Improving Third-Party Pollution Audits in Gujarat

Evidence informs scale-up of pollution audit policy scaled up in Gujarat, India

Research by J-PAL affiliates Esther Duflo, Michael Greenstone, Rohini Pande, and Nicholas Ryan has shown that making environmental auditors more independent improved the accuracy of pollution audit reports and led industrial plants in the Indian state of Gujarat to reduce their emissions.

Based on the results of the randomized evaluation, the Gujarat Pollution Control Board (GPCB) reformed its environmental auditing system in 2015.

The new guidelines issued by GPCB require environmental auditors to be randomly assigned to industrial plants and have their work double-checked for accuracy. Both requirements were part of an improved auditing system designed and evaluated in partnership with J-PAL affiliated researchers. The new guidelines are expected to improve air and water quality in the state.

The Problem: Auditors often lack incentives to accurately report pollution by industrial plants.

Rapid industrial growth in countries like China and India has greatly reduced poverty, but it has also led to severe air and water pollution, resulting in shorter and sicker lives for millions of people. The World Health Organization estimates that urban air pollution causes 1.3 million deaths worldwide per year, most of which are in middle-income countries.

To curb pollution, regulators need to know which plants are polluting most. One way to monitor industry compliance with environmental regulations is through third-party auditors. However, in most countries, auditors are managed and paid by the company they are auditing, creating a conflict of interest. In these auditing systems, auditors may distort or falsify their reporting to maintain good relationships with the companies they audit. However, if auditors do not report the truth, there is no reason for the plants being regulated to comply, since regulators will not know if they fail to meet pollution limits.

In 1996, the Indian state of Gujarat sought to strengthen its environmental regulatory framework by introducing the first third-party environmental audit system in India. The initial system, however, was thought to produce unreliable information about pollution. Recognizing this problem, GPCB sought out researchers to help reform the audit market in 2009.

The Research: Changing auditors’ incentives made them more likely to report the truth about pollution levels at industrial plants. In response, the plants polluted less.

J-PAL affiliated researchers collaborated with GPCB to design and evaluate a set of reforms in which auditors were randomly assigned to industrial plants, paid from a common pool, monitored for accuracy, and paid a bonus for accurate reports. Industrial firms in Ahmedabad and Surat, the two largest cities in Gujarat, were randomly assigned to participate in the new audit system. The results were striking: under the new system, auditors were 80 percent less likely to submit a false pollution reading. In response to more accurate audits, industrial plants reduced emissions of air and water pollutants by 28 percent, and this effect was driven by the highest-polluting plants.

The field work for the three-year study was conducted by J-PAL South Asia and was funded by the Center for Energy and Environmental Policy Research, the Harvard Environmental Economics Program, the International Growth Centre, the International Initiative for Impact Evaluation, the National Science Foundation and the Sustainability Science Program at Harvard.

“The state is at the forefront of testing and implementing innovative policies that actually work, which is why we wanted to partner with this team of researchers. The visionary leadership of the state coupled with the strong evidence generated through the research has been a guiding force for implementing new ideas in our march towards sustainable development.” Hardik Shah, Member Secretary of GPCB

From Research to Action: GPCB’s commitment to testing various reform options ensured that the right policies could be effectively implemented and scaled.

To implement the new reforms GPCB worked with programmers to develop a new software system that tracks and manages all interactions between GPCB and polluting industrial plants. The new software automatically randomly assigns auditors to firms so that neither the auditors nor the regulators have discretion regarding who audits a particular firm. This component was rolled-out across the state in March 2015. By 2017, the software system will facilitate auditor monitoring by randomly assigning audits to be back checked.

Building on this successful partnership, the researchers are continuing to work closely with officials in Gujarat and other Indian states on environmental policy design and evaluation. Current directions for research include the use of information technology in pollution monitoring and the benefits of market-based instruments for low-cost pollution abatement.