Evidence From India

Members of the Emissions Market Accelerator Scientific Advisory Council—Michael Greenstone, Rohini Pande, Nicholas Ryan and Anant Sudarshan—worked with the Government of Gujarat to pilot the world’s first particulate pollution market in the industrial city of Surat. EMA is now scaling this work to other areas of Gujarat, as well as to Maharashtra and Rajasthan.

The Problem

Regulators in Gujarat faced a confounding problem. Despite strict pollution rules on the books, pollution levels were exceeding the standards. Industry also found the rules to be expensive.

With the conventional "command and control" rules, the regulator set a pollution limit and mandated a technology—imposing harsh penalties, like shutting down a factory, or even criminal penalties as the teeth for enforcement. But, it was challenging to get firms to follow the existing rules.

Gujarat officials teamed with Michael Greenstone from the University of Chicago, Rohini Pande and Nicholas Ryan from Yale University, and Anant Sudarshan from the University of Warwick, in collaboration with EPIC and J-PAL, who found plants were violating pollution limits and regulators were selective in penalizing them. This was leading to corruption.

A Market-Based Approach

The Gujarat government worked with the researchers to pilot the world’s first Emissions Trading Scheme for particulate pollution in the industrial city of Surat.

The Pilot

The pilot was conducted as an experiment, so the results from facilities participating in the market could be compared to a control group of facilities following existing, conventional air pollution rules.

Win #1: Eliminate Non-Compliance

Facilities outside of the market following conventional rules didn’t comply with the rules about a third of the time.

Win #1: Eliminate Non-Compliance

With the market’s more flexible approach, only 1% of facilities didn’t comply.

In other words, they held enough permits to cover their emissions—99% of the time.

Win #2: Reduce Pollution

The researchers also recorded the amount of pollution facilities following conventional rules were emitting.

Win #2: Reduce Pollution

And compared that to the facilities in the market. Those in the market were emitting 20% to 30% less pollution.

Win #3: Reduce Industry Cost

Which facilities were spending more money to comply? Here’s how much facilities following conventional rules spent to install emissions control technologies.

Win #3: Reduce Industry Cost

Compared to plants in the control group, it cost plants 11% less to comply with the market.

Overall, the market delivered a benefit-to-cost ratio of 215:1 by improving air quality, public health, and industrial efficiency.

Michael Greenstone

Co-Chair, Emissions Market Accelerator; Director, EPIC; Milton Friedman Distinguished Service Professor in Economics, University of Chicago

"The market delivered a rare win-win-win by reducing pollution, decreasing abatement costs, and raising 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."

Rohini Pande

Henry J. Heinz II Professor of Economics; Director, Economic Growth Center, Yale University

“The exciting part of the emissions trading scheme that we did for particulate matter, aside from reducing emissions, is that it provides a proof of concept that even in a setting with lower state capacity, a compliance market can work, and often will outperform the command-and-control approach.”

Nicholas Ryan

Associate Professor of Economics, Yale University

“We have worked with the Gujarat Pollution Control Board for over a decade on testing policy interventions such as altering the incentives of third-party pollution monitoring and sharing emissions information with the public. This collaboration is setting a path for environmental policy across India.”

Anant Sudarshan

Associate Professor of Economics, University of Warwick; Senior Fellow, EPIC

“Under the market, both the efficiency of the trading platform and the higher level of compliance allowed regulators to reach their environmental goals, while lowering abatement costs for plants. The market is a win for both government and industry, as well as for the public by reducing air pollution.”

Scaling Up

Following the success of the pilot, the Gujarat government expanded the market to cover the control group of facilities. It also launched a second market in the city of Ahmedabad—Gujarat’s largest city and a major industrial hub. Today, 20 million people are breathing cleaner air in Gujarat due to these markets. Further, the Emissions Market Accelerator team is working with the Gujarat government to establish a sulfur dioxide trading market and a wastewater pollution market.

Building on Gujarat’s momentum, the Emissions Market Accelerator team is now supporting a sulfur dioxide market in Maharashtra and is beginning to design a market in Rajasthan. Discussions are also underway to expand to several other Indian states, as well as internationally.