The Indian state of Gujarat has launched the world’s first emissions trading system for particulate pollution. The program, launched today by the Gujarat Chief Minister Shri Vijay Rupani, is a market-based system where the government sets a cap on emissions and allows industries to buy and sell permits to stay below the cap. It is being initiated in the city of Surat, a densely populated industrial center where textile and dye mills release a significant amount of air pollution. As the first market-based approach to regulating pollution emissions in India, it is expected to drastically reduce air pollution at a low cost to both government and industry and provide best practices for replicating trading schemes to other emissions.

“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,” says Dr. Rajiv Kumar Gupta IAS, chairman of the Gujarat Pollution Control Board (GPCB). “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.”

The GPCB 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 from the Evidence for Policy Design at Harvard Kennedy School, 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.

Of the program, EPIC Director Michael Greenstone, the Milton Friedman Distinguished Service Professor in Economics, says: “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.”

The emissions trading program builds on another early innovation by the GPCB, the use of continuous emissions monitoring systems to track industry emissions in real time. About 350 industries around Surat have installed continuous emissions monitoring systems and now transmit real-time, high-quality emissions data. The new scheme takes advantage of this technology’s modern, transparent approach to monitoring.

The GPCB has a history of innovation in tackling reform that has often led the way for other states in India. In 2015, the GPCB worked with the same research team to design, test, and, based on the test results, implement a new way of carrying out industrial pollution audits, fixing the incentive problem that occurs when third-party auditors responsible for testing plants on behalf of the regulator are also paid by these same plants. As part of its commitment to effective and efficient pollution control, the emissions trading program will be experimentally tested to understand its impacts on emissions, industry costs, and regulatory costs.

Globally, cap-and-trade systems have been used to reduce other forms of pollution, such as programs that have successfully reduced sulfur dioxide (SO2) and nitrogen oxides (NOx) in the United States. But the Gujarat program is the first in the world to regulate particulate air pollution, which is the single greatest threat to human health globally. Its effects on life expectancy exceed that of devastating communicable diseases such as tuberculosis and HIV/AIDS, behavioral killers like cigarette smoking, and even war, according to the Air Quality Life Index (AQLI). The AQLI, produced by EPIC, converts particulate air pollution into its impact on life expectancy, and finds that it cuts global life expectancy short by about 2 years.

The history of cap-and-trade programs also reveals that by unleashing market forces, they greatly reduce the costs that industries incur complying with regulations. Such reductions in compliance costs would facilitate the rapid growth that is the Government of India’s focus while maintaining air quality.