Pressing Need: Cities should assess environmental externalities accurately

Cities should assess environmental externalities accurately

The country’s rapidly degrading environmental conditions have become a major cause for concern for policymakers. From a financing point of view, this poses obvious challenges for the government since the environment, as a public good, has a long life with its benefits spread across generations. Therefore, while examining the financing aspect of the environmental externalities, it is important to capture the intergenerational and cross-sectional effects of this good. Also, dedicated initiatives are required to be taken to safeguard the environment, including groundwater, climate, pollution levels and the green cover.

Definition and financing issues

Externalities mainly arise due to behavioural change in people, which, in the context of the environment, takes the form of degraded water and air quality, traffic congestion, etc. These negative externalities not only result in serious health hazards but also adversely impact the entire ecosystem. First, there is a social accounting cost associated with the lack of access to better quality water and sanitation. Taking into consideration this social cost along with the cost or user charges levied on basic services, it has been found that the poor are actually the ones who end up paying a higher price for availing of basic civic services.

While financing the social costs of environmental externalities, urban local bodies (ULBs) face a variety of challenges. These include no/improper valuation methods of externalities, consumer resistance to environmental charges, lack of political will and low public awareness.

In view of the increasing environmental externalities, it is especially important to accurately measure the social costs associated with them for the betterment of the present as well as future generations.

Levying congestion charges – An effective measure

In order to curb traffic congestion on roads, the concept of congestion charges can prove to be very useful for urban areas. Congestion charges, also called road pricing or congestion pricing, simply means that whoever is using the road asset should be charged for it. Globally, cities such as London, Singapore and Stockholm have already introduced this system and 16 other cities worldwide are planning to adopt it too.

The system is relatively easy to implement and administer since it is essentially based on information technology (IT) and enables cities to simultaneously tackle traffic congestion and high pollution levels while raising additional revenues. These additional revenues can be further invested for economic development and building efficient public transport infrastructure in the city. For instance, the congestion charging system has generated nearly $352 million per annum in London and around $60 million per year in Singapore.

Other key benefits of congestion charging systems include reduced congestion by fewer vehicles on roads, increased use of public transport, improved environmental conditions, fewer accident casualties, and reduced development cost (since congestion can be reduced without building additional lanes).

The advantages notwithstanding, overcoming barriers is a unique challenge for the introduction of the congestion charging system. These barriers include high upfront investments, political unwillingness to levy charges, consumer resistance to adopt such congestion pricing methods and improper scheme designing. These can be effectively removed by increasing public awareness, using the additional revenue for other developmental activities, and by allowing flexibility in the scheme design.


There is an urgent need to explore various approaches to assess the factors that affect externalities, gauge the impact of these externalities and evaluate their monetary value. Key measures such as levying charges on the polluter, implementing by-laws and stringent rules, allocating proper budgets for the environment, introducing environment taxes, etc., can prove to be effective in minimising the social cost associated with environmental externalities. This can help in coping with the rising environmental concerns and moving towards sustainable development.

Based on presentations by Stuart King, Senior Infrastructure Finance Specialist, Cities Development Initiatives for Asia; Dr Aarsi Sagar, Green Cities Analyst, Global Green Growth Institute; and Navin Kumar Devkota, Department of Urban Development and Building Construction, Ministry of Urban Development, Government of Nepal, at a recent NITI Aayog conference