When do firms go green? Comparing command and control regulations with price incentives in India

There are two commonly accepted views about command-and-control (CAC) environmental regulation. First, CAC
delivers environmental outcomes at very high cost. Second, in a developing country with weak regulatory institutions,
CACs may not even yield environmental benefits: regulators can force firms to install pollution abatement equipment,
but cannot ensure that they use it. We examine India's experience and find evidence that CAC policies achieved
substantial environmental benefits at a relatively low cost. Constructing an establishment-level panel from 1998 to
2009, we find that the CAC regulations imposed by India's Supreme Court on 17 cities improved air quality with little
effect on establishment productivity. We document a strong effect of deterred entry of high-polluting industries into
regulated cities; however little effect on the overall level of manufacturing output, employment, or productivity in
those cities. We also find sustained reductions in within-establishment coal use, with no evidence of leakage into
other fuels. To benchmark our results, we use variation in coal prices to compare the CAC policies to price
incentives. We show that CAC regulations were primarily effective at reducing coal consumption of large urban
polluters, while a coal tax is likely to have a broader impact across all establishment types. Our estimated coal price
elasticity suggests that a 15-30% excise tax would be needed to generate reductions in coal consumption equivalent
to those produced by these CAC policies.