Taxing the Pollution

Abstract

Most firms that process rubber in Sri Lanka do not comply with national water pollution control standards. The present command and control system fails in the face of a slow enforcement process, and also because of the nature of ‘older’ production units, many of which date back to colonial times. This study seeks to estimate a pollution tax that could motivate firms to meet these standards. I use data from 62 rubber-producing firms in Sri Lanka over three years to estimate a marginal cost function for pollution abatement. I then estimate the taxes that would bring firms into compliance. The tax rate necessary for environmental compliance is 26 Sri Lankan rupees per 100 grams (in 2005 values) of Chemical Oxygen Demand (COD) per year. While the burden of this pollution tax on the average firm would be equivalent to 8.6 per cent of annual turnover, it varies with the size of the firm, which may have adverse consequences for small firms through closures or layoff of workers. I suggest that the use of this economic instrument might motivate the Central Environmental Authority (CEA) to monitor effluents more carefully and firms to make economic use of effluents.