When do Firms Go Green?: Comparing Price Incentives with Command and Control Regulations in India

India has a multitude of environmental regulations but a history of poor enforcement. Between 1996 and 2004, India’s Supreme Court required 17 cities to enact Action Plans to reduce air pollution through a variety of command-and-control (CAC) environmental regulations. We compare the impacts of these regulations with the impact of changes in coal prices on establishment-level pollution abatement, coal consumption, and productivity growth. We find that higher coal prices reduced coal use within establishments, with price elasticities similar to those found in the US. In addition, higher coal prices are associated with lower pollution emissions at the district level. CAC regulations did not affect within-establishment pollution control investment or coal use, but did impact the extensive margin, increasing the share of large establishments investing in pollution control and reducing the entry of new establishments. For reducing SO2 emissions, our results suggest that higher coal prices were more effective in improving environmental outcomes than command and control measures. ∗We are grateful to Michele De Nevers, Rema Hanna, Gib Metcalf, David Popp and seminar participants at Johns Hopkins SAIS for helpful comments and suggestions. We also thank Michael Greenstone and Rema Hanna for generously providing us with city-level pollutant data for India. This material is based upon work supported by the National Science Foundation under Grant No. SES-0922332. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the National Science Foundation. We further acknowledge support from the Mack Institute for Innovation Management at the Wharton School. All errors remain our own. †The Wharton School of the University of Pennsylvania, and NBER ‡The Wharton School of the University of Pennsylvania §Department of Economics, University of Melbourne ¶RAND Corporation