduce industrial carbon emissions, however
might result in GDP losses. In order to solve the problem of GDP loss, they suggested that “the
revenue generated from tax collection should be reallocated and transferred more to more
affected regions to balance their welfare losses. Moreover, the carbon price to be set should
not exceed 50 USD/ton.” Recently, China launched a CO2

9
 emission trading system, which aims to contribute to global reductions in GHG emissions
however it differs from the principle approach used in other countries. Studies suggest that the
“environmental benefits of TPS exceed its cost by a factor of five when only both climate
benefits and health benefits from improved air quality are included” [23].

The table below summarises core benefits and challenges as experienced by different countries
which successfully implemented different forms of MBIs for environmental pollution.

Table 1: Benefits and Challenges of implementing various market-based instruments

Objective MB Instrument Benefits Challenges Sources

Water 1. Effluent charges Producer bears the cost Difficulty in designing due to Kumar et al.
Pollution of pollution non availability of adequate
(2000)
data.
Induced the producer to
reduce the amount of Institutional challenges Giovanna M.
discharge, political acceptability. Longo (1970)

Incentives for firms to law on municipal

come up with new jurisdictional power may (Kraemer, R.
technology for reduce the impact A. et al., 2004)
pollution abatement.
Difficult to implement at a
local level

2. Tradable Large revenue flow to Acceptance of the emission Kraemer, R. A.

Permits for Water governments. rights and accompanying et al. (2004)
Pollution trading rules
Greater flexibility to
the firms Need for an effective Holley &
administrative and legal Sinclair (2018)
Incentives for the firms establishments
to innovate and employ
technology to reduce Challenges in addressing (Marion G.
emissions to its chosen universality of impact and Wrobel, 1990)
level source

Insufficient knowledge of the

behaviour of trading firms

10
 Limited data accuracy

Uncertainty regarding
environmental benefits
achieved

Firms may use MEPs as

Speculative or Predatory
Tools

Limited operation across the

country.

Reduction 3. Carbon Trading Offers certainty about Concerns regarding (Pillay & Buys,
in GHG (Cap-and-Trade the quantity of credibility of the emission 2013)
emissions Systems) emission reduced cap.
Shammin &
Provide flexibility for Need for a competitive Bullard (2009)
individual firms to set market to facilitate trading
their own compliance tax implications. (US EPA,
path 2023).
Price uncertainty
Improves firms Dechezleprêtre
economic performance Need for new financial et al. (2023)
and productivity regulations and
administrative capacity.

Non-transparency of
distributional incidence

Regressive and the cost of

reducing GHG emissions will
fall disproportionately on low
income groups.

4. Carbon Taxes Offers certainty about Uncertainty regarding the (Pillay & Buys,
price quantity of emission 2013)
reductions.
Simple to implement Fremstad and
Inequality concerns Paul (2019)

11
 Encourage green Might result in GDP losses. (IMF, 2022)
investments and energy
conservation Issue of social acceptance

Generate revenues for Additional tax burden

the government

4.2 The Indian Context

4.2.1 Water pollution: Existing policies and challenges

“Water pollution exists because water is an underpriced good” Giovanna M. Longo (1970).
This can be very well understood from the context of India. India is facing a wide range of
water-related challenges starting from pollution to water scarcity, floods, droughts, all having
both direct and indirect impact on the economy in general and agriculture development in
particular (Venkatachalam, L. n.d.). Waste disposal into the water bodies, over-extraction of
groundwater, lack of proper water management system, inadequate distribution, climate
change, and water related conflicts are the alarming threats to sustainability and development
of the country. A rise in industrialization and urbanisation has resulted in contamination of
rivers and groundwater, making it unsafe for consumption [39]. Also, lack of a well-defined
property right system and accountability creates incentives for overuse. India has adopted a
mix of instruments to tackle the problem of water pollution. The main regulatory instruments
include the Water (prevention and control of pollution) Act, 1974, the Water (prevention and
control of pollution) Cess Act, 1977 and the Environment (protection) Act of 1986 (Rajaram,
T. & Das, A. 2007). Central Pollution Control Board (CPCB) and State Pollution Control
Boards (SPCBs) were established to enforce ambient water quality standards and set/regulate
emission/discharge. A penalty in the form of Environmental Compensation is imposed by the
National Green Tribunal (NGT) and pollution control boards, for non-compliance with the
pollution standards. Economic instruments such as effluent standards and water cess are widely
used along with installation and use of Common Effluent Treatment Plants (CETPs) and
Sewage Treatment Plants (STPs). Rajaram, T. & Das, A. (2007) suggest that “the regulatory
system in India for controlling industrial discharge needs a complete transformation in the form
of setting standards, enforcement and monitoring.”

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4.2.2 GHG Emissions: Existing policies and challenges
India ranks third highest in the world, roughly contributing to 7% of the world’s CO 2 emissions
(WEF, 2022). Factors like rise in population, rapidly growing economy, and increased energy
consumption have contributed significantly to the soaring emissions (Statista, 2024). More than
half of the country’s electricity generation is generated using coal, making the power sector the
largest emitter, followed by the agriculture and manufacturing sectors, respectively. Currently
India does not tax carbon emissions directly but has placed a Coal Cess (Clean Environment
Cess) on coal production and imports since 2010 (WEF, 2022). The revenue generated is
directed towards the National Clean Energy Fund (NCEF) to aid renewable energy projects and
investment in cleaner technologies. Also, India does not levy any explicit carbon price.
“Internal Carbon Pricing is adopted as a strategy to encourage voluntary emission reductions
so that investments can be made in greener and more energy-efficient technologies”
(Vikaspedia Domains, n.d.).

5. Policy Recommendations

After analysing the existing policies, India definitely needs to rethink its current strategy to
deal with environmental challenges. Based on the international experiences, Table 1
summarises the possible benefits and challenges that may be encountered by a country like
India, when the given market-based instruments are implemented. It can be seen from the table
that instruments like tradable permits for water pollution or cap-and-trade emission trading
system, both require enormous amounts of investment into development of effective
administration, legal establishments and regulatory support. For a developing country like
India, proper monitoring and enforcement of policies is already a challenge, hence making it
more difficult to implement such market-based instruments. Apart from that, literature suggests
that even after successful implementation of tradable permits, uncertainty still lies regarding
environmental benefits that will be achieved. Lastly, tradable permits being regressive in
nature, the cost of reducing GHG emissions will fall disproportionately on lower income groups
which can pose a serious problem for any developing country.

The main benefit of implementing effluent charges is that the producer bears the cost of
pollution, which in turn induces the producer to reduce the amount of discharge or incentivises
the firms to come up with new technology for pollution abatement. On the other hand, major
challenges include difficulty in implementation at a local level. It becomes very

13
difficult to administer the small industries, which are major sources of pollution. They also do
not have enough financial resources to invest in expensive treatment plants. One way to tackle
this problem is to provide subsidies to the small industries for the installation of adequate
technology for treatment of waste along with an effluent charge. Kraemer, R. A. et al., (2004)
suggested that “A successfully administered state-led policy for controlling water pollution
based on effluent charges will require the state to construct, operate, and maintain all treatment
and water resource facilities and to calculate and impose charges over the whole state.”

A carbon tax is more simple to implement as compared to the emission trading system.
Collection of tax generates revenues which can be redistributed to address the inequality
concerns. However, the transparency and effectiveness of this redistribution syst em still
remains a challenge. Taxes add to the producer’s cost and hence encourage green investments
and energy conservation. Additional tax burden may give rise to the issue of social acceptance.
In the presence of imperfect information on the marginal abatement cost and the marginal social
cost, uncertainty might arise regarding the quantity of emission reductions. Based on India’s
target to achieve an emission reduction of 45% by 2030, stricter actions must be taken in
reducing emissions. A carbon tax, if paired along with heavy investments in installation of
non-fossil fuel based electric power plants, then the benefits of a carbon tax can be realised
sooner or later.

6. Conclusion

Both management of water quality and reduction in emissions involves high complexity.
However, international experiences suggest that traditional command -and control models are
getting obsolete and ineffective day by day. Newer problems demand for more technically
advanced solutions which cannot be achieved through traditional approaches as they do not
provide incentives for firms to innovate or invest in new and cleaner technology. Recently,
market-based instruments have started gaining popularity in different parts of the world. These
methods are preferred by many economists as it internalises the social cost of pollution and
gives the optimal amount of pollution by equating the marginal abatement cost to the marginal
social cost. However, the theoretical framework can be very different from the real world
scenario in the presence of imperfect information. When we look at the international
experiences, only developed countries like the US are successfully able to implement

14
advanced-trading mechanisms. For developing countries like India, where challenges in
monitoring and enforcement already exist, tradable permits might not be a suitable tool for
addressing environmental challenges. Effluent charges can turn out as a more d esirable solution
for water pollution when they are paired with subsidies to the small and scattered industries for
installation of advanced waste water treatment mechanisms. When considering an instrument
for emission reduction, carbon tax turns out to be more simple to implement as compared to the
emission trading system. Revenue generated from collection of tax can be redistributed to
address the inequality concerns. However, the transparency and effectiveness of this
redistribution system still remains a challenge. For India to fully utilise the benefits of the
carbon tax system and at the same time achieve its emission reduction targets, a huge amount
of investment is required in setting up more renewable energy based power plants.
Acceptability of these policies and availability of data remains as common issues for
implementation of any policy. With advanced data collection mechanisms, more scientific data
can be produced, however collection of data at a local level still requires administrative support.
This study is limited to only four most commonly used market-based instruments and
concludes that a single policy instrument is not enough for dealing with complex environmental
problems that developing countries like India are facing. Analysis needs to be done
incorporating more such instruments to find an ideal mix of instruments which will be most
appropriate in the Indian context.

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