Pollution Markets May Hold Promise but Regulatory Mechanisms Remain Crucial in India

Bengaluru: Imagine you have a factory that bellows out far more smoke and other poisonous fumes into the air than is permitted for the health of both the environment and the people who live nearby. But the factory near yours doesn’t produce as many pollutants. So you get to buy ‘credits’ from the lower-emission factory – essentially compensating for the extra pollutants you emit into the air. 

This simple trade-based “pollution market” strategy – similar to carbon markets – could effectively reduce pollution levels far better than a top-down regulatory mechanism that penalises industries to ensure lower emissions, a recent study suggests.

Studying a five-year-old pilot programme that is ongoing in Gujarat, a team of scientists from universities, including Yale in the United States, found that a particulate matter pollution market in Surat reduced pollution by 20-30% while also reducing the pollution abatement costs of industrial plants by more than 10%.

However, these markets are still in their infancy. They cannot, in their current form, replace regulating pollution levels and penalising industries in India due to several reasons including the differences in old (and more-polluting) versus new (and less-polluting) technology that industries use, experts told The Wire.

What is a pollution market?

With carbon dioxide emissions rising every year and adding to greenhouse gases that cause global warming and climate change worldwide, carbon markets are the rage right now.

As part of this market, entities that have a high green footprint – due to activities such as construction, or its members taking numerous high-emission flights – can buy 'carbon credits' from groups, organisations or companies that engage in activities – like planting trees for instance – that sequester carbon emissions from the atmosphere. Trees help lock up carbon emissions in the form of organic matter (vegetation), and thus counter the impacts of climate change.

Buying and selling carbon credits is now a type of trade; high-footprint entities can supposedly offset their emissions through the carbon-sequestering actions of another. The concept of a pollution market – also called an emissions trading scheme or cap-and-trade market – is similar. Industries that emit pollutants above a particular threshold can buy credits or ‘permits’ from other industries in the same area that emit far lower levels of pollutants.

Studies show that prescribing a limit for the maximum amount of specific pollutants (a cap, in that sense) and using the system of permits to trade these between plants have helped industries limit their emissions in many countries including China. A study in 2023, for instance, found that China’s emissions trading system achieved a reduction in emissions in mining cities by as much as 22%.

A team of scientists from the universities of Chicago and Yale in the US, and from the University of Warwick, United Kingdom, worked with the Gujarat Pollution Control Board (GPCB) to design a pollution market for particulate matter. Particulate matter are small solid or liquid particles below 10 micrometers in diameter, a major pollutant that industries emit.

In 2019, the GPCB launched the market for industrial plants in and around Surat. The GPCB brought 318 plants under the scheme. Of these, 162 were assigned to a pollution market wherein they could trade permits amongst each other. The remaining 156 were monitored for comparison, as they functioned under the existing regulatory mechanism which involved installing abatement equipment and being inspected at regular intervals by government regulators.

Initially, the team set the emissions cap at 280 tons of particulate matter emissions per month. But based on actual emissions data from continuous monitoring, the team decreased this cap to 170 tons per month.

Gujarat’s pilot pollution market

The team analysed the performance of this first ever particulate pollution market between April 2019-March 2021 by measuring pollution levels in all these plants using an online monitoring system, along with data on trading, as well as surveys that gave information on compliance records.

They found that industries that were assigned to the pollution market traded permits covered almost all their emissions. Industries that were not part of the market, on the other hand, ended up meeting with emission regulations only 66% of the time.

Industries that were part of the pollution market also reduced emissions as compared to those that were not part of the market by a staggering 20-30%. Per the team’s estimates, being part of the pollution market reduced industries’ pollution abatement costs – expenses that a company incurs to reduce or prevent pollution and environmental damage, such as fines for non-compliance – by 11%. These benefits – including reducing emissions without too much capital investment – exceeded the costs of the market by a whopping 25 times. 

“The market delivered a rare win-win-win by reducing pollution, decreasing abatement costs, and raising [the] government’s success at enforcing the law. And, it did all this in a setting where there was great skepticism that pollution markets could work,” co-author of the study Michael Greenstone, the Milton Friedman Distinguished Service Professor in Economics at the University of Chicago, said in a press statement.

“This success of pollution markets is generating a great deal of interest from other governments that are trying to balance the goals of economic growth and environmental quality. In addition to our continuing collaboration with the Gujarat Pollution Control Board, we’re now working with other states in India and governments in other countries to scale-up the use of pollution markets.”  

The group is now in talks with the Maharashtra Pollution Control Board to develop and implement a state-wide sulphur dioxide pollution market for emissions from thermal power plants and other industrial sources.

Regulatory mechanisms remain crucial

But despite the success of this pollution market, experts still remain sceptical of the efficacy of the markets in India for several reasons. 

One of them is that the cap on emissions was not decided by the carrying capacity of the area but by industrial operations, commented Sunil Dahiya, a scientist who studies air pollution and was not involved in the study.

If emissions – from industries, vehicular transport and even household pollutants – are more than the prescribed standards such as those set by the Indian government or the World Health Organisation and thus result in more hazardous air than the standards specified, then those emissions are said to be above the carrying capacity, Dahiya clarified.

Other conditions factor into this as well: the meteorology and geography of a place also can play a role in whether pollution levels are diluted below a prescribed standard. And that is why for different months, the carrying capacity will be different too, Dahiya added.

“This means that if ten other new industries come online, depending on their capacity and size, [and] whatever they will emit – this cap [based on industrial operations] might increase. When you are not basing your cap on the carrying capacity of a region but on the industrial operations and capacities, the cap is very subjective and that doesn’t necessarily mean that the emissions will keep going down,” he told The Wire.

To reduce pollution levels, we have to be aggressive about emission control and the cap should be staggered, reducing targets for every industry in the larger airshed, he added. “The cap can be reduced to a new limit if we have new technology,” he said.

Being a pilot project that looked only at particulate matter, it has “very limited scope” for now, Dahiya, Founder and Lead Analyst at Delhi-based think tank EnviroCatalysts, told The Wire. Particulate matter is just one of the many pollutants that industries emit, he said.

“In India, if we have a stringent regulatory approach, implementing that well would work faster than pollution markets. I think that in the existing form, the proposed PM or pollution market is not comprehensive, and misses out on details and aggressive pathways for real emission reductions through market mechanisms because it does not take into account the carrying capacity of a region, [and] looks at only primary particulate matter and not secondary pollutants,” Dahiya commented.

Saying that a pollution market approach will work better than a regulatory one may be too far-fetched for now, he added. 

“I still feel that in a country like India, a regulatory approach has a very critical role to play in emissions reduction and it is only the failure of the implementation of the regulatory approach which is resulting in high pollution levels, so we need to focus on that.”

If a factory working on old or outdated machinery emits a high level of pollutants, but the same company’s another factory uses modern technology and emits low levels of pollutants, then there is a feeling that both units can be operated because, put together, their levels are under the specified cap under the current version of market approach, commented Dahiya. 

“In a way, it is incentivising old technology because these units or companies can buy credits from somewhere else. India has a lot of this variation and therefore the regulatory mechanism works way better than the market mechanism. The air pollution problem in India is immediate. We are facing this crisis now. We cannot wait for another 15 years for the market mechanism to mature. We cannot discount the fact that regulatory mechanisms and powers and implementation of those powers by regulatory bodies is the only mechanism present with us today to tackle this immediate crisis that we are facing.”

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