DISTRIBUTIONAL ASPECTS OF WATER POLLUTION CONTROL PROGRAMS: A CASE STUDY OF NCT DELHI

A brief synopsis of my PhD Thesis

 RUPA BASU

 (Under the Supervision of Professor D.N.Rao)

CENTER FOR ECONOMIC STUDIES AND PLANNING SCHOOL OF SOCIAL SCIENCES

JAWAHARLAL NEHRU UNIVERSITYNEW DELHI, INDIA

2008

Introduction

• With growing awareness and concern about the environment, a number of pollution control programs are being implemented in developed as well as developing countries. These programs often involve all the sectors of the economy and a huge amount of resources.

• In the world of political reality the distribution of benefits and costs is often the key issue in environmental policy.

• While economists are usually concerned about the economic efficiency of a proposed environmental program, most other observers like policy makers, the press and the public are more interested in its equity.

• The distributive issue in environmental policy must be dealt with effectively, not only because attention to it is good political strategy, but because the subject is really crucial to the welfare of the society.

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Continued:

• Over the years water pollution has emerged as a major environmental problem and the provision of safe drinking water is among the biggest issues confronting urban development professionals all over the world.

• To control the pollution levels of a river, a multi-pronged strategy that involves setting up of sewage treatment plants, controlling the flow of industrial effluents into the water body and relocating existing patterns of life is required. This is bound to involve a lot of cost.

• Such programs often face severe opposition from the masses because of perceived inequity in their distribution of costs and benefits.

• On examining the incidence of water pollution abatement costs the government may wish to adopt an appropriate redistribution program. By this we would be able to blunt any political backlash against the pollution control measures being adopted. 3

Objectives of the study

In this study we have taken up the case study of the Programs for Cleaning of Yamuna River in Delhi (abbreviated as PCYD for convenience).

The two main objectives of this study are:

• To advance our understanding about the patterns of distribution of benefits and costs associated with water pollution abatement programs.

• To test the hypothesis that the burden distribution of comprehensive pollution control programs like a river action plan is in general regressive.

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Programs for Cleaning of Yamuna in Delhi (PCYD)

• The National Capital has grown to an enormous size over the last four decades with population explosion, haphazard growth of unauthorized colonies, slums and industrial units.

• This has resulted in discharge of massive amounts of domestic and industrial wastewater that are eventually released into the Yamuna River.

• The stretch between Wazirabad and Okhla is most heavily polluted and is characterized by high bacterial population, cloudy appearance and strong disagreeable odor.

• For more than a decade now the government is trying to improve the condition of the river Yamuna. Numerous public works are being undertaken by the Union Government under the Yamuna Action Plan (YAP) along with other initiatives by the Delhi State Government.

• The Supreme Court has also been very active in this matter. • Overall a lot of money has been spent on these programs.

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Pollution Problem of the Yamuna River in Delhi: Some Details• In general the water pollution problem of a River like Yamuna that

flows through several states should be studied in an integrated manner since upstream activities and pollution control measures have an impact on the water quality of the River downstream.

• However the case of water pollution problem of Yamuna River in Delhi is unique in the sense that after it enters the city at palla village, the river is tapped at Wazirabad Barrage for drinking water supply to Delhi.

• Generally no water is allowed to flow beyond Wazirabad barrage in dry season (almost 9 months), as the available water is not adequate to fulfill water requirement of Delhi.

• Thus for all practical purposes the pollution problem of Yamuna River in Delhi can be treated as a separate problem that needs to be solved by addressing the issue of the large volume of untreated and partially treated industrial and household borne effluents that join the River through 19 majors nallahs crisscrossing Delhi.

The Broad Approach followed

•To determine the benefits derived from the expected water quality improvement form PCYD and the incidence of those benefits.

• We compare the two estimates to come to a conclusion about the overall distributional impact of this major pollution control initiative.

• The objectives of our study are evaluated in the light of our findings

•To determine the aggregate costs incurred for PCYD and the incidence of these costs on different income groups.

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Contingent Valuation Study of Yamuna River in Delhi

• In order to estimate the total benefits as well as the distributional impact of the benefits from PCYD it is necessary to know the value attached to the improvement in the river water quality by the inhabitants of the city .

• Since water quality is a nonmarket good having several dimensions, the contingent valuation method (CVM) was thought to be the most appropriate technique for this purpose.

• CV is a survey based method frequently used for placing monetary values on environmental goods and services not bought and sold in the marketplace.

• Under CVM individual respondents are asked hypothetical questions about how much they would be willing to pay for preservation of the resource.

• CVM allows us to determine the total economic value (= Use Value + Existence Value + Bequest Value + Option Value) of an environmental resource.

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The Survey

• To estimate the benefits from water quality improvement of Yamuna River in Delhi (WQIYD for convenience) a CV study of the Yamuna River was carried out in May-June 2005.

• 502 households were surveyed at random across Delhi using district-wise stratified random sampling.

• Double Bounded Dichotomous Choice (DBDC) elicitation procedure was used followed by an Open Ended question. Face-to-face interviews were used and the questionnaire was administered in both Hindi and English for the comfort of the respondents.

• A crucial issue in this method is the choice of the bids offered to respondents since it can affect the estimation of the mean WTP.

• Three questionnaires were designed with varying double dichotomous bids to measure the respondents’ willingness to pay. These were Questionnaire A: 80-100-120, Questionnaire B: 35-50-65 and Questionnaire C: 10-20-30.

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Continued:• These figures were fixed on the basis of the willingness to pay

(WTP) data obtained in a pilot study where an open-ended format was used.

• The questionnaire was carefully designed to minimize biases (like hypothetical bias, strategic bias, payment vehicle bias, anchoring bias and social desirability bias) that are associated with CV administration.

• The questionnaire included questions on Willingness to Contribute Time along with the WTP for WQIYD.

• An important aspect of a CV study is the selection of an appropriate payment vehicle. The payment vehicle must be realistic, believable and neutral.

• It was decided that a monthly wastewater treatment fee would ensure that the payment question was incentive compatible and also prevent the respondents from acting strategically.

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Continued:• Considering the unsatisfactory record of the government, it was

suggested that the improvement in the water quality would be brought about through various programs carried out by a non-profit making NGO that is reputed for doing honest and efficient work.

• The respondents were told that they would have to pay the monthly wastewater treatment fee for a period of 3 years. This discouraged “yes saying”.

• We had expected that only those belonging to the lowest income groups would mostly be willing to contribute time partly because of their inability to contribute money.

• However the survey showed that 45.4% of the respondents (228 in number) said ‘yes’ that they would be willing to contribute time for activities for cleaning up of Yamuna. This was an important indication of people’s concern for the state of Yamuna river in Delhi.

• The study shows that CVM can be used successfully in developing countries to measure benefits from environmental resources.

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Statistical Analysis of the Survey Data

Our statistical analysis of the survey data was carried out in several steps:

A. Analysis of Single Bound Dichotomous Choice (SBDC) Responses using the Logit Model.

B. Analyzing DBDC data to estimate the WTP by using Multilevel Modeling Methods (MLM).

C. Estimating the incidence of the benefits from WQIYD by analyzing the stated WTP data using Ordinary Least Squares method

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Analysis of SBDC Responses using the Logit Model

• The individuals who agreed to make a payment of a monthly wastewater treatment fee were offered one of three initial bid levels (Rs.100, Rs.50 or Rs.20).

• Before analyzing the DBDC data using MLM we have first carried out conventional analysis of the Single Bound Dichotomous Choice data first using logistic regression.

• The dependent variable in this model is the ‘yes’ and ‘no’ response i.e., binary data to whether a respondent will pay the initial bid as a monthly WWTF.

• In the logistic regression of the SBDC responses we found that apart from pcy and bid none of the other explanatory variables were significant. The equation we get is:

Li = ln (Yi / 1- Yi) = 2.007 - 0.039 bid + .001 pcY• This was followed up by the analysis of DBDC data using MLM

method.

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Multilevel modeling: A brief Introduction• Many kinds of data have a hierarchical or clustered structure.

Multilevel models recognise the existence of such data hierarchies by allowing for residual components at each level in the hierarchy.

• For example, a two-level model which allows for grouping of child outcomes within schools would include residuals at the child and school level. Thus the residual variance is partitioned into a between-school component and a within-school component

• The school residuals represent unobserved school characteristics that affect child outcomes. It is these unobserved variables which lead to correlation between outcomes for children from the same school.

• Traditional multiple regression techniques treat the units of analysis as independent observations. One consequence of failing to recognise hierarchical structures is that standard errors of regression coefficients will be underestimated, leading to an overstatement of statistical significance.

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Using MLM to estimate WTP from DBDC data

• The DBDB data generated by the CV survey is essentially hierarchical in character. It is a three level model with responses at level 1, individuals at level 2, and initial bid presented at level 3.

• MLM is therefore the appropriate approach for analyzing DBDC data since it provides the opportunity to study variation at different levels of the hierarchy.

• In carrying out the MLM exercise we are principally concerned with estimating the E(WTP) using DBDC data and separating out effects due to the design of the response structure from those due to individuals.

• Consequently in this study we have only considered a two-stage hierarchy with responses nested within individuals by defining the former as level-1 variation and the latter as level-2.

• Moreover for modeling the 3 level hierarchical data the number of initial bids should be large which we did not have.

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Continued:• Since we found pcY and bid as the only significant variables in the

analysis of the SBDC data these variables were included in the estimation of WTP.

• The multilevel model we have estimated is: LOGIT ki= a + bBID ki +cPCY ki + viBID ki + wiPCY ki + ui + e ki

wi = allows random slopes, vi ~ N (0, σ2v)

• The MLM analysis was carried out on LISREL 8.30. We found that there is no significant estimated variance between the response variable and BID and the insignificant terms were omitted.

• The best model is given as equation:Li = ln (Yi / 1- Yi) = 1.20881 + -0.01946BID+ 0.00013PCY

(0.38446) (0.00154) (0.00021)• The final model includes PCY and BID as explanatory variables and

significant first order interactions. We get the median WTP as equal to Rs 93.74.

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Estimating the incidence of the benefits from WQIYD• For this we used the linear regression model where the dependent

variable is SWTP (stated willingness to pay) i.e. the maximum WTP figure stated by the respondents in response to the open-ended question at the end of the DBDC valuation questions. The figures are considered to be continuous in nature.

• The protest bids and outliers were excluded the final count of observations stood at 440. OLS regression was run using the software package SPSS.

• Effort was made to examine the presence of any anchoring effect or starting point bias. Taking bid C as default, bid B did not turn out to be significant but bid A was positive and significant indicating that those who were offered a bid of Rs 100 did state a higher WTP. Effects of the bid variable were removed by setting bid_a = 0.

• The mean WTP for WQIYD comes down from Rs 79.46 to Rs 63.23 after correcting for the starting point bias. The median WTP is Rs. 60.41.

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Continued:

• We see that the WTP estimates obtained from the OLS regression are much less than the WTP estimates yielded by the DBDC data.

• This is, in fact, supported by literature. Most studies comparing the WTP estimates from open-ended (OE) and dichotomous choice (DC) elicitation formats have reported that the mean WTP from DC formats exceed those from OE experiments (Bateman et. al. 1999).

• OLS regression method yields the mean WTP whereas the SBDC and DBDC methods give us estimates of median WTP.

• OLS estimates have been used for determining the incidence of the benefits from WQIYD between different income groups since median cannot be aggregated over the population (Duffield and Patterson 1991) .

• In this study we have used the income groups fixed by the Market Information Survey of Households 2001-02 conducted by NCAER.

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Continued:• The population is divided into 5 income groups: lower income group

(an annual household income of up to Rs 45000), lower-middle income group (Rs 45001 to Rs 90000), middle income group (Rs 90001 to Rs 135000), upper-middle income group (Rs 135000 to Rs 180,000) and higher income group (more than Rs 180,000).

• The average of the SWTP of the individuals belonging to each income class was estimated.

Table 1

• We see that, as expected, water quality improvement is a normal good and the demand for water quality improvement increases with income.

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‘Regressive’ and ‘Progressive’ distribution of benefits: Some reconsideration

• In our study we have taken the Willingness To Pay figure as the measure of the benefits derived by different income groups (Ebert 2003).

• Using the terms in a parallel fashion, this study assumes that a benefit schedule is regressive when the gain as a percentage of income declines as the level of income rise, and that it is progressive when the opposite occurs.

• It follows that the implications for equality differ depending on whether the regressive schedule is applied to benefits or to costs.

• Thus we note that (A) whereas a regressive tax/costs schedule is “against the poor” and “pro-rich”.(B) a regressive benefits/ expenditure schedule is “pro- poor” and “against the rich”.

Is the distribution of benefits from WQIYD pro-rich?• Studies have shown that if and only if the income elasticity of the

benefit measure is greater than one that benefits are distributed progressively, i.e., pro-rich (Ebert 2003).

• Our regression estimates showed that the income elasticity of WTP of the residents of Delhi to pay for WQIYD is 0.401 which is less than unity. This implies that the benefits are distributed regressively i.e. are pro-poor.

• The result is supported by the findings of Kristrom and Riera (1996), Johnstone (1997) and others who while examining the income elasticity of environmental improvements in different countries found a persistent result that people in lower income brackets have a relatively higher WTP for preserving particular environmental goods.

• The income elasticity of environmental improvements is also often found to be less than unity.

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Income Groups

(1)

Annual WTP (per

Household)(2)

Number of Households

(3)

Aggregate WTP for 2005-06

(4)=(2)*(3)

PV of the Stream of Benefits 2005-06 to 2007-08)

(5)

Benefits Received

(per Household)(6)=(5)/ (3)

1. L 297.60 27560 8201856 22436482.12 814.102. LM 448.92 235260 105612919 288908068.2 1228.043. M 691.80 376800 260670240 713073135.7 1892.444. UM 939.24 424700 398895228 1091192731.0 2569.325. H 1539.24 1653680 2545410403 6963064820.0 4210.65

Total 2718000 3318770646 907.87 cr (approx)

Continued:• In our case this may be due to the fact that while people belonging

to higher income groups can take remedial steps to improve the quality of water supply, those belonging to the lower income groups must depend on the public water supply system for meeting their drinking water and other needs.

• The quantitative analysis of SWTP gives us the average WTP of households belonging to different income groups:

Table 2: Benefits from PCYD (Figures in Rs)

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Cost Estimation• In our study we have separately estimated the expenditure incurred

for pollution control of Yamuna River in Delhi for the YAP component, the expenditure incurred by the Delhi State Govt. on STPs, construction of sewers etc, the expenditure incurred the Government and the private industries on CETPs and the cost of rehabilitation of slums from Yamuna River banks.

• The aggregate costs of PCYD are estimated for the years 2000-01 to 2007-08 (Table 3).

• The choice of this period was dictated by the availability of data as well as the fact that most of the efforts for cleaning up of the Yamuna River in Delhi have been made during this period under pressure from the Supreme Court.

• The present value of the aggregate costs of PCYD was estimated to be Rs 1662.25 crores.

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Year DJB(sewage

and drainage schemes)

MCD (CTCs, mini and micro

STPs, PP & PA)

CETPs/ JJ rehabilitati

on/others

Total(current prices)

Present value of

cost incurred (2005-06 prices)

2000-01 7569.62 67.5 7637.12 12299.66

20001-02 13098.14 7240.84 20338.98 29778.30

20002-03 12765.43 9185.00 21950.43 29216.02

20003-04 13909.11 13909.11 16830.02

20004-05 18650.55 18650.55 20515.60

20005-06 11245.67 1660 10609.76+ 5672.14

29187.57 29187.57

20006-07 11245.67 1660 12905.67 17732.43

20007-08 11245.67 1660 12905.67 10665.84

Total 137485.10 166225.44

Table 3: Aggregate Costs of PCYD (Figures in Rs lacs)

Incidence of the Costs of PCYD • All the costs of meeting environmental standards and the costs of

various environmental programs are ultimately borne by households.

• They must pay for the costs incurred by the government through the process of taxation and expenditure cuts and the costs incurred by business by a shifting mechanism which includes higher prices, lower dividends and changed job opportunities.

• In order to determine the pattern of incidence of pollution control expenditure incurred by the government, we must determine the way in which the expenditure is financed.

• We assume that tax increases financed the government’s share of the water pollution control programs instead of expenditure cuts (Dorfman 1975).

• To analyze the distribution of taxes we also must adopt a set of assumptions about the taxes that are involved in the financing of water pollution control expenditure by the government i.e. the ‘tax-mix’ problem . 25

Assumptions made for estimating the incidence of the costs of PCYD

(a) The part of total expenditure on PCYD that is being funded by an international soft loan is assumed to be incurred by the Union Government since it is responsible for the loan repayment.

(b) The budget documents of the Delhi government show that for the year 2005-06 , 77% of own tax revenue was generated through indirect taxes. Therefore we have assumed that the portion of costs of PCYD that is borne by Delhi Government is funded out of indirect taxes.

(c) On the basis of the total tax revenue of the Union government for the year 2005-06 we have assumed that the expenditure incurred by the central government for PCYD is also financed through indirect taxes.

(d) the indirect taxes on the whole are assumed to be raised by equal percentage surtaxes, leaving the distribution of each tax unchanged with respect to its base.

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Explanation of the Assumptions• Incidence analysis deals with the diffusion of tax burden among

different economic classes in a country. To analyze the incidence of indirect taxes one has to trace the consumption of taxed commodities to the family budgets of people in different income classes.

• Very few such studies have been carried out in India at State and all India levels.

• In the absence of data on income distribution, in most studies expenditure has been assumed to be equal to income and the burden of indirect taxes has been expressed as a ratio of expenditure, rather than income of different economic groups.

• However consumption expenditure, as a proportion of income, tends to fall as one move up the income scale. Thus, at very low levels of income, consumption might be as much as the income whereas it might account for an insignificant proportion of income at high income levels.

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Continued:

• In fact Aggarwal (1998) noted that if we assume zero savings by an average person in the lowest expenditure class and a 30% savings rate for an average person in the top expenditure class, then their effective tax rates with respect to income will be approximately equal even in the rural areas. Such a pattern of savings rates is not implausible.

• On basis of the above mentioned study we have assumed that all individuals belonging to different income groups in Delhi are paying an equal percentage of their income as indirect taxes.

• On the basis the revenue figures obtained from the budget documents of Delhi government and the Union Government for the year 2005-06 we estimated that 7.06% of per capita income is paid in indirect taxes to the state government.

• 6.73% of per capita income is paid as indirect taxes to the union government by all households in Delhi.

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Distributional Impact of Environmental Protection Costs Incurred by Private Industries• Some early studies (Drofman and Snow 1975, Robison 1985) have

examined that the distributional impact of environmental protection costs incurred by the private industries.

• Drofman (1975) found that an effort to trace the inter-industry effects of cost increases using an input-output matrix, led to the conclusion that increases in prices of final products will be so widely diffused over the spectrum of commodities that their impact on income groups will tend to follow the pattern of general consumption expenditures.

• Following this logic we have also assumed that the expenditure incurred by private industries for the construction of CETPs has the same impact as that of a sales tax.

• It was estimated that the cost incurred on CETPs implied a surcharge of 16.47% on the sales tax paid by households to the state government and a surcharge of 0.30% on the indirect tax paid to the union government. 29

Incidence of the Costs and Benefits on Different Income Groups

Income Groups cost incidence benefit incidence

Lower 458.44 814.1

Lower-Middle 1084.6 1228.04

Middle 1899.55 1892.44

Upper Middle 2832.82 2569.32

Higher 7354.02 4210.6530

Integrating different aspects the study described above we get the estimates of the incidence of the benefits and costs of PCYD on different income groups:

Table 4: Incidence of Costs and Benefits on Different Income Groups (per annum)

• Thus we find that for the lower and lower-middle income groups the estimated benefit is actually more than the cost measured in terms of additional tax burden on the households.

• For the middle income group the two are almost equal and for the upper-middle and higher income groups the incidence of costs is higher than the incidence of benefits.

• Thus the hypothesis about the regressive net impact of pollution control program does not hold in the case of PCYD.

Incidence of Costs and Benefits of PCYD

0

1000

2000

3000

4000

5000

6000

7000

8000

1 2 3 4 5

income group

ann

ual

WT

P/a

dd

itio

nal

tax

bu

rden

Costs

Benefits

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Notes

• The results of the study show that the people of Delhi feel a lot of concern for protection of environmental resources. They are particularly concerned about the state of the River Yamuna and are also willing to pay for the cleaning up and restoration of the River provided the funds collected are appropriately used.

• The findings of our study encourage us to think that with political commitment and the right kind of institutional setup such efforts can be successful and financially sustainable.

• The results of this study on the distributional impact of large scale and comprehensive programs like PCYD should go a long way in providing support for environmental protection programs in general and River Action Plans in particular.

• The results of the study support the view that in general environmental policies are often labour intensive in nature and should prove to be a means of raising the real income and wages in low-income regions (Anderson 1991). 32

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Selected References

• Aggarwal, P.K. (1998); The Incidence of Major Indirect Taxes in India. National Institute of Public Finance and Policy, New Delhi

• Bateman, I.J., I.H.Langford and J.Rashbash (1999); Willingness to Pay Question Format: Effects in Contingent valuation Studies. Chapter 15 in Valuing Environmental Preferences. Theory and Practice of the Contingent Valuation Method in the US, EU and Developing Countries. Eds. I.J.Bateman and K.G.Willis. OUP. New York

• Dorfman, N.S. and A. Snow (1975); Who Will Pay for Pollution Control? - The Distribution by Income of the National Environmental Protection Program 1072-1980. National Tax Journal 28 p101-15

• Dorfman, R. (1977); Incidence of the Benefits and Costs of Environmental Programs. American Economic Association 67(1) p333-40

• Ebert, U. (2003); Environmental Goods and the Distribution of Income. Environmental and Resource Economics 25 p435–59

• Johnstone, N. (1997); Economic Inequality and the Urban Environment: The Case of Water and Sanitation. Working Paper DP 97-03 U.S. Environmental Protection Agency

• Kristrom, B. and P. Riera (1996); Is the Income Elasticity of Environmental Improvements Less Than One? Environment and Resources Economics 7 p45-55

• Markandya, A. (1998); Poverty Income Distribution and Policy Making. Environmental and Resource Economics 11(3-4) p459-72

• Robison, H. D. (1985); Who Pays for Industrial Pollution Abatement? The Review of Economics and Statistics 67(4) p702-06

Thank You