Environmental fiscal reforms: Where
and How
Background Note
20th-21st September 2012,
Venue – New Delhi
Background
The complex and cross-sectoral nature of the environmental issues creates the need for variety of
instruments and policy measures for the protection of the environment and management of natural
resources. Over the last few decades, economic instruments have been used to complement the
legislation-based environmental policy. Though the use of economic instruments has been greater in
the developed world, but recent years have seen the developing countries also making increasing
use of such instruments.
Fiscal instruments, in their capacity to prioritise and channelize government allocations and
influence decisions of economic agents, are being recognized as an integral part of environmental
policy making. Instruments such as environment- related taxes and subsidies, tradable permits,
creation of market for natural resources and budgetary allocations for environment related
programmes are being adopted as measures for undertaking environmental fiscal reforms (EFR).
These aim to complement regulatory approaches to environmental management.
Designing EFR however requires accounting for several considerations such as efficiency and cost
effectiveness of the instrument, its distributional and equity impacts, fiscal implications and
administrative feasibility and flexibility. In order to ensure acceptability of a fiscal instrument, a clear
understanding of direct and indirect trade-offs further remains important given that application of
instruments in certain situations can result in regressive outcomes, leading to iniquitous impacts.
Usage of EFR globally, suggests that a general blueprint for EFR does not exist with effective policies
dependent on institutional and political factors and hence are best developed by countries
themselves. In a federal context such as in India, with different tiers of government—Centre, state
and local bodies—responsible for environmental management, designing EFR further require
consideration of jurisdiction of both the environmental subject and the instrument. The use of
fiscalinstruments towards attaining environmental objectives in India has remained limited. While
the National Environmental Policy 2006 recognizes the importance of economic instruments in
achieving environmental goals, its applicability is inadequate.
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Objective
This conference aims to take forward the existing research on EFR and examine issues of
implementation in India on the subject, by providing a platform to bring together experts in the
area.
Issues for discussion
The broad topics for discussion are:
 Making instruments (like taxes, subsidies etc) work together in a coherent way, to achieve
sustainable development
EFR will need to be designed in a way that it takes into consideration the demands on fiscal policy.
Governments use the fiscal policy for balancing various economic, social and environmental
considerations and in designing any reform measures, it makes it essential to take into account all
these. For example, implications of an environmentally justifiable demand to reduce the use of
chemical fertilizers and pesticides have to be balanced against the wider interest of food security for
public welfare. This may then call for the need to assess the overall fiscal soundness in mind. A
comprehensive approach to EFR would also imply that governments should use their general
taxation and spending powers to induce economic behaviour that is environmentally accountable
rather than dealing with specific environmental issues or problems as they arise. So what are the
approaches that could help in successful implementation of EFR for the broader objective of
sustainable development?

Political economy issues related to EFR, implementation challenges faced and conditions
needed to create the EFR process
Designing EFR however requires accounting for several considerations such as efficiency and cost
effectiveness of the instrument, its distributional and equity impacts, environmental vs. fiscal
effectiveness (i.e. the possible trade-off between the revenue raising capacities vs. environmental
improvement), fiscal implications and political and administrative feasibility and flexibility. With
there being different broad objectives of EFR, it is important to determine the right balance between
these objectives. In order to ensure acceptability of a fiscal instrument, a clear understanding of
direct and indirect trade-offs further remains important given that application of instruments in
certain situations can result in regressive outcomes, leading to iniquitous impacts.
Though it is important to identify and understand the implications of EFR instrument on revenue
generation and meeting of environmental objectives, social implication of such instruments would
also need to be understood both in terms of how progressive the incidence of environmental
charges may be as also how these may clash with other social objectives of the government. On
equity impacts for instance, EFR can be potentially regressive and could even damage the resource
base upon which the poor depend if their demand for the resource is relatively inelastic to price or if
there limited substitution possibilities. Similarly, it may be argued that removing subsidies on
petroleum products would affect the cost of public transport and the general cost of living. Or for
example, implications of an environmentally justifiable demand to reduce the use of chemical
fertilizers have to be balanced against the wider interest of food security for public welfare.
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How can governments play a role in ensuring that the trade-offs are minimized?
Further the effectiveness depends on the political will, institutional capacities and social acceptance.
It is important to ensure that EFR complements, rather than clash with existing policies and
institutional arrangements. EFR implementation requires a relatively stable and coherence
governance framework, particularly in terms of financial governance. Good financial governance
aims at improving the tax system, making it more proficient in levying, collecting and redistribution
of the revenues and encourages transparent and accountable public financial management. The
governance mechanism includes the institutions, laws, regulations and procedures to manage the
public expenditure that create the needed transparency and accountability, and proper accounting
practices. EFR should not ever be considered a substitute for adequate environmental regulation
and enforcement.
Taxpayers’ compliance with and support for EFR depend on their understanding of why the
measures are being introduced, what the revenues will be used for, and the overall social, economic
and environmental impact. This will call for transparency in the budget and the collection and use of
EFR revenue, and effective communication with the public. EFR also requires a challenging process
of coordination and concentration among various stakeholders given their diverse objectives and
interests, and needs special negotiations skills and capacities. Hence this calls for firm understanding
of the stakeholders, particularly who stands to win and who stands to lose from the process, and
how ultimately a win-win situation can be arrived in medium/long term.
The level of administration capacity to administer the EFR process at a decentralized level may also
vary and this needs to be taken into account. Also if staff of the government departments lacks
sufficient skills in managing the EFR process, they should receive the necessary training and funds
should be allocated for the same.

Linkages of EFR in practice to national planning
The use of fiscal instruments (other than expenditure policy) in national policy has been rather
limited in India; even though the need to employ economic and fiscal policy instruments for the
control of pollution and management of natural resources has gained steady recognition since the
1990s.
In the Policy Statement for the Abatement of Pollution, released in 1992, the MoEF noted the need
for a mix of policy instruments in the form of regulations, legislation, agreements, financial
incentives, etc to address environmental concerns. In the Ninth Five Year Plan (1997-2002), an
important element of the environmental strategy was 'integrating environment with decision making through valuation of environmental impacts;
evolving market-based instruments as an alternative to the command and control form of
environmental regulation; appropriate pricing of natural resources based on their long-term
marginal cost of supply; appropriate fiscal reform and natural resource accounting'.
The State of the Environment Report prepared for India in 2001 as part of a project supported by
UNEP and the MoEF recommended that economic measures need to be put in place to encourage a
shift from curative to preventive measures, internalization of the costs of environmental
degradation, and conservation of resources. The revenue generated may be used for enforcement,
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collection, treatment facilities and R&D. The Report also called for economic incentives for
environmentally benign substitutes, technologies and energy conservation. The need for evolving an
appropriate tariff structure for water services to encourage wise usage and to generate funds for
cash-strapped service-providers was also recognized in the Report.
The National Environmental Policy 2006 also has recognized the importance of economic
instruments in achieving environmental goals. However the actual use of fiscal incentives in the
country has, been rather limited. These take the form of tax concessions for the adoption of
pollution control equipment and a somewhat more structured policy for the promotion of
renewable energy technologies. Tax incentives are usually specified for identified abatement
technologies and activities, not providing dynamic incentives for technological innovation and
diffusion. Also, since most of these are end-of-the-pipe treatment technologies, these incentives do
not promote more efficient use of resources. There are some provisions for the use of levies, cess,
fines, penalties etc. for polluters, though their implementation and effectiveness could do with
improvement.
What are the ways in which the use of EFR can be integrated more strongly within the national
policy making and broader objective of sustainable development? In a federal context like India’s, it
would also be necessary to go one step ahead to say that each state and local body must develop its
own strategy for EFR and a consensus for any reform across the issues pertaining to states or two
both would be a big challenge for the government.
 Institutional and governance mechanisms needed to support EFR
In a federal context like India, with different tiers of the government—Centre, state and local
bodies—responsible for environmental management, designing appropriate EFR strategies further
require consideration of jurisdiction of both the environmental subject and the instrument. It is
important to understand the institutional and governance mechanisms for decision-making in
context of EFR.
However there are deficiencies in the institutional arrangements which need to be addressed if EFR
related policies are completely successful within the federal structure of India. Significant
weaknesses in the institutions of environmental governance, in particular, are evident from the state
of pollution control boards. There is insufficient coordination between CPCB and SPCBs due to
double subordination of the SPCBs (and the administrative influence of the state governments).
Significant human and technical capacity constraints also deter the effective functioning at various
levels. Besides there being high proportion of non-technical staff members, the vacancy ratio in
several SPCBs. Funding limitation created by inadequate revenue sources and improper revenue
sharing arrangements also pose a significant challenge to these institutions.
Also there are large variations in the financial positions of the SPCBs. While some boards rely heavily
on state government grants, other like that in the state of Bihar receives negligible support and the
limited financial allocation to the boards also is noted to be a major factor behind corruption.
Instruments including consent fees under the Water and Air Act are being used, wherein the new
industries are required to get license to operate by paying a consent fee to the concerned SPCB for
discharging sewage and/or trade effluents within the standards. But there is variation found in the
structure of consent fees and other fees across the states in India, suggesting inequitable horizontal
treatment of industrial units.
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The capacities of the various levels of government in the federal structure also face other constraints
like political interferences, lack of civil administrative authority (particularly imposing fines),
ineffective systems of accountability, lack of awareness of the stakeholders, high levels of
corruption and inadequate skills in monitoring and enforcement activities
 Capacity building gaps and ways to address these gaps
The capacity development component for EFR is necessary to promote both economic growth and
environmental stewardship through the reforms of governmental policy and should be placed within
the bigger picture of capacity building for sustainable development. Capacity development is needed
to design and implement appropriate economic instruments to solve environmental problems in line
with local conditions that exist. Challenges identified in the context of political economy concerns of
EFR can also be addressed through capacity development, which can take on a number of formsstakeholder processes, strengthening tax administrations and expanding their focus from
expenditures to public revenues, supporting inter-ministerial co-operation, financing studies and
expert exchanges to support local ownership. What are the different ways in which capacity
development around the four areas-Human resource development, Organisational development ,
Network development and System development be enhanced for effective implementation of EFR.
Expected outcome
These issues, which have been raised by various stakeholders, have not been discussed at a common
platform. This conference seeks to fill this gap and highlight possible “windows of opportunity” for
greening economies by implementing EFR and supporting mechanisms that need to be in place.
TERI-GIZ-MoEF Project on Environmental Fiscal Reforms
As a step towards the larger goal of moving on the path of sustainable development, TERI-GIZ and
MoEF undertook a study - ‘Environmental Fiscal Reforms: Where and How’. This was a two year
project beginning August 2010. The study proposes to answer the following questions for a select set
of environmental and resource management issues in India:
1. What role can EFR play? What are the potential instruments/reform (across jurisdictions) and
their relative merits?
2. Does the required EFR infrastructure exist? Are current administrative, institutional and legal
frameworks conducive to the design, monitoring and enforcement of these instruments?
3. Who are the likely winners and losers? Understanding the political economy by analyzing the
tradeoffs among the various objectives of EFR (fiscal, environmental and social) and across
stakeholders (different users of the resources, different tiers of the government, industries,
NGOs, or CBOs involved in the various aspects of resource management).
4. How can these trade-offs be resolved?
5. What is likely to work and how?
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Based on answers to the above questions, the project aimed to recommend the fiscal instruments
and institutional changes that seem most appropriate for the issues under examination and possible
ways to implement the recommendations.
The issues considered in the project were:

Environmental fiscal reforms in the municipal solid waste management (MSWM) sector with
a focus on designing municipal charges for (three) selected cities in India

Environmental fiscal reform for enhancing resource efficiency and need for technology
upgradation in the micro, small and medium enterprise (MSME) sector in India

Environmental fiscal reforms in the municipal wastewater management (MWWM) sector
with a focus on designing municipal charges for (two) selected cities in India

Environmental fiscal reforms in the e-waste management sector with a focus on designing
fiscal instruments (and other economic instruments) for facilitating effective implementation
of E-waste (Management and Handling) rules 2011
This conference will also provide an opportunity to share the findings of this project and seek
valuable inputs from the participants.
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Environmental Fiscal Reforms in India
Date: 20th -21st September 2012
Venue: India Habitat Centre, Lodhi Road, New Delhi
Participants: 40-50
Tentative Agenda
Day 1:
20th
10:00 – 10:45
September, 2012
Inaugural Session
Welcome and Opening Remarks
Dr. Ardhendu Sen, Distinguished Fellow, TERI
Mr. Bernd Dunnzlaff, German Embassy (or Manfred Haebig, GIZ)
Dr. Prodipto Ghosh, Distinguished Fellow, TERI
Special Address
Mr. Hem Pande, Joint Secretary, Ministry of Environment and Forests (tbc)
Keynote Address
Mr. Arun Maira, Member, Planning Commission (tbc)
Vote of thanks
Mr. Souvik Bhattacharjya, TERI
10:45 – 11:00
Session I
11:00 – 13:00
Tea break
Environmental fiscal reforms -Prospects and Progress: The session will focus on
(i) Importance, scope, and role of EFR measures
(ii) Need for increased participation and incentive provision to private sector
(iii) Role of capacity development for EFR and possible role for international
cooperation
Chair: Dr. R S Ahlawat, Economic Adviser, MoEF
Speakers:
Dr. K.S. Kavi Kumar, Madras School of Economics (tbc)
Dr. Surendar Kumar, Delhi University
Dr. Manish Gupta, NIPFP
Dr. Ashish Chaturvedi, GIZ
Dr. Trishita Ray Barman, TERI
13:00 – 14:00 Lunch
Session II
14:00– 15:30
Environmental fiscal reforms -case studies: The session would present some case
studies of EFR measures that have been implemented in India and Germany and
assess the objectives of such instruments and whether their outcomes have been
successful in meeting the desired objectives.
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Chair: Mr. Nitin Desai, Distinguished Fellow, TERI
Speakers:
Mr. Arun Tripathi, Director, Ministry of New and Renewable Energy (fiscal
incentives to promote use of renewables and disincentives to reduce use of nonrenewables)
Mr. Amarendra Sinha, Additional Secretary & Development Commissioner,
MoMSME (tbc)
Mr. Ajay Mathur, (tbc)
Dr. S. Majumdar , CII-ITC Centre of Excellence for Sustainable Development
Dr. Kala Seetharam Sridhar, Head, Public Policy Research Group (tbc)
Mr. Axel, GIZ
15:30 – 15:45
Tea break
Session III
15:45 – 17:15
Panel discussion on political economy issues linked to EFR: Although potential
benefits of EFR are many, however achieving multiple objectives/ benefits
simultaneously can result in certain trade-offs. This panel discussion would
discuss trade-offs involved with the implementation of EFR in terms of who wins
and who loses, issues related to the organisational structure and the federal
framework in India and the lack of co-ordination amongst different tiers of the
government.
Chair: Dr. Amitabh Kundu
Speakers
Dr. Kanchan Chopra, Visiting Professor, TERI University
Dr. Sacchidananda Mukherjee, NIPFP
Dr. Snigdha Chakraborty, ISI, Kolkata
Dr. T Paul, World Bank (tbc)
Dr. Meeta K. Mehra, JNU
Closing of Day 1
17:15- 17:30
Wrap up of Day 1, TERI
17:30 – 19:00
Networking Dinner
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Day 2: 21st September, 2012
10:00-10:10
10:30 – 10:45
Session I
10:10 – 12.00
Welcome and setting the stage for Day 2
Tea break
EFR for urban services: The Municipal Corporations play a very significant role
towards an effective city management in India. The session will discuss the role of
institutional framework for effective EFR implementation, the role of non-state
stakeholders, and the possible role of the state governments.
Chair: Ms. Vaishali Nandan
Brief presentation by TERI team on the findings from the TERI-GIZ-MoEF Project
Mr. Souvik Bhattacharjya, TERI
Dr. Shilpi Kapur, TERI
Panel Discussion:
Representative ,Municipal Corporation of Shimla
Representative ,Varanasi Nagar Nigam
Representative, Kochi Municipal Corporation
Representative, Raipur Municipal Corporation
Session II
12:00 – 13:30
Panel Discussion on E-waste management in India: Possible use of fiscal
instruments: The panel discussion will help to learn the e-waste problem in India
and the existing initiatives undertaken by various stakeholders like government,
producers, recyclers, etc to deal with such challenges. It will also help in improved
understanding of the potential role of environmental fiscal instruments in efficient
and cost effective way of e-waste management in India by filling the identified
gaps.
Moderator: Dr. Ashish Chaturvedi, GIZ
Brief presentation by TERI team on the findings from the TERI-GIZ-MoEF Project
Ms. Arpita Khanna, TERI
Ms. Aastha Mehta, TERI
Panelists for discussion from the following organisations
 Greenscape
 Earth Sense
 Dell
 Nokia
 Samsung
 Department of Information Technology
13:30-13:45
Closing remarks
13:45 onwards
Lunch
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