Estimating marginal abatement costs for industrial water pollution in Colombo

- Abatement costs for industries in Kelani river catchment were estimated using distance functions.
- Costs for different policy scenarios based on effluent concentration standards were simulated.
- Variation of marginal abatement costs makes a strong case for use of market based instruments.

This paper estimates the cost of effluent discharge regulations for firms located in the lower Kelani River catchment in Sri Lanka. The river provides water for many economic purposes including drinking water to the capital city, Colombo and a variety of ecosystem services. Employing multi-input and multi-output translog production technology, we estimate shadow prices of effluents and technical efficiency of firms belonging to eight industries. With the given level of compliance, we extend our analysis to compute total abatement cost for firms under different policy scenarios, related to simultaneous reduction in concentration of three water pollutants including current regulatory standards. The evidence of poor compliance and wide variations in firm and industry specific shadow prices (marginal abatement costs) provide a strong case for a comprehensive redesign of environmental policy to control water pollution by industries in the heavily industrialized river catchment.