Economists can solve environmental problems (with the help of everyone else)

by Bishal Chalise (ELP 2016) | Founder, Artha Foundation, Nepal (in Australia)

Economics and biology (and respective related disciplines) are often presented as if they are in opposite poles of an environment continuum. ELP 2016 was no exception. While we can debate endlessly on differences and/or similarity of approaches an economist or a biologist takes on solving an environmental problem, my takeaway from all the sessions so far is that they are definitely not binary propositions and that both disciplines can work together to bring about desired solutions. Here I present one such case in which the solution requires a collaborative effort of environmentalists, economists, sociologists and so forth. My apologies for the long read but it should be informative.


This case is about transboundary haze pollution (THP) which has become a major environmental policy challenge in Indonesia and in Southeast Asia. The dense smoke released from peat and forest fires mostly in Kalimantan and South Sumatra in Indonesia badly affects countries in the region, mainly Singapore and Malaysia. Despite this transboundary nature of the problem, inadequate coordination and distrust among affected countries act as a major impediment to resolving the crisis. Corruption and poor governance structure in Indonesia further exacerbates the problem. Based on my case analysis, I suggest that strengthening ASEAN’s agreement on transboundary haze problem (ATHP), in particular better financing and monitoring mechanisms, can address the problem to a large extent. 

Costs and Causes of THP

The haze brings about massive socio-economic and environmental damages at the national, regional and global level. The World Bank estimates the total economic costs of 2015 fires in Indonesia to be nearly $16 billion in direct damage to crops and losses on trade, industry and tourism. Businesses, schools and key infrastructure like airports remained closed for several weeks. Moreover, Greenpeace suggests nearly 110,000 people died and millions were affected from illness arising from haze related pollution over the years, which has soared-up the annual health costs by as much as $1 billion in the region. 

The haze also causes immense environment damages. The fire releases huge amounts of CO2, which expedites the accumulation of atmospheric greenhouse gases. Additionally, the haze is responsible for loss of rainforest and biodiversity, damage to wildlife and their habitat, soil erosion and loss of productivity in Indonesia. 

Peatland fires for clearing lands are the main source of the haze although traditional 'slash-and-burn' method also contributes significantly to the haze. Large scale deforestation for commercial logging and palm plantation coupled with drainage of water quickly convert swampy peatlands into open drylands which is highly susceptible to fire. While up to 80 percent of fires occur in big land concessions held by plantation companies, individuals and smallholders also resort to such techniques. Clearing lands by burning is 3-4 times cheaper than alternative mechanical methods, thus provides clear incentive for companies to continue with it over the years.

Analyzing the problem

While fires are a proximate cause to the haze, there are many other deep determinants. On the domestic front, the weak governance, the rampant corruption and patronage network particularly at the district level, is considered guilty of promoting fire. The rapid decentralization of political and economic rights post-2000 put local governments at the helm of natural resource management, among other things. The bupatis and bureaucrats have a free-reign to distribute concession land to logging and palm plantation companies in return for economic and political favor. This has created blurred land boundaries and conflicting and overlappingg rights of communities, smallholders and big plantation companies over concession lands. As a result, attribution of fire events on these lands and subsequent prosecution of the perpetrators has become challenging, which is reinforcing the corruption.

Although THP has local origins, its transboundary nature adds regional and global dimension to the problem which is analyzed here using the game theory framework. THP is a unidirectional negative externality in which haze originates from economic activities in Indonesia, mostly related to palm plantations, that imposes costs to other countries. However, other countries also benefit from the economic activities that produce haze to a certain extent. For example, many plantation companies are registered and based in Singapore and Malaysia. Similarly, several multinationals source Indonesian palm oil to produce consumer goods for the world market.

This scenario gives rise to a 'strategic behavior' between Indonesia and other countries. On the one hand, other countries blame Indonesia for not taking 'definitive action' to stop fire. Indonesia is accused of failing to improve the governance and curbing corruption and not cooperating in sharing data on fire hotspots and maps of land ownership concession lands. On the other hand, Indonesia claims, sometimes with a nationalistic posture, that Singapore and Malaysia cannot shirk their responsibility in taking action against the plantation companies based in respective countries for their role in the fire. It also perceives that the 'financial aid' coming from ASEAN and Singapore is rather too little to combat the THP.

The blame-game has led to 'non-cooperation' between Indonesia and other countries despite the fact that both parties know resolving nthe issue is in their best interest. Singapore fears that even after receiving the monetary benefits, Indonesia might be unwilling to curb the pollution whereas Indonesia is skeptical that it would bear unfairly larger costs of stopping the haze on which other countries would free-ride. In other words, each party benefits more if other stop haze, while it did nothing.

The most pertinent cause of such a conundrum is the lack of 'an international body' to govern the action of the parties towards collective action to maximize the common good and to credibly establish the benefits of cooperation. However, there can be a mutually agreed 'treaty' that can create a set of rules and mechanism that binds the parties to credibly commit to a solution.

Improved ATHP as a solution

THP doesn't have 'prescriptive, simplistic solutions.' However, we can provide a better probability of solving the THP by improving the financing and monitoring mechanism under ATHP to prevent peat fires by incentivizing and monitoring plantation companies.

We have discussed cost is the prime motive for using fires to clear lands by the plantation companies. So, they would be financially indifferent if provided with the subsidy to clear the land by the mechanical method, which is 'clean' by expensive. In such cases, big companies are likely to switch to the new way and comply with the zero-burning policy of the government.

Subsidizing alternative methods of land clearing would require external assistance as the cost of the huge resources goes well beyond the capacity of Indonesia. The 'ATHP Control Fund' established under the ATHP (article 20) can be used to fund such programs. However, the fund has just $0.5 million in voluntary contributions by the member countries, which is way below the estimated sum. Hence, ASEAN should encourage other 'rich' countries and global agencies to contribute to the Fund. For example, a part of Norway's $1 billion pedge on helping Indonesia reduce carbon emission can be channeled through the Fund. The UNFCCC's Clan Development Mechanism (CDM) can be another financing source.

Paying to stop haze is based on the 'victim pay' principle, a Coasian solution where affected parties pay polluters to stop polluting. For THP, victim countries, say Singapore, would find it cheaper to make such payments when compared to the cost imposed by the haze. However, eelings of loss of national sovereignty held by a section of Indonesian society might make acceptance of external funding politically challenging. The other challenge would be to address the deficit of trust among countries as discussed earlier.

Other countries would be ready to share the burden of haze mitigation only when they believe such action would lead to effective work on the ground. In other words, the compensation would be based on measurable outcomes and not just efforts, which requires effective monitoring mechanisms. The ATHP also encourages monitoring (article 7) and technical cooperation (article 16) among countries.

A cooperative mechanism is required to upgrade the monitoring and information sharing infrastructure that are currently in place. Although satellite images showing hotspot and fire areavailable, Indonesia's reluctance to share plantation concession maps hinders the identification and then prosecution of the actual perpetrators (Tan 2016). The different maps and concession rights allocation produced by different government agencies and departments have added to the complexity (Lee et al. 2016, Tan 2016). One alternative is a remote sensing platform that integrate the field and satellite data on fires and help share the information on multiple platforms on real-time. The technology was widely and successfully used in monitoring deforestation prevention projects in Brazil.

To make the monitoring effective, Indonesia has to produce a unified map that clearly shows the land concession and distribution as fires occur int he land that falls under its jurisdiction. This would help in tracing the real owner and/or use of the land where the fire was started or occurring. Additionally, such platforms should be accessible to all parties including the plantation companies and NGOs. This would make the monitoring process transparent and more effective. For example, organizations like 'Roundtable on Sustainable Palm Oil' (RSPO) can access the data on the platform to certify the palm oil companies based on their progress in preventing fires on their concession land. This would put pressure on companies to act fairly and take proactive measures to stop fires.

We can expect some resistance and 'uncooperative' behavior from local authorities, as the increased monitoring and transparency would increase the costs of corruption and dis-incentivize the companies to get involved in such practices. Moreover, producing the accurate land ownership requires Indonesia to have clear land tenure and establish clear land rights which might require a long time horizon. However, it should be a logical step for Indonesia, if it wants to solve the crisis once and for all.


THP is a multi-dimensional environment problem and solution requires concerted effort at the global, regional and local level. The improved ATHP can be a widely accepted way forward and Indonesia ratifying the treaty in 2015 is an important positive step in that direction.