The Right Price

Economic profit maximization is one of the main objectives of any industry or firm.  But with global climate change, does a firm look towards reducing carbon emissions and pollutions at the cost of lower productivity? Is it right to levy more taxes on firms to reduce greenhouse emissions? Does one target economic development or become more eco-friendly?

In this study, the researchers, which include Prof. Santosh Kumar Sahu and Mr. Prantik Bagchi from the Department of Humanities and Social Sciences, Indian Institute of Technology Madras, Chennai; Prof. Ajay Kumar from EMLYON Business School, Ecully, France; and Prof. Kim Hua Tan from Nottingham University Business School, Nottingham, UK, have studied the manufacturing sector of the Indian economy using data collected from the Prowess IQ database of the Centre for Monitoring Indian Economy from 2001 to 2015. Their research focuses on a possible solution to the pollution and productivity problems of the manufacturing firms in India.

Manufacturing firms are more open to mitigation policies to reduce pollution. There are two ways to mitigate the problems of global warming: (1) by controlling temperature and/or (2) by reducing emissions. As controlling the temperature is impossible, reducing emissions should be the central focus of the firms. At the firm level, emission control can be achieved in two ways:

1. Reducing energy use through energy mix/substitution between fuels and/or
2. Technological advancement

Based on these above issues, the objectives of their study are to find a solution to the following research questions:

1. Can price instruments (such as tax) and technology (such as expenses on research and development) help the manufacturing firms to achieve energy efficiency?
2. Is a certain amount of energy efficiency crowded out due to the productivity dilemma?

Two factors are taken into account in this study: energy intensity and energy efficiency. Energy intensity can be used as a proxy for energy efficiency. Their data analysis from 2001 to 2015 concluded a decreasing trend for energy intensity, implying energy efficiency has increased. An increase in energy efficiency for the firms in the manufacturing sector indicates technological advancement at the firm level. The following factors influence energy intensity:

1. Price instruments (such as tax)
2. Technology (such as expenditure on research and development)
3. Firm-level productivity
4. Pollution levels
5. Other firm characteristics such as the structure of the firms

From the above factors, price instruments  and technology  are instrumental in increasing energy efficiency. There is ample evidence suggesting that technology plays a significant role in reducing energy intensity, which is in line with this study. For better environmental policy, one-to-one correspondence between technological advancement and achieving energy efficiency should continue at the firm level. In the case of tax, it has been noticed that stringent tax policies can be detrimental to the economy. Thus a cap-and-trade is better suited for the Indian economy to control firms’ carbon emissions.

Based on the econometric analysis of this research paper, the policy suggestions indicate to frame environmental regulations related to increasing energy efficiency at the firm level.

One-to-one correspondence between tax and energy intensity may help promote the use of renewable energy. Firms that are improving energy efficiency can be either given tax credit or tax exemption as rewards. There is an urgent need to replace vintage capital and adopt new technology. The researchers further conclude that the positive spillovers from export participation and foreign direct investments could help the Indian economy and increase energy efficiency in the manufacturing sector. A sustainable energy policy targeting the manufacturing industry is essential for the Indian economy to contribute to green and sustainable development. The researchers feel that more recent data, including information on the stages of research and development, patents, and environmental expenses at the firm level for manufacturing industries, would be highly beneficial to explain India’s energy consumption and emission structure.                                       

Prof. Filip De Beule, from the Department of Management, Strategy and Innovation, Antwerp Campus, KU Leuven gave the following views on the paper: “In today’s turbulent climatic landscape, scholars and policymakers have paid growing attention to the influence of environmental regulation on firm efficiency and behavior. The study by Sahu and colleagues contributes to these insights by analyzing how the institutional and policy context influences the energy intensity of firms in the Indian manufacturing sector. They conclude that the Government must design green domestic policies for the manufacturing sector and map them with FDI and trade. Clearly, import competition and FDI are vital to increase energy efficiency in this sector. Being one of the largest emerging economies with limited energy resource, India needs a sustainable energy policy that addresses the demand for energy and the negative externalities to the ecosystem.”

The study also has important policy implications with regard to global climate change regulation as an increasing number of cap-and-trade emission trading systems are also being implemented around the globe (e.g., in California in the U.S. and China). As pollutionintensive industries and firms are more likely to be attracted by lax environmental policy, “Performance, Achievement and Trade” (PAT) policies need to focus on these firms. Additionally, as firms in pollutionintensive industries seem to prefer to relocate to pollution havens rather than innovate, assisting these firms in improving their energy efficiency and reducing their pollution can help them in gaining legitimacy and maintaining their business.”

Article by Akshay Anantharaman
Here is the original link to the paper:



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