A Win-Win-Win Innovation in Environmental Policy
As the dust settles following an historic Indian election, it is an opportune time to think about innovative policy tools that could help India achieve its development goals. In the last term, several schemes have had their roots in Prime Minister Narendra Modi’s home state of Gujarat. To take just two examples, a redesign of the electricity distribution to move towards 24-hour power for rural households, and an innovative scheme to generate female employment through the collection of Neem seeds.
Today, as we commemorate World Environment Day, Gujarat is proving itself to be a trailblazer once again as the state launches the world’s first emissions trading scheme (ETS) for particulate air pollution. This ground-breaking idea was initiated when Modi was chief minister of the state and the pilot will apply to 350 industries in Surat, a densely populated industrial center.
Emissions trading schemes are the rare policy that offer the potential for a win-win-win. Specifically, it is expected that air pollution emissions will decline significantly, and that industry compliance and government enforcement costs will both decrease.
The first win is that under the ETS, the Gujarat Pollution Control Board (GPCB), which Gupta chairs, will set a fixed emissions cap covering all factories with plans to systematically reduce the cap over time. An appealing feature of the scheme is that it enforces compliance with the environmental goal, namely regulating the total mass of particulate matter put into the air. Reducing this form of air pollution offers high potential benefits because it causes the average person in India to lose about 4 years of life expectancy, according to the Air Quality Life Index (AQLI) produced by the Energy Policy Institute at the University of Chicago (EPIC).
The second win is that the ETS promises to reduce industries’ compliance costs by unleashing markets to identify the least cost way for heavy polluters to comply and rewarding the most efficient plants. The flexibility of being able to trade reduces the costs imposed on industry, because plants for whom it is cheap to emit less will take on more of the burden. In contrast, in the status quo, regulations mandate the use of specific abatement technologies, regardless of whether it is the least expensive way for a plant to reduce emissions. In many respects, this status quo resembles a hangover from the pre-liberalization years when licenses, permits and permissions governed most aspects of India’s economy.
There are good reasons to believe that this first-ever particulate pollution cap-and-trade program will deliver inexpensive pollution reductions. This is because emissions trading programs have been highly successful in other countries. For example, the United States used a trading market to address sulfur dioxide emissions that were causing acid rain in the 1990s. The program slashed SO2 emissions by 40%, with the benefits exceeding the costs by a 40 to 1 ratio. A similar program for nitrogen oxides has delivered similar results, with the benefits easily exceeding the costs.
The third win is that it will greatly reduce GPCB monitoring costs and increase their visibility into industrial emissions. Currently, plants are manually sampled about twice a year for roughly 30 minutes to test air pollution levels, which requires a team of several GPCB employees to make in-person visits and sending samples to labs. Direct measurements for the remainder of the year are unavailable.
In contrast, the ETS relies on another innovation spearheaded by Gujarat: continuous emissions monitoring systems, a real-time sensing network that streams real-time data on emissions directly to the regulator. Over the last several years, Gujarat officials tested the system to ensure it was obtaining readings reliably. After some experimentation, the result is one of the most sophisticated particulate emissions monitoring systems in the world. The findings are relevant for the entire country as India now mandates continuous emissions monitoring systems for 17 key sectors.
To test whether the ETS delivers on all three potential wins, researchers from EPIC, which Greenstone leads, the Abdul Latif Jameel Poverty Action Lab (J-PAL), Harvard and Yale University are working with the GPCB to evaluate the pilot project. The evaluation will be use the gold-standard approach of a randomized control trial to compare the program’s benefits and costs, relative to the status quo command and control style approach.
If it works, Gujarat’s forward-looking vision will not just create lasting changes for the people living in this state but could become a model for cities and national governments around the world, and other parts of India, that are contending with polluted air and expensive regulations. It would not be an exaggeration to say that this would be a 1991 moment in environmental regulation.