SUMMARY

How Economic Instruments Can Improve Air Quality in Asia

Coal-burning for energy, industry, and residential heating is the primary cause of air pollution in Asia. Photo credit: ADB.
Coal-burning for energy, industry, and residential heating is the primary cause of air pollution in Asia. Photo credit: ADB.

Published: 16 August 2021

A market-based approach for reducing air pollution offers countries in the region great potential for flexibility and innovation.

Overview

Each year, 4.5 million people in Asia die prematurely from illnesses caused by breathing polluted air (Health Effects Institute, 2020). Fine particulate matter (PM2.5) is considered the greatest threat to human health. In 2017, 58% of the total ambient PM2.5 mortality burden was in India and the People's Republic of China (PRC), at 0.87 million and 1.4 million, respectively (McDuffie et al 2021). 

Air pollution also has massive impacts to the environment. It is closely linked with climate change, since major sources of carbon dioxide emissions and air pollutants are the same.

Asia’s cities report some of the worst air pollution in the world, resulting primarily from coal combustion for industry, energy, and residential heating, as well as household biomass burning.

In the PRC, next to secondary inorganic aerosols, PM2.5 is mostly from traffic sources at about 19%, but industry is not far behind at close to 17%. PM10 distribution varies in the North and South, due to the contribution of natural dust, but coal combustion plays a big role. In South Asia (and largely in India), next to secondary inorganic aerosols, the biggest share of PM2.5 is traffic at around 25% of PM2.5 and  21% of PM10 (Hopke et al 2020).

Biomass burning from deforestation and slash-and-burn land clearing cause widespread PM2.5 emissions in Southeast Asia and is the second biggest contributor to greenhouse gas emissions after carbon dioxide (Karthik et al. 2017, Jacobson 2001, and Wentzel et al. 2003). Moreover, rising population and economic growth, coupled with the lack of stringent regulations, have led to increasing pollutant emissions from energy and transport. 

In response, many governments in Asia have adopted traditional regulatory approaches to control emissions, which generally do not offer strong incentives for behavior changes or innovations. An increasing number of economies began adopting market-based instruments in the 1980s. These are policy interventions that provide incentives for producers and consumers to change their behavior, use resources more efficiently, and reduce their negative impact on the environment.

This is a summary of the chapter on air pollution of Greening Markets: Market-Based Approaches for Environmental Management in Asia, which provides an overview and assessment on the suitability of using different market-based instruments to address air pollution caused by energy production, industry, transport, and household fuel use in Asia. It provides recommendations and enabling conditions for the use of specific interventions for more efficient and effective air quality management.

Findings and Policy Implications

Market-based instruments have the potential to promote flexibility and spur innovation in finding solutions to improve resource use and environmental quality, as well as create incentives to minimize the costs of achieving environmental goals. If properly designed and implemented, these can reduce pollution at the lowest cost with the potential to facilitate even greater reductions in emissions than standards set by command and control regulations.

Based on a systematic analysis synthesizing findings from previous studies of selected countries in East Asia, South Asia, and Southeast Asia, the report identifies four types of market-based instruments used to address three main sources of air pollution—energy production and industries, transport, and household heating and cooking—in Asian economies. These include (i) taxes, fees, or charges, (ii) subsidies and subsidy reduction, (iii) tradable permits, and (iv) information provision, labels, and voluntary agreements. The review produced the following findings.

Imposing targeted taxes and charges and removing harmful subsidies have great potential for upscaling in Asia.

In many developing Asian economies with weak regulatory capacity, taxes and charges can help mitigate pollution that would otherwise go unchecked. Fuel taxes can be collected with little additional administrative burden and revenues can be redirected to environment-friendly alternatives or used to compensate vulnerable populations. In the Philippines, starting in 1997, the government imposed taxes on the consumption of leaded gasoline to reduce transport emissions and to phase it out from the market. With the introduction of the Clean Air Act in 1999, information campaigns raised awareness and provided a venue for dialogue on the shift to unleaded gasoline.  Leaded gasoline was phased out in Metro Manila by 2000 and nationwide by 2001. In addition, 7.5% of the Motor Vehicle Users’ Charge, which is imposed through the registration fees of vehicles, goes to a pollution control fund.

Taxes and charges can also influence the transport sector toward lower traffic congestion, upgraded vehicle fleets, and greater use of public transportation. For example, Singapore's Electronic Road Pricing scheme has helped reduce peak-hour traffic volumes and vehicle emissions as well as increase use of mass transportation. One study found that bus ridership increases by 10%–20% in response to an increased charge rate of about $0.30 (Agarwal and Koo 2016). A complementary policy, referred to as the carbon emissions-based vehicle scheme, also encouraged the purchase of low-carbon emission vehicles by offering discounts on registration fees (Wang et al. 2017).

Removing subsidies must be done gradually and communicated clearly to be politically feasible and to limit economic disruptions. In 2013, India adopted a gradual strategy to reduce growing diesel subsidies. It eliminated the subsidy within 2 years by imposing a significant price increase for bulk consumers (mainly state-owned railways) and small monthly price increases for all other consumers (Acharya and Sadath 2017 and Clarke 2015).

At the same time, viable alternatives to fossil fuels, such as affordable clean energy, mass transit options, and cleaner heating and cooking technologies, must be made available to consumers and firms.

Subsidies for clean energy and clean production are more politically feasible to implement and can incentivize users to shift away from polluting energy sources.

Subsidies for renewable energy and cleaner industrial production have been implemented successfully in several Asian economies and have attracted private investments. They can support research and development of clean technologies, such as electric vehicles.

In the PRC, a research and development program for electric vehicle technology (PRC Auto 2005) targets the share of electric cars to reach 50% of car sales in 2030. Pilot cities were subsidized to use new energy vehicles in public transit; subsidies and preferential tax rates were made available to purchasers; and Beijing’s license plate quota was lifted for new energy vehicles (Li and Zhan 2017).

Policy makers need to develop a well-designed strategy for adopting subsidies that can be phased out when specific goals are achieved and avoid overcapacity, encourage electricity conservation, and redirect funds. Incentives should be increasingly directed to research and development activities and infrastructure investments for energy storage and transmission (IRENA 2018).

Compensation and information can increase application and feasibility.

Appropriate use of revenues can make applying market-based instruments more politically feasible. For example, revenue saved by removing fuel subsidies can be redirected to help poor households. In Indonesia, the government started to remove the subsidy on gasoline in 2014. The reform was progressive; the impact on households through increased cost of living is larger for the richer households (Yusuf et al. 2018).  The Asian Development Bank recommends using subsidy savings for poverty reduction and social programs (ADB 2015).

Information should be shared with stakeholders to reduce resistance and convince them of the fairness of market-based instruments. In Tasmania, Australia, one intervention to replace wood stoves with electricity combined educational campaigns and enforcement of environmental regulations. The proportion of households using wood as heating decreased from 66% to 30% over 13 years and particulate matter 10 (PM10) emissions decreased by 39% (Chafe et al. 2015). Similarly, in Cambodia, the Lao People's Democratic Republic, and Viet Nam, subsidies were used mainly for design, training, awareness-raising campaigns, and demonstration.

Cap-and-trade schemes have potential but require strict caps and strong institutions.

In Asia, only India, the PRC, and the Republic of Korea have implemented tradable permit schemes. There is potential to expand emissions trading schemes, particularly learning from experiences in the PRC.

An effective tradable permits program requires local enforcement. There could be efficiency gains from broadening the scope (either geographically or by adding sectors) of the regulated firms (Chen and Xu 2018). International evidence shows that permit markets operate most effectively when transactions costs are kept low (EEA 2005). Participants should understand the rules fully so they can plan accordingly (Schmalensee and Stavins 2017).

Past experience in Asia suggests that the price signal in many cap-and-trade schemes has been low and volatile (Borghesi and Montini 2016 and Narassimhan et al. 2017). Tradable permit schemes leave the price of pollution control to the market, leading policy makers to set loose caps and thereby reducing the schemes’ effectiveness. An aggressive cap is necessary to achieve significant emissions reduction.

Getting the prices right is essential to achieving environmental goals.

Political opposition from interest groups and the public can lead to prices that are too low, making it difficult to successfully implement taxes, fees, and charges and to effectively reduce pollution.

Getting the prices right can be a long process and requires carefully designed policies. Take the power industry in Shanghai as an example. In 2014, the pollution charge rate was 1.26 yuan (CNY) or about $0.19 per kilogram (kg) for sulfur dioxide (SO2) and nitrogen oxide (NOX), but the cost of reducing these pollutants amounted to CNY8.00/kg for SO2 and CNY9.00/kg for NOX. The industry’s NOX emissions kept rising despite the increases in the pollution charge rate (Chen and Li 2017). With the implementation of the Environmental Protection Tax Law in 2018, the pollution charge rates in Shanghai came closer to typical emissions reduction costs at CNY6.65/kg for SO2 and CNY7.6/kg for NOX (Hu et al 2020).

Lessons from experiences in Europe and the United States may be applied in Asia.

Asian experiences with these instruments compare well with early experiences in Europe and the United States as they encountered similar challenges related to design and implementation. Countries in Asia can apply lessons learned from these global experiences, and attention should be given to facilitate learning among countries in the region.

Recommendations

As an increasing number of countries in Asia have begun adopting market-based instruments to improve air quality, the following are recommended for the future implementation of these strategies

  • Strengthen enforcement of existing environmental policies through clearer incentives.

  • Implement fuel taxes and phase out fossil fuel subsidies while shifting to subsidies for environment-friendly alternatives.
  • Adopt and gradually phase out subsidies for renewable energy.

  • Tap procurement auctions to identify least-cost clean energy suppliers and lower energy prices closer to production costs.
  • Expand emissions trading schemes.

Resources

A. A. Yusuf et al. 2017. Reducing Petroleum Subsidy in Indonesia: An Interregional General Equilibrium Analysis. In A. A. Batabyal and P. Nijkamp, eds. Regional Growth and Sustainable Development in Asia. Cham, Switzerland: Springer.

E. E. McDuffie et al. 2021. Source Sector and Fuel Contributions to Ambient PM2.5 and Attributable Mortality Across Multiple Spatial Scales. Nature Communications. 12.

E. Narassimhan et al. 2018. Carbon Pricing in Practice: A Review of Existing Emissions Trading Systems. Climate Policy. 18 (8). pp. 967–991.

J. Chen and M. Li. 2017. An Empirical Study on the Effect of Sewage Charges on Environmental Governance: A Case Study of Power Industry Pollution Reduction (in Chinese). Price: Theory & Practice. (3). pp. 159–162.

J. Li and J. Zhan. 2017. Policy Changes and Policy Instruments Selection of [the PRC’s] New Energy Vehicle Industry (in Chinese). China Population, Resources and Environment. 27 (10). pp. 198–208.

K. R. G. Karthik et al. 2017. Understanding the Southeast Asian Haze. Environmental Research Letters. 12 (8).

K. Clarke. 2015. Diesel Subsidy Reform in India: Lessons Learned. Global Subsidies Initiative and International Institute for Sustainable Development Report. IISD. 31 March.

M. Z. Jacobson. 2001. Strong Radiative Heating Due to the Mixing State of Black Carbon in Atmospheric Aerosols. Nature. 409. pp. 695–697.

M. Wentzel et al. 2003. Transmission Electron Microscopical and Aerosol Dynamical Characterization of Soot Aerosols. Journal of Aerosol Science. 34. pp. 1347–1370.

P. Hopke et al. 2020. Global Review of Recent Source Apportionments for Airborne Particulate Matter. Science of The Total Environment. 740.

R. H. Acharya and A. C. Sadath. 2017. Implications of Energy Subsidy Reform in India. Energy Policy. 102 (C). pp. 453–462.

R. Schmalensee and R. Stavins. 2017. Lessons Learned From Three Decades of Experience With Cap and Trade. Review of Environmental Economics and Policy. 11 (1). pp. 59–79.

S. Agarwal and K. M. Koo. (2016). Impact of Electronic Road Pricing (ERP) Changes on Transport Modal Choice. Regional Science and Urban Economics. 60. pp. 1–11.

S. Borghesi and M. Montini. 2016. The Best (and Worst) of GHG Emission Trading Systems: Comparing the EU ETS with Its Followers. Frontiers in Energy Research. (4) 27.

X. Chen and J. Xu. 2018. Carbon Trading Scheme in the People's Republic of China: Evaluating the Performance of Seven Pilot Projects. Asian Development Review. 35 (2). pp. 131–152. September. 

X. Hu et al. 2020. Impacts of Potential China’s Environmental Protection Tax Reforms on Provincial Air Pollution Emissions and Economy. Earth’s Future. 8 (4).

V. V. Abrera. 2011. The Use of Economic Instruments in Natural Resource Management in the Philippines. Paper. Presented at the Forum-Workshop on Economic Instruments Applied in Environmental and Natural Resource Management in Southeast Asia. Bali, Indonesia. 26–28 September.

Asian Development Bank. 2015. Fossil Fuel Subsidies in Indonesia: Trends, Impacts, and Reforms. Manila. October.

Asian Development Bank. 2021. Greening Markets: Market-Based Approaches for Environmental Management in Asia. Manila.

Health Effects Institute. 2020. State of Global Air 2020. Boston, MA: Health Effects Institute.

International Renewable Energy Agency. 2018. Renewable Power Generation Costs in 2017. Abu Dhabi: International Renewable Energy Agency.

Z. Chafe et al. 2015. Residential Heating With Wood and Coal: Health Impacts and Policy Options in Europe and North America. Copenhagen: World Health Organization.

European Environment Agency. 2005. Market-based Instruments for Environmental Policy in Europe. EEA Technical Report No. 8/2005.

Ask the Experts

  • Jessica Coria
    Associate Professor, Department of Economics, University of Gothenburg

    Jessica Coria’s research focuses on the design of environmental policies. She is an Associate Professor in the Department of Economics at the University of Gothenburg in Sweden and deputy director of FRAM, the university’s Center for Chemical Regulation Research. She is also associate editor of the academic journal Resource and Energy Economics.

  • Isao Endo
    Environment Specialist, Environment Thematic Group, Sustainable Development and Climate Change Department, Asian Development Bank

    Isao Endo is an Environment Specialist working on natural resource management at ADB. He manages technical assistance to promote natural capital investments with a focus on nature-based solutions and market-based instruments, supporting ADB’s operation to integrate these innovative approaches into project design. He holds a bachelor’s degree in Economics from Sophia University and a master's degree in Environmental Management from Yale University.

  • Karma Yangzom
    Principal Environment Specialist, Sustainable Development and Climate Change Department, Asian Development Bank

    Karma has more than 15 years' experience in the field of transport infrastructure ecological impacts management. She started her career in 1998 as a field officer for World Wildlife Fund Bhutan in Bhutan’s Royal Manas National Park. 

  • Asian Development Bank (ADB)

    The Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.

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  • Jessica Coria
    Associate Professor, Department of Economics, University of Gothenburg

  • Isao Endo
    Environment Specialist, Environment Thematic Group, Sustainable Development and Climate Change Department, Asian Development Bank

  • Karma Yangzom
    Principal Environment Specialist, Sustainable Development and Climate Change Department, Asian Development Bank

  • Asian Development Bank (ADB)