Duflo, E., Greenstone, M., Pande, R. and Ryan, N., 2013. Truth-telling by third-party audits and the response of polluting firms: Experimental evidence from India, 3ie Impact Evaluation Report 10. New Delhi: International Initiative for Impact Evaluation (3ie)
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To evaluate the effectiveness of these interventions, the researchers adopted a mixed-method approach to investigate the causal chain which leads from refining incentives for environmental auditors to lower pollution estimates. The study used inputs from qualitative work to inform the design of a randomised controlled trial with a sample of 473 plants that were randomly assigned to a treatment or control group. The treatment improved on the existing third-party audit system, where firms choose and pay their own auditors by randomly assigning auditors from a central pool, paying auditors from state funds (the pay was then linked to performance in the second year of the intervention) and introducing back checks where staff from the Gujarat Pollution Control Board (GPCB) back checked 20 per cent of audits.
In addition, half of the plants assigned to the treatment group were randomly subjected to an even higher level of back checks to monitor auditor truthfulness, in effect creating the second treatment this study seeks to inform.
The study reported four main findings: 1. It found the status quo system was corrupt. Auditors systematically reported lower emissions (just below penalty level) than actually existed.
2. The new audit system was successful in lowering false reporting by auditors: fewer firms were falsely reported as compliant with pollution standards.
3. The increased truthfulness of audits was successful in generating positive environmental outcomes as firms worked to reduce emissions; industries in the control group had biochemical oxygen demand effluent concentrations at the point of discharge of about 300 milligrams/litre as compared to 150 milligrams/litre in the treatment group. The level of several other pollutants also fell significantly.
4. Increasing the frequency of random back-checks on auditors reports did not have a significant effect on pollution level.
On 23 January 2015, the GPCB reformed its environmental auditing system based on the findings from this study. As per the new guidelines, environmental auditors in Gujarat will now be randomly assigned to industrial plants and have their work double-checked for accuracy.
About this impact evaluation
While rapid industrial growth in emerging economies like India and China has greatly improved living standards, it has come at the cost of widespread environmental damage. For instance, high levels of particulate matter air pollution in urban India have been associated with sharply higher mortality. Similarly, improper disposal of waste effluents can taint drinking water supplies and affect agricultural productivity.
The role of environmental regulation is to contain these externalities. A stringent formal regulatory framework that sets acceptable levels of industrial air and water emissions will, however, not be effective if these standards are only weakly enforced in practice. Sustainable development will require a way of monitoring and penalising industrial polluters so that the firms driving the country’s future growth receive private incentives aligned with social benefits.
The study looked at both public and private options for improving enforcement of environment regulation, in partnership with the pollution control board of one of India’s fastest growing states – Gujarat. The authors deemed the prevailing audit system to be flawed. It allowed firms to choose and pay for their own third-party auditors. This option created a conflict-of-interest for auditors. The system incentivized auditors to falsify reports to retain clients.
The study evaluates two interventions: a) an improved third-party environmental audit scheme that enables the independence of the auditor and b) increased frequency of back checks on auditor reports by GPCB teams.