Through the Clean Air Markets in India, the government sets a cap on emissions and allows industries to buy and sell permits to stay below the cap. This cap-and-trade approach is expected to drastically reduce air pollution at a low cost to both government and industry.
The Indian state of Gujarat launched the country’s first clean air market on July 15, 2019, in the form of a large-scale pilot programme in Surat, Gujarat. Trading officially began on September 16, 2019. A total of 156 industries are participating. Since it’s launch, the plants have met the pollution cap every month, while industry output is higher than it was in the year before the market was in place. Moreover, the pollution cap is currently half the estimated pollution prior to the launch of the market, indicating that environmental goals are being met.
“With this program, we are kicking off a new era of cleaner production, while lowering industry compliance costs and rewarding plants that cut pollution in low-cost ways. We believe using this market-based system will prove that rapid economic growth, ease of doing business, and breathing clean air can all be achieved at the same time.”
Dr. Rajiv Kumar Gupta IAS, Chairman, Gujarat Pollution Control Board
The Gujarat Pollution Control Board is carrying out the emissions trading program with the help of a team of researchers, including Michael Greenstone and Anant Sudarshan from the Energy Policy Institute at the University of Chicago (EPIC), Rohini Pande and Nicholas Ryan from the Economic Growth Center at Yale University, and others from The Abdul Latif Jameel Poverty Action Lab (J-PAL). The researchers are evaluating the program’s benefits and costs, relative to the status quo, using a randomized controlled trial.
As this pilot proceeds, so too does interest in spreading it across India. On June 7, 2021, the government of Punjab announced the launch of the second programme in India in the city of Ludhiana. The Gujarat government announced the third market in Ahmedabad on June 25.
As one of the most polluted countries in the world, India declared a “war against pollution” in 2019 and launched a National Clean Air Program to bring down levels of deadly particulate pollution by 20-30 percent by 2024. If successful, this progress in reducing air pollution would extend the life expectancy of the average Indian by about 1.3 years.
To confront this challenge, India needs strong pollution policies that deliver a safe environment at an affordable cost for industry. Historically, however, the country’s environmental regulations have produced just the opposite. Blunt, inflexible regulations have proven costly for industry and difficult for the government to implement and enforce, resulting in poor compliance and dangerously polluted air. Market-based instruments, such as emissions trading schemes, provide an alternative that could meet the dual challenge of economic growth and environmental safety.
Emissions trading schemes have been proven effective in reducing pollution at a low cost in countries around the world. One of the largest such programs in history, the U.S. sulfur dioxide emissions trading scheme, slashed pollution by 40 percent between 1980 and 2003. Analysts have shown that the program’s benefits exceeded its costs by a 40:1 ratio. Based in part on this example, successful trading markets have been adopted for a variety of pollutants in Canada, Europe and recently in China. Prior to the Surat Clean Air Market, however, market-based instruments had not been used to reduce particulate pollution anywhere in the world.
“As one of the most sophisticated such initiatives in the developing world, and the first globally to tackle particulate air pollution, Gujarat’s forward-looking vision has the potential to create lasting changes for the people living in this state, as well as become a benchmark for other states in India and countries across the world.”
Michael Greenstone, Milton Friedman Professor in Economics, University of Chicago
The ETS in India therefore starts with the sky, capping the overall amount of pollution allowed from all regulated industries. Individual plants are allotted an initial quota of permits, allowing them to emit a restricted amount of pollution. Unlike the existing practice, however, plants are free to buy and sell these permits amongst themselves. Plants for whom it is inexpensive to cut pollution have an incentive to make large reductions—they can make money by selling permits to other factories for whom it might be very expensive to reduce emissions. Plants that buy permits can do so for less than it would have cost to install pollution abatement equipment or make other investments that would have been required under previous regulations. For both the permit sellers and permit purchasers, operating costs go down while environmental goals are met.
In 2010, regulators in Gujarat faced a confounding problem. Pollution levels in industrial cities across the state were rising. A significant share of this pollution came from the many coal burning factories driving the state’s economy. Yet, when these factories were audited by third-party laboratories, the results suggested widespread compliance with environmental standards. This was a puzzling result. How could these test results be reconciled with the common sight of black air rising out of hundreds of small chimneys in and around cities like Surat? The team of researchers from the University of Chicago, Yale University and J-PAL worked with the Gujarat Pollution Control Board (GPCB) to find the answer.
The law granted environmental regulators wide-ranging powers to penalize violators. To use these powers, however, the GPCB had to receive actionable and accurate data showing that a plant was in violation of the law, and there were simply too few enforcement officials to gather that kind of data on a wide enough scale. Following a landmark High Court order, the state instituted a system of third-party audits carried out by accredited environmental laboratories. The idea was that the outside auditors could reduce the demands on an already understaffed regulator while ensuring, at least in theory, that high-quality pollution data was regularly received.
The problem was that the third-party audit system also created a clear conflict of interest. Labs were selected and paid by the same industries that they were supposed to audit. If a laboratory was willing to falsify data and under-report pollution, they were probably more likely to retain their contracts. Conversely, accurate reporting, especially of clients who were heavy polluters, was likely a surefire way to lose business.
Official pollution measurements reported by these third-party auditors suggested that most plants were in compliance with the law. When these factories were independently tested by qualified teams paid by the researchers, however, the results were very different from those the GPCB had been receiving. Fifty-nine percent of plants were found to be polluting well above the regulatory limit. That number was just 7 percent when the auditors were paid by the plants they were auditing.
To solve this problem, the researchers developed an entirely new system of audits. Under the new system, all plants paid a fee to the regulator, which used these funds to hire auditors. The auditors were then randomly assigned to plants, breaking the relationship between inspector and plant. A second, independent team back-checked the measurements to identify and reward those auditors who were most accurate. The new system was evaluated through a large-scale trial where a randomly selected “treatment group” of factories were introduced into the new system while others remained in the status quo.
“Our partnership proves the success of innovative, evidence-based approaches to policymaking and is a model for how researchers and policymakers can make a big difference by working together.”
Hardik Shah, Gujarat Pollution Control Board
The researchers measured both the quality of data and the actual pollution in both systems. The results were striking. Breaking the conflict of interest yielded huge improvements in accuracy. In the treatment group, inaccurate reports plummeted by nearly 80 percent compared to the test group. Perhaps most importantly, the reformed inspection system also produced better environmental results: Over the following year, pollution dropped 28 percent among plants in the test group.
In 2015, the reforms were permanently adopted across the state of Gujarat and four years later the Ministry of Environment, Forests, and Climate Change cited the changes as a compelling case for other states.
Gujarat auditors experiment complete
Reforming the audit system gave regulators a much better picture of the air pollution levels in their constituencies. This picture was still based, however, on manually gathered samples, which were vulnerable to human error and offered at best a snapshot of air pollution from a given site. For a complete picture of industrial emissions—an essential component of emissions trading systems— regulators needed a new technology.
The researchers began working with the Central Pollution Control Board (CPCB) and the Ministry of Environment, Forests, and Climate Change to develop new standards and specifications that would allow for the use of Continuous Emissions Monitoring Systems (CEMS). These systems provide regulators with a stream of real-time measures of the concentration of pollution from a given smokestack, providing them with uninterrupted and reliable access to huge amounts of new data. CEMS also opens up the possibility of using statistical tools to flag errors and discrepancies.
In 2013, the Indian government introduced the first standards for CEMS. The researchers went to work testing whether better data would in fact reduce pollution from factories. They first gathered manual samples to establish baseline pollution levels. Working with the government, the then installed CEMS devices inside the smokestacks of about 150 factories in Surat. The devices were calibrated using the manual measurements, and were regularly audited and recalibrated if necessary. Once they were up and running, the CEMS devices sent data back to regulators on an ongoing basis.
Comparing the CEMS data to data delivered by auditors confirmed the vital importance of CEMS in providing accurate pollution information. Auditors who visited factories every few months to test emissions levels measured pollution
only at a single point in time. It remained possible for plants to pollute much more when they were not being tested. Trusting that these manual test results were representative of actual emissions levels rested on the rather optimistic assumption that a factory undergoing a test behaved in exactly the same way when it was not being watched. CEMS revealed that was not always the case.
In 2018, the Indian government expanded the program and mandated CEMS for all industries in 17 highly polluting sectors. This regulatory order was a landmark moment in India’s shift away from manual testing of pollution and towards technology-based, high-quality measurement of both instantaneous and total emissions.
CEMS installation complete
Although CEMS clearly improved the quality of data, the evidence gathered by the researchers suggested that mandating these devices did not by itself lead to significant reductions in plant pollution. This finding suggested that without regulatory reform, better data could only go so far. The next step therefore was to use the CEMS infrastructure to implement modern, market-based regulation in Surat.
The researchers and their colleagues had first conceptualized the design in a concept paper solicited by the Indian government in 2010. They then worked closely with the Gujarat Pollution Control Board and the Central Pollution Control Board and solicited input from industry through a series of surveys, iterating through several versions of the design based on their feedback. The design guidelines covered topics including how to choose a cap, rules by which permits could be initially allocated, setting validity periods for permits ranging from a month to a year, and features of the trading platform that would be necessary to implement a cap-and-trade regime. The guidelines also included topics such as permit ownership limits to prevent hoarding, fines for non-compliance, and penalties for not reporting emissions data.
With guidelines on paper that could provide a framework for the Surat Clean Air Market and future scale-up efforts, the researchers began working with the government to set the Surat design in motion. That required the government to establish a supportive regulatory setting that could make the legal connection between emissions trading and existing laws. This legal connection would offer assurance to industries that bought permits that they do indeed meet compliance obligations. Otherwise, they may have been reluctant to join the scheme.
In early 2019, the Gujarat Pollution Control Board formally wrote to the Ministry of Environment, Forests, and Climate Change (MoEFCC) intimating them of their intention to begin the new pilot. In a landmark step for environmental regulation in India, the MoEFCC responded with their approval and provided the legal basis under which states could begin their own schemes. They noted that “under Section 17(1) (a) of the Air (Prevention and Control of Pollution) Act of 1981, state board has to plan a comprehensive programme for prevention, control, or abatement of air pollution and to secure execution thereof.”
With this assent, the Gujarat Forest and Environment department issued a notification laying out the broad rules of the pilot market and, importantly, creating a market oversight committee empowered to fine-tune parameters as the pilot proceeded. The creation of such a group has proven essential to implementation. The Surat Clean Air Market—like all pilot projects—was initiated in an extremely data-scarce environment (CEMS data were an invaluable proof of concept, but at this early stage had not yet achieved much breadth or depth). As such, it was invaluable to have a group empowered to adjust elements such as the level of the cap, penalties for misreporting data, calibration timelines and other elements as required. The market oversight committee includes not just staff from the Gujarat Pollution Control Board, but also representatives of the industry association, the researchers, and representatives of the National Commodities and Derivatives Exchange (the trading platform).
Clean Air Market Launches in Surat
The Gujarat Pollution Control Board introduced the Surat Clean Air Market on July 15, 2019, beginning with two months of mock-trading to allow for intensive stakeholder capacity building before coming into full force. During this time, the Gujarat Pollution Control Board issued detailed rules that included the level of the initial cap (280 tonnes per month), the length of the first compliance period (one month), and the dates on which permit auctions would be held. These parameters were set by the market oversight committee.
On September 16, 2019, the Surat Clean Air Market officially began trading. A total of 156 industries are participating. Trading occurs every day, and the auctioning of permits occurs each week. During each of the one-month compliance periods, an average of 80,000 transactions have occurred. Permit holdings within the Surat Clean Air Market are calculated based on CEMS data, and the cap on emissions has become more stringent over even this short timeline—steadily decreasing from 280 tonnes per month to 170 tonnes per month.
An engineering economic model based on a detailed survey of industries suggests the possibility of significant benefits. The market has the potential to reduce particulate pollution emissions by about 29 percent. At the same time, this system delivers greater flexibility and will cost plants less than current regulations, which focus on mandating the installation of specific pollution abatement equipment and staying within fixed pollution limits. Because a large majority of permits are initially allocated for free, plants able to sell permits actually make money from the program. All told, the model predicts that the majority of industries will see their profits increase.
Researchers are encouraged by the program’s progress so far. Industry output is higher than it was in the year before the Clean Air Market was in place, and the plants have still met the pollution cap each month since trading began. Moreover, the pollution cap is currently half the estimated pollution prior to the launch of Clean Air Market, indicating that environmental goals are being met.
The Clean Air Market pilot is designed to be rigorously evaluated as a randomized control trial —the first of its kind for an emissions market anywhere in the world. The researchers will conduct a detailed survey of plants regulated under the Clean Air Market and those not participating, after the end of the 2019-2020 financial year. This survey will provide definitive empirical evidence on the impact of Clean Air Market on industry profits and operating costs, as well as levels of pollution.
Gujarat and Punjab Announce More Markets
The Government of Punjab’s Department of Industry & Commerce and the Department of Science, Technology & Environment signed a pact on June 7, 2021, that they will launch India’s second Clean Air Market programme. The programme will be run by the Punjab Pollution Control Board (PPCB), in partnership with JPAL South Asia and EPIC India. It will regulate emissions from 200 dyeing industries in Ludhiana as the first step in this partnership.
“The Government of Punjab is keen to combat environmental pollution through regulation that promises a win-win situation of cleaner production, coupled with lower compliance costs for industries. ETS is one such initiative that can help regulate critically and severely polluted industrial belts in Punjab.”
Shri Alok Shekhar, IAS Principal Secretary Industries & Commerce
Additionally, Gujarat Chief Minister Vijay Rupani announced on June 25, 2021 that Ahmedabad will be the third city to pilot the program, with 240 industrial units joining the new market.