Can emission trading markets help India tackle its industrial pollution crisis?

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. 

ETS experiments in India

In India, a two-year pilot of the ETS was unveiled in early 2011, where three states (Gujarat, Tamil Nadu and Maharashtra) received a mandate from the Union Government to implement a scheme focusing on particulate air pollution with the scheme covering over 1000 industries.  The Ministry of Environment and Forests launched the scheme along with the Central Pollution Control Board (CPCB) and the respective State Pollution Control Boards (SPCBs). Launching these schemes required changes in the monitoring framework for the industry. To enable this, the CPCB released guidelines for continuous emissions monitoring systems (CEMS) in December 2013, and mandated the installation of CEMS across 17 categories of highly polluting industries in February 2014.  A 2015 baseline survey in the three chosen states revealed significant potential for emission reductions, and CEMS were then progressively installed at Surat as part of a trial in four phases from 2015 to 2019.  No information is available on the pilot ETS in Maharashtra and Tamil Nadu after 2015.

Since the Indian environmental legal framework does not specifically support an ETS, Gujarat Pollution Control Board (GPCB) sought approval from the CPCB in 2019, and this was accorded under Section 17 (1) (a) of the Air Act which permits states to take measures to reduce pollution. Subsequently, the first ETS for PM was launched in Surat. 

Surat’s ETS

Citing the potential for lowering pollution while minimizing costs through a self-regulating system (the market), proponents of the ETS argued that it was superior to the traditional "command and control approach" by providing a more efficient pathway to more stringent standards (i.e., reduction of the cap over time). The pilot ETS for PM was established in Surat and the efficacy of the system was evaluated by conducting a field randomized control trial (RCT). 317 plants were randomly assigned to the treatment (ETS, n=162) and the control arm (n=155). Of the total permitted emissions, 80% were issued for free in equal proportions to the participating industries based on their boiler and thermopack capacity. The remaining 20% were sold by auction at a floor price of Rs 5/Kg with a ceiling price of Rs 100/Kg. The pollution load was monitored for the suspended particulate matter (SPM), and not PM10 and PM2.5 as in the case of ambient pollution monitoring. At the end of the seven-month of the RCT, a 24% reduction in SPM emissions were reportedly observed in the treatment arm compared to the control arm.

While these results seem promising, there remain concerns that need to be addressed as the proliferation of ETS’ across the country continues. Here, I outline five key factors that need to be considered while assessing the Surat ETS and evaluating the potential for introducing similar cap-and-trade schemes in other parts of the country.

1.    Transparency

Transparency is vital for ensuring emissions monitoring, compliance, enforcement, and fairness across the participating industries. No information is publicly available on the emission load and boiler capacity of each of the participating industries in the Surat scheme, the reduction achieved by each industry (due to the nature of the study design), unit-wise purchase of caps, and details of units penalized for non-compliance. The CEMS and the ambient pollution data for the industrial cluster were also not available on the CPCB and GPCB websites. Under section 17 (1) (c) of the Air Act, the role of SPCBs is to collect and disseminate information related to air pollution to the public. In its order in the year 2017, the Supreme Court made it clear that the CEMS data should be made public. As per a research report, Gujarat's CEMS data was previously available but is not anymore. The paper documenting the results of the Surat RCT also notes that industries in the treatment arm were provided financial incentives to report CEMS data, an unsustainable long-term arrangement to ensure timely and accurate reporting. 

2.    Reproducibility

The reproducibility of this work to other sectors and states is unclear. The role of any pilot program is to undertake a feasibility study or trials on a smaller size and to then suggest the way forward to implement the work on a larger scale. A model can be deemed reproducible and worthy of further investment only if it is likely to be effective in other settings.  ETS for PM has only been tested for textile and dyeing industries in a small region with substantial investments made in monitoring and regulatory capacity. How is it scalable to other highly polluting industries like steel or thermal power plants? Implementing a cap-and-trade system across other industries may also have second-order effects that are yet to be studied including rising costs and affordability of basic goods. As ETS is being rolled out in other states, it is important to gauge whether the regulatory agencies in these states have the capacity and competence to design and implement an ETS. Can these states implement a market-based system in the same way without the support of an external agency supporting the work (as is the case in the Surat ETS)? 

It would also be worth examining the alternative scenario in this case. Given the time and money invested in the Surat ETS since 2011 (not just during the 7-month study period), would investing similar resources in SPCB capacity building, augmenting existing staff through new hires, installing appropriate pollution control equipment, and effectively implementing the command-and-control strategy have yielded similar results?

3.    Regulated and unregulated emissions

The textile/dyeing industries emit a diverse range of pollutants due to a wide range of operations that may release gaseous pollutants such as NOx, SO2, VOCs, hydrocarbons, ammonia, and others in addition to PM. The pollution control technology built to remove particulates is ineffective in controlling gaseous pollutants. Furthermore, higher NOx and SO2 emissions lead to the formation of secondary PM, thereby raising the ambient PM load, which cannot be recorded by the CEMS linked to stack emissions. The purpose of any such scheme is to lower pollution in the ambient air. However, no information is available on the reduction in ambient PM10 and PM2.5 levels in the industrial cluster. In addition, increased emissions by specific industries may create hot spots of pollution that will invariably affect the disadvantaged, raising questions of environmental justice and equity. 

4.    Political economy

The political economy in the state plays a crucial role in designing and implementing such a scheme. Overcoming the primary challenge of getting industries to install CEMS and pollution control devices, and then coaxing industries in India’s large informal sector to implement an ETS will likely prove an impossible hurdle to overcome. Secondly, the SPCBs are unlikely to have the know-how to design a well-functioning market, the capacity to regularly monitor its performance, allocate permits, monitor compliance, and check CEMS performance, as their technical staff are already overburdened due to the large number of vacant posts. Is outsourcing this work to a third party, like a well-funded research organization, feasible or even desirable? What does it mean to substitute rather than supplement state capacity for environmental regulation?

5.    Clarity in the policy framework

Gujarat had to receive dispensation under Section 17 (1) (a) of the Air Act to implement their ETS as a trial. In the absence of any clear provision for an ETS under the legal framework, there is no one-size-fits-all market system that every state can use. For example, when the regulators sell units through auction, they earn significant revenue. If the current approach is extended to additional pollutants and states, another unresolved policy question is how the auction income would be used. With the increase in the number of clean air markets, the Environment ministry should consider developing a framework for ETS. This process can be guided by an interdisciplinary team of experts from different organizations, along with public consultations to ensure accountability. 

Conclusion 

ETS is gaining traction as a market-based instrument to reduce industrial emissions. However, questions around transparency, reproducibility, state capacity, and policy design and clarity threaten the viability of this approach in the Indian context. Because of the country's alarming levels of pollution, regulatory authorities' efforts should focus on pollution reduction at the source. In the absence of concerted efforts to address these factors, and long-term investments in institutional capacity, ETS alone is unlikely to solve India’s industrial air pollution crisis. 

(Environmentality is a collection of ideas, perspectives, and commentary by researchers at the Initiative on Climate, Energy and Environment, Centre for Policy Research, New Delhi. Views and opinions expressed in this blog are solely those of the authors. They do not represent institutional views.)

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