India hosts the world’s first-ever air pollution market. Here are the lessons learned so far

India faces the world’s worst air pollution crisis, with billions of people constantly exposed to unhealthy levels of ambient PM 2.5 (the most harmful pollutant in the air). In 2022, several Indian cities ranked as the most polluted cities in the world. Today, in 2023, the air quality in India’s capital has plummeted to a ‘severe plus’ category, making Delhi the most polluted city in the country. This appalling decline in air quality and awareness of its ill effects on the health and development sectors in India is driving effective innovation in public governance with the support of the private sector.

Pollution control markets have been widely credited with reducing pollution in many regions across the world. For instance, in the United States, between 1980 and 2003, the introduction of the US Emission Trading Scheme (ETS) dramatically reduced the pollution caused by sulfur dioxide in the air by 40%. Trading markets have been adopted ever since for reducing pollutants in Canada and Europe, but never before to tackle particulate pollution in the air.

In 2019, the Government of Gujarat launched the world’s first-ever market for trading in particulate matter emissions in the city of Surat. The project called the Emission Trading Scheme, aims to reduce air pollution by allowing industries to ‘buy and sell’ permits for emitting particulate matter.

This pilot project was first conceptualized by the Ministry of Environment, Forests, and Climate Change in 2012. To execute the ETS, the Gujarat Pollution Control Board partnered with renowned researchers from leading academic institutions worldwide, including the University of Chicago, Yale University and the Abdul Latif Jameel Poverty Action Lab.

Simply put, businesses that emit more particulate matter than allowed, must buy permits from businesses that emit less. This approach ensures that businesses and industries that are heavy polluters bear a higher cost – a principle that champions financial commitment as a means to incentivize cleaner practices.

The Gujarat Pollution Control Board plays a central role in this by setting a cap on the total volume of particulate matter (PM) emissions permitted for participating industries. This cap is based on the historical emissions data collected by the Continuous Emissions Monitoring Systems.

Gujarat is one of the most industrialized states in India, with a large concentration of energy-intensive industrial sectors, such as iron and steel, petrochemicals, aluminium, cement, fertilizers and power plants. This means that Gujarat faces a severe air pollution problem, especially from particulate matter, which is a mixture of fine solid particles and liquid droplets suspended in the air that cause various health problems. According to a recent study by the Centre for Science and Environment, Gujarat faced the highest winter air pollution levels in the last four years, with an average PM2.5 concentration of 73 micrograms per cubic metre, more than seven times the safe limit prescribed by the World Health Organization.

The ETS pilot in the Gujarat town of Surat has shown promising results in reducing PM emissions and improving air quality. An initial analysis of the effectiveness of the scheme has projected that participating industries reduced their PM emissions by 24% (with an 8% margin of error), compared to industries that continued to be under the business-as-usual regulation.

Unlike the earlier traditional command-and-control regulations approach that primarily focused on enforcing strict limits on emissions without placing any restrictions on the overall volume of pollution released, the new Emission Trading Scheme introduced a cap on the total pollution release, addressing a significant flaw in the previous method.

ETS itself is a market-linked ‘cap and trade’ mechanism that operates under the polluters pay principle. Under the polluters pay principle, a compensation of Rs 200 per kilogramme is charged for any excess emissions over and above the permits held by a unit, at the end of the trading period. Participating units are also required to submit an ‘Environmental Damage Compensation’ amount, which varies from Rs 2 lakh for small units, Rs 3 lakh for medium-sized units and Rs 10 lakh for large-scale industries.

This project, however, did not materialize overnight; it underwent a meticulous trial phase. Mock trading was conducted for two months after the launch, allowing stakeholders to familiarize themselves with the intricacies of the system.

The evaluation of ETS leverages continuous emissions monitoring systems (CEMS) devices across the state, which send live readings of particulate emissions. ETS takes advantage of this technology to track industry emissions in a transparent way. From a sample of about 320 solid fuel burning factories already implementing CEMS in Surat, half were chosen at random to participate in the first phase of a new emissions trading scheme (the intervention group, while the others remained under the status-quo command and control regulation.

One drawback of the ETS is that it may impact businesses unevenly, depending on their emission levels and the cost of reducing those emissions. Consumers might face slightly higher prices for goods or services due to increased production costs or scarcity of rents for permits.

After several months of mock-trading, plants started trading permits and the project was implemented in 155 industries in Surat on September 16, 2019. Following the end of the 2019-2020 financial year, researchers will measure impacts on particulate matter emissions among industrial plants, output, revenues and compliance costs. An initial analysis of the effectiveness of the scheme has projected that participating industries reduced their PM emissions by 24% (with an 8% margin of error), compared to industries that continued to be under the business-as-usual regulation.

Following the encouraging results of the pilot of the Emission Trading Scheme in Surat, the Gujarat government is going to replicate the same scheme in Ahmedabad in two phases covering industrial clusters, Naroda, Vatva and Danilimda.

Expanding to Ahmedabad, the Gujarat government has installed the Continuous Emission Monitoring System (CEMS) in these industry clusters to ensure that the prescribed norms are followed, failing which the entire industrial cluster will be penalized. The CEMS tracks emissions from the industries participating in the ETS scheme. The live trading among 118 Ahmedabad industries in the scheme commenced on 5th September 2023, marking a momentous feat in curbing industrial emissions and effluents in the air.

With India’s commitment to achieving net-zero emissions by 2030 and the forthcoming COP28 summit, the focus on financing climate has become critical. One of the topics that will be discussed at this summit is linking different emission trading systems and creating a global carbon market. While India is surely and steadily road-mapping its progress story with a $9 trillion economic opportunity by 2030, balancing its rising working-age population and growing trends for businesses to expand will be the biggest challenge. By introducing financial incentives and market-based solutions, polluting industries are expected to incorporate the cost of pollution into business costs and centralized decision-making. Without market corrections and a demand for robust air-quality-related research, heavy polluters will continue to pollute the air.