A labourer stacks firewood for use in a brick kiln as smoke billows from a chimney on the outskirts of Jammu
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MUKESH GUPTA
If the experiment in Surat, Gujarat, is anything to go by, Cap-and-trade could be the way out to secure a cleaner environment in developing countries.
A study by the Energy Policy Institute at the University of Chicago cites an experiment that shows that the cap-and-trade market in Gujarat reduced pollution by 20 to 30 per cent, while reducing industrial plants’ pollution abatement costs by more than 10 per cent, and increasing compliance with the law.
The study, released on April 15, is to be published in the May issue of The Quarterly Journal of Economics. It experimentally evaluates the world’s first cap-and-trade concept for particulate pollution. “Its success demonstrates that pollution markets can work in low- and middle-income countries, where pollution is frequently very high and state capacity is often low,” those involved with the study say.
A cap-and-trade scheme is a market-based mechanism used to control pollution by setting a limit (cap) on total emissions and allowing companies to trade emission allowances (trade). This system incentivises businesses to reduce emissions by creating a financial incentive for reducing pollution.
Particulate air pollution has caused a public health crisis in many lower-income countries. Reportedly, the average person in India loses more than three years of life expectancy on account of such pollution.
“These countries tend to rely on difficult-to-enforce command-and-control approaches to regulating pollution, even though pollution markets or cap-and-trade programmes, have a strong track record of reducing pollution at low cost in the US and Europe,” the study said.
“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 scepticism that pollution markets could work,” Study co-author Michael Greenstone, the Milton Friedman Distinguished Service Professor in Economics at the University of Chicago, has said.
In fact, this success of the pollution market has generated a great deal of interest from other governments that are trying to balance the goals of economic growth and environmental quality, he said, adding that “following our continuing collaboration with the Gujarat Pollution Control Board, we’re now working with other states and governments in other countries to scale-up the use of pollution markets.”
Greenstone and his co-authors Rohini Pande and Nicholas Ryan, both of Yale University, and Anant Sudarshan of the University of Warwick, worked with Gujarat to launch and evaluate the market in Surat.
The Gujarat government had mandated 317 large, coal-burning plants to install pollution monitors. From there, half the plants were randomly assigned to the market, while the rest were kept under traditional regulations. The plants in the market were given a cap on the total amount of pollution they could emit. Those that easily met the cap traded permits with those who could not meet the cap, with both buyers and sellers benefiting.
The plants that participated in the market reduced particulate emissions by 20 to 30 per cent overall, relative to plants that were experimentally assigned to continue with the status quo form of regulation. Further, plants that participated in the market benefited from 11 per cent lower pollution abatement costs, that increased their profits.
From a legal or regulatory perspective, the market also functioned almost perfectly — with plants holding enough permits to cover their remaining emissions 99 per cent of the time. By contrast, plants outside of the market were in violation of their pollution limits at least a third of the time. When all the aspects where put together, it was found that the benefits of the market exceeded the costs by at least 25 times.
Enthused by the success of the experiment, the Gujarat government has expanded the scope to include plants originally left out of the pilot experiment. It has also launched a second market in Ahmedabad, and is exploring expanding the market regime to additional industry clusters and pollutants, as well as additional cities.
Published on April 15, 2025