From paddy to pollution – Part II

This is the second part of the two part blog series on air pollution from open-field burning. If you haven’t read the first one already, I’d recommend you to do so, and while you’re at it, you may also read the original blog that inspired me to write this two part blog series.

Continuing over from the previous blog, in this blog we will take a look at some theoretical economic models to – understand the competitive equilibrium and the associated deadweight loss, establish the social optimal outcome and recommend policies to achieve this social optimal. For the purpose of analysis, the study employs theoretical marginal private and marginal social cost (MPC, MSC) for paddy production, marginal private benefits (MPB) from paddy consumption.  To begin with, the analysis first focuses on the competitive equilibrium developed in Figure 1a. Since the competitive equilibrium is unable to account for the external costs, market clears where marginal private costs and the marginal private benefits meet, i.e. where demand meets the supply, thus maximizing the net benefits externalities excluded. This renders Q^CE amount of paddy at price P^CE but also a welfare loss from unaccounted externalities. The social optimal outcome (Figure 1b) however clears market where marginal social cost meet marginal private benefits thus accounting for externalities from paddy production. Note, the social optimal will not completely eliminate the externalities from the market, but to a level where the benefits from further elimination just equals the cost of further elimination of externalities. Thus at social optimal in this paddy market we get fewer paddy produced – Q^*,  at a higher price – P^*.

The social optimal can be achieved either by taxing the rice production or by setting property rights with tradeable permits. In the former, an optimal level of tax – τ^* on rice production, will shift the marginal private costs up such that this taxed marginal private costs meet the marginal private benefit at the social optimal (Figure 1c). In fact, if a unit of rice production emits µ amount of pollution and requires λ amount of groundwater from a depth of h, an equivalent τ^*/µ tax on emissions, τ^*/λ tax on groundwater or τ^*/ρλgh tax on energy use will render the same social optimal outcome (ρ is the density of water, while g is the acceleration due to gravity). Alternatively, government can set a cap on either total rice production at Q^*, total emissions at Q^*µ, total groundwater use at Q^*λ or total energy use at Q^*ρλgh, and sell/distribute permits for the same, thus establishing property rights (Figure 1d). It is important to note that intervention on emissions incentivizes use of alternate and cleaner means of production, be it in the form of tax or cap. While it is quite obvious in the case of tax, in the latter, farmer that uses efficient methods of production will have additional allowances that can be traded and sold to another farmers that need more allowances. However, it can be hard to regulate, mandate and audit emissions from individual farms. This is also why penalty on burning paddy waste would fail to work due to inability to monitor every farm. On the other hand, intervention on rice production and its inputs (groundwater or energy) is much easier though it limits production. Thus the choice of intervention is a political and administrative question which must be addressed appropriately.

Having established essential market principles and possible economic solutions for pollution from paddy agriculture, this blog now analyses some of the current policies including Minimum Support Price (MSP) offered by the Govt. of India, subsidy on purchase of Happy-Seeder provided by the state Govt. of Punjab and incentives on alternate use of paddy waste. The analysis for support price here assumes that all farmers sell all the paddy to the government at the offered support price (Figure 2). Though this assumption fails in real life, it provides important insight on support price, which is that an optimal support price would be such that total paddy produced is socially optimal. A higher support prices render additional externalities (Figure 2a), whereas lower support price would result in lower producer and consumer surplus. The current support price for rice is a pan-India value which does not take into account regional heterogeneity and externalities. Thus regardless of our earlier assumption, a state specific support price accounting for emissions from paddy farming could result in a better outcome.

Now, on to the use and subsidy on Happy-Seeder, a machine that cuts and evenly distributes the paddy straw and simultaneously sows wheat seed. Note, if all farmers were to switch to using Happy Seeder, air pollution from paddy production can be eliminated. This might be a desirable outcome even though the social optimal does not suggest so. The success of this technology therefore, would depend on what incentives does the farmer face. A farmer observes a fixed purchase cost and in addition an operating cost in the form of maintenance and diesel cost when using this machine. Currently the Govt. of Punjab offers 50% subsidy to the farmer on purchase of Happy-Seeder. However, even a 100% subsidy on purchase leaves the farmer with a lower surplus from additional operational cost of using the Happy-Seeder (Figure 3). In fact, even when both fixed as well as operational costs are subsidized, the farmer could face opportunity cost in the form of risk of adaption to a new technology that could disincentive use of Happy-Seeder. Thus this outcome with zero pollution from paddy farming can be achieved though at a huge cost to the government in the form of heavy subsidies.

And finally, we analyze whether incentivizing alternate use of paddy waste can abate pollution. It is important to recall that the farmers burn the paddy as they do not have a sufficient time between harvesting paddy and sowing wheat to manually remove paddy straw. Thus the cost of manual removal is not only the additional labour cost but also the opportunity cost of sowing wheat at the optimal time. Thus a farmer abates just as much such that marginal benefits from alternate use equal marginal cost of abatement (Figure 3). Alternate use must hence provide substantial benefits to the farmer to bring about significant pollution abatement.

Concluding remarks
The pursuit of agricultural progress and industrialization in India, ever after its independence, to become self-reliant and feed its growing population, has come at a huge cost of environmental degradation in the form of falling groundwater and deteriorating air quality. The specific issue of open field burning in Punjab and consequently rising pollutant levels in Northern India has been a cause of major concern for some time now. What was once the “wheat bowl of India” is today a “rice-wheat mono-culture”. For the longest time, growing rice and wheat in the same calendar year was near impossible due to their lengthy production period. But thanks to Green Revolution, today, with short-period variety of grains, farmers in Punjab largely grow wheat in the first half of the year and rice in the latter. This has been critical to India’s efforts in making itself food secure and self-reliant. However, both, rice and wheat are nutrient and water intensive. While Punjab has one of the finest irrigation systems in the country, its groundwater level is at alarmingly low levels. When faced with such pertinent economic and environmental question, governments often tend to take the easier but a shortsighted approach of addressing the symptoms rather than the disease, which typically leads to more problems. This is exactly what happened when the state government of Punjab passed Subsoil Water Preservation Act in 2009, notifying farmers on when to sow paddy rather than addressing exorbitant groundwater extraction through market principles, thus introducing the problem of open field burning and deteriorating air pollution. These market principles include corrective taxes or setting property rights on either emissions (air), rice production, groundwater or energy use. Misplaced interventions such as penalizing farmers, subsidizing happy seeders, providing alternate use of paddy residue do little good and are analogous to addressing the symptoms and not the disease. While penalties on burning incidents require effective and extensive monitoring of each farm, subsidy on Happy Seeders must not be limited to just the purchase cost, but must also compensate for operation of cost. Thus, both of these interventions come at huge cost to the government. In order to effectively address falling groundwater and deteriorating air quality related environmental issues market-based incentives and instruments are the way to go ahead.