RECENTLY, a few private banks jointly organised a training session in Karachi for their sales staff on how to market green financing products. To stimulate the demand for green financing products, the main challenge is to convince businesses of their higher profit without covering the social cost i.e., environmental pollution. If they are convinced, one can hope to create a market for this newly-introduced financing product.

Industrial pollution — the main source of environmental pollution by businesses — pollutes the water with its effluent and contaminates the air with its emissions. There are many ways to control industrial pollution; the first being the enforcement of environmental laws in their true spirit.

Sadly, the weaknesses in the enforcement mechanism are not the only obstacles. The decades-old custom of allocating a lesser budget for environment and limitations of businesses to comply with green laws are some of the other giant hurdles.

The second issue is on the demand side. If the consumers stop buying products and services from businesses that do not comply with green laws, they will be compelled to follow them in order to achieve their sales targets. Many export-based businesses comply with environmental laws as they are bound by their foreign buyers to sell to them products with complete environmental compliance.

Unfortunately, the majority of local consumers do not have a basic concept of what is a green product; their only preference is lower prices.

The third and final side that is not exercised anywhere around the developing world as yet is managing the social cost through supply-side economics. The supply-side of an economy lifts aggregate demand through easing its various policies, including monetary and fiscal ones.

In a mixed economy, the government has the option to increase or decrease the aggregate supply by offering different incentives and limiting certain benefits. But here again, the main concern of the government is to manage the price level by increasing the aggregate demand through increasing aggregate supply and vice versa.

On the fiscal policy side, the taxation system needs a big overhaul to incorporate pollution factors in its tax rates and tax base. Tax authorities need to broaden the tax base to cover all those sectors which pollute more than the rest.

Also, the tax rate of the most polluting businesses should be higher to include the cost of pollution in the price. Introducing carbon tax is another option though it is still in its infancy even in the developed world. The other option is to offer easy loans to businesses that intend to install pollution-control equipment or adopt clean production technologies.

They should be the target markets of sellers of green financing products.

Handling the issue of social cost through supply-side policies will not raise business costs steeply. Also, owing to green banking support, traders will not protest against a higher tax rate if the rise in prices is jointly shared by both the seller and the buyer.

Otherwise, in the absence of green financing, they will try to cover their risen cost by escalating the prices that will hit the common man already suffering from pollution of all types. The newly-introduced ‘polluter pays’ principle can be a great tool to regulate aggregate supply. According to the principle, the one who produces pollution should bear the costs of managing it to prevent damage to human health and the environment.

However, its successful implementation requires a spirit of voluntarism and a sense of responsibility among citizens so that every polluter self-calculates the social cost of production activities, and then submit it into the national kitty.

Mujtaba Baig

Karachi

Published in Dawn, February 13th, 2021