Over the last year, a number of state governments have announced the launch of emission trading schemes (ETS) to control air pollution and greenhouse gas (GHGs) emissions. India’s first experience with ETS was a pilot scheme for particulate matter (PM), introduced in 2019 in Surat, Gujarat. Incidentally, this was the first time an ETS had been introduced for PM in the world. Following this experiment, clean air markets for PM and GHGs in Surat, Ludhiana and Ahmedabad were announced in the past year.
ETS as a regulatory tool appears to be gaining traction in India, but concerns relating to transparency in the process, the capacity of the regulatory agencies, the design of the scheme and the supporting legal framework remain. In this piece, I provide an overview of the first ETS in India and outline some of the key factors that need to be considered before introducing ETS in other industrial clusters.
What is an emission trading scheme?
An ETS is a market-based regulatory instrument designed to limit the emission of specific pollutants in a certain geographical area or industrial cluster. Permits amounting to a set quantity of emitted pollutants (usually measured in absolute emissions) are either allocated for free or auctioned off by the environmental regulator. The regulator also sets a total “cap” on the number of permits allocated or auctioned to ensure cluster-wide reductions in pollutant emissions. As part of an ETS, emitters must possess permits in an amount equivalent to their emissions of the regulated pollutant. Emitters who wish to emit more than the permits they possess must purchase additional permits on the open market (“trade”) from other emitters who possess permits in excess of their emissions.
Such cap-and-trade schemes for pollution management have their roots in the 1990s when they were successfully employed in the United States to reduce sulfur dioxide and nitrous oxide emissions in an effort to combat acid rain. Globally, the number of ETS’ is growing with significant examples including markets for carbon in China and South Korea. Such schemes can prove to be effective mechanisms in regulating harmful emissions from industry, provided the right enabling conditions exist. They can also offer co-benefits through ensuring transparency in emissions reporting, and reducing the workload of over-stretched regulators through the institution of off-site data-driven regulatory decision-making.