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![Page 1: Truth-telling by third party auditors and the response of ... · Truth-telling by third party auditors and the response of polluting firms: Experimental Evidence from Gujarat, India](https://reader031.vdocuments.us/reader031/viewer/2022030300/5b8521ae7f8b9a317e8d66de/html5/thumbnails/1.jpg)
Truth-telling by third party auditors and the
response of polluting firms:
Experimental Evidence from Gujarat, India
Rohini Pande (Harvard)
Hardik Shah (Member Secretary,
Gujarat Pollution Control Board)
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Overview
• Context
• Evaluation
• Data
• Results
• Research Into Action
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Overview
• Context
• Evaluation
• Data
• Results
• Research Into Action
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The Importance of Effective Environmental
Regulations in Developing Countries
1. Less pollution means longer, healthier lives.
• Chen et al (2013) document substantial losses of life expectancy due to particulates air pollution in China.
• CPCB (2012) study for Delhi reports significant health impacts
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Pollution High in Emerging Asia
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The Importance of Effective Environmental
Regulations in Developing Countries
2. Implementing
effective regulation in
developing countries
hard.
• Olken and Pande
(2012)
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3. Climate Change
• International Climate negotiations appear to be moving toward model where countries will set and enforce their own targets
• Creates strong need for effective regulatory instruments
The Importance of Effective Environmental
Regulations in Developing Countries
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Industrial Pollution in Gujarat
• Gujarat is a highly industrialized
state
– 19% of all manufacturing output, 5%
of population (60 million)
– Home to top 3 industrialized districts
in India
• Regulating Water and air pollution
a key issue
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Context: Regulatory Framework
• India has a stringent regulatory
framework, further strengthened by recent
court orders.
− Water Pollution and Control Act of 1974.
− Air Act of 1981, Patterned after US Clean Air Act.
− Delegated enforcement to State Pollution Control
Boards.
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Context: Enforcement
• Gujarat Pollution Control Board regulates about 20,000 plants through command-and-control regulation
• Regulator powerful: Penalties include bonds against future performance and closure enforced by disconnecting electricity or water
• But industry growth not accompanied by growth in regulator staffing
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Context: Enforcement
• Gujarat Pollution Control Board has two primary
tools for monitoring compliance:
– Regulatory inspections
– Third-party audits: instituted on basis of high
court request.
• High pollution-potential plants required to hire auditor
and submit annual report
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Context: Environmental Audits
But, third-party auditing system creates conflict of interest, because firms hire their auditors.
The auditors’ interest may not be perfectly aligned to report the truth.
Gujarat installed several safeguards including:
– Auditors cannot consult for the same plant
– Rotation mandated every three years
– Audit teams must be comprised of four people with particular degrees and experience
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Context: What is an audit and what are its
consequences?
What is an Audit?
• Auditors visit three times per year
• Submit annual report with pollution readings and suggested improvements in operations
Consequences
• Non-submission or non-compliance is punishable, in principle, by closure and disconnection of water and electricity
• False audits can lead to auditor decertification
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Context: Qualitative description of auditor
market
Strong price competition
• In our sample, cost of conducting an audit is roughly 40K INR
• Audits can be purchased for INR 24K on average
Audit quality
• Regulator suspicious of audit quality
• Regulated plants sued to end audits on the grounds that GPCB was not acting upon the audit reports
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Overview
• Context
• Evaluation
• Data
• Results
• Research Into Action
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Evaluation
Sample: All audit-eligible plants from GPCB
regions in and around Gujarat's two most
populous cities.
– Two year experiment: 233 of 473 plants
assigned to audit treatment at start of first
year for both years
– All interested GPCB certified auditors
were included
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Evaluation
Treatment has four components:
1. Random assignment of auditors to firms
2. Financial independence. Fixed payment from
central pool.
3. Monitoring of auditors.
4. Accuracy incentives for auditors (year 2
only).
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Overview
• Context
• Evaluation
• Data
• Results
• Research Into Action
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Data: Three Sources
• Auditor reports of Pollution Readings
• Backcheck reports
–Measure the same pollutants at the same plant within several weeks.
• Survey for final pollution outcomes. About 6 months after end of treatment (April-July 2011).
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Reporting outcomes for important
pollutants
• Water pollutants: BOD, COD, TDS, TSS, NH3-N
• Air pollutants: SO2, NOx, SPMg.
• Pollutant readings standardized throughout the analysis
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Final-outlet water and boiler-stack air samples
Water sampling Stack sampling
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Overview
• Context
• Evaluation
• Data
• Results
• Research Into Action
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Results
1. Incorrect Reporting under status quo.
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1. Incorrect Reporting under status quo.
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1. Incorrect Reporting under status quo.
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Results
1. Incorrect Reporting under status quo.
2. Treatment caused the auditors to become
more truthful.
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2. Treatment caused the auditors to become
more truthful.
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Results
1. Incorrect Reporting under status quo.
2. Treatment caused the auditors to become
more truthful.
3. Treatment caused plants to reduce
pollution.
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3. Treatment caused plants to reduce
pollution.
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Impact of New Audit System on Pollution
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Overview
• Context
• Evaluation
• Data
• Results
• Research Into Action
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Research Into Action
Presented Gujarat Pollution Control Board with
3 recommendations:
1. Randomly assign auditors to plants
2. No negotiation between auditors and plants
on their fees
3. Monitor auditors reporting through
back-checks
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Research Into Action
• GPCB is changing its audit policy in response to this evidence
–Hardik Shah (Member Secretary, Gujarat Pollution Control Board) will speaking next to explain the details
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Research Into Action
A continuing collaboration with Indian regulators:
– Continuous emissions monitoring (CEMs): first wave currently being installed in Gujarat and Maharashtra
– An emissions trading system for particulate matter—the first ever evaluations of market-based environmental regulation in a developing country
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Other areas of application: Environmental Audits and Impact Assessment
Environmental Audits (EA)
• EA in India conducted by CAG for last 25 years: can cover water, air pollution, biodiversity and waste management
Environmental Impact Assessment (EIA)
• EIA mandatory for large projects such as mining, thermal power plants, infrastructure
• EIA needs to address factors such as air and water quality, occupational safety and health, details of the treatment and disposal of effluents and transport of raw material
• Determines clearance of projects by the government and approval conditions
• Discussions on regulatory framework but much less on quality of data used for regulation
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Increasing interest in independent Audits in other Areas
• Government programmes: NREGA & Mid-day Meal (CAG performance audit and social audit)
• Mission mode projects of state governments
• Quality of government school buildings (Maharashtra)
• Construction/ Real Estate: Third-party safety and health audits at construction sites