New Delhi: Last week, China, the world's top greenhouse gas emitter, announced it was opening a national carbon market, a type of emissions trading system. Under the system, industrial units that cannot meet annual government-set greenhouse gas emissions targets will have to purchase surplus targets from units that met theirs.

A pilot emissions trading scheme (ETS) for particulate matter pollution implemented in Surat, Gujarat in September 2019--the world's first such programme--works similarly. Industries participating in the pilot scheme reduced their particulate matter pollution by 24% (with an 8% margin of error), compared to industries that continued to be under the business-as-usual regulation of complying with ambient air quality standards, an initial analysis of the effectiveness of the scheme has projected.

Particulate matter, a major cause of air pollution in and around industrial clusters, is a mixture of fine solid particles and liquid droplets suspended in the air. These fine particles, when inhaled and after entering the bloodstream, can cause lung and cardiovascular disease. In 2017, air pollution caused one in every eight deaths and a total of 1.24 million deaths in India, IndiaSpend reported in December 2018.

Last month, Gujarat Chief Minister Vijay Rupani announced that the pilot scheme would be replicated in Ahmedabad. The Punjab government also signed a pact on June 7 to roll out a similar system in Ludhiana. Surat and Ludhiana are home to some of India's largest industrial clusters.

How does the emissions trading or cap-and-trade market work?

Under Surat's ETS, the designated government authority sets a limit or cap on the quantum of pollution that industries may emit. In the case of Surat, where the pilot scheme's third phase began on November 16, 2019, the cap on the total mass of suspended particulate matter emissions is set at 276 tons per industrial unit. The cap is based on an assessment of emissions data from the government's continuous emissions monitoring system (CEMS).

Participating industries can comply either by installing technology that cuts pollution, or by purchasing 'emission permits' to emit more than their limit for a specific pollutant. This is the trade part of the system. Industries that have installed emissions-reducing technology and have surplus permits left over, can sell these to the industries that find it costlier to install such technology. This way, industries also earn from installing emissions-reducing technology.

The government authority in-charge, the Gujarat Pollution Control Board (GPCB) in the case of Surat, fixes the number of such tradable emission permits, which are created at the start of each period of compliance or trading. For the November 16 to December 31 trading period in 2019, the GPCB distributed 80% (220.8 tons worth of emissions) of permits free to participant industries at the start of trading. The pro-rata allocations were based on the boiler and heater capacity of an industrial unit. The remaining 20% of emission permits were auctioned by GPCB through the National Commodities and Derivatives Exchange Limited e-market.

"At the end of a specified trading period, the total emissions by a factory are compared to the emission permits they hold and to be in compliance, permit holdings must be equal to or greater than actual emissions," Anant Sudarshan, South Asia director of the Energy Policy Institute at the University of Chicago (EPIC), and one of the four principal investigators assessing the effectiveness of Surat's project, told IndiaSpend.

"Therefore after trades, permits will end up being redistributed. We see plants for whom it is very expensive to cut pollution buying permits from others for whom it is relatively cheaper. Those for whom it is cheapest to reduce emissions are in a position to sell permits," he explained.

Ahmedabad, which will follow Surat's pilot scheme, has placed orders for purchasing pollution monitoring equipment, said Sudarshan. The Punjab government is currently determining who should bear the cost of monitoring equipment--whether it should be entirely paid by industry (as in Gujarat) or should the cost be shared between industry and government.

Why is this important?

Under the usual system of regulation, which follows a command-and-control model, industries are not allowed to pollute beyond specified limits. To comply with these regulations and avoid penalties, industries have to install pollution-curbing technology, which is often cost-intensive.

A market-based emissions trading mechanism gives industries financial incentives to reduce pollution, at lower costs, and also provides them an opportunity to earn profits through the trading of emission permits, experts explained. Since only a limited number of permits are available, industries have to either comply with the cap by investing in pollution abatement technology, or they have to buy permits.

"The goal of an emissions trading scheme is to attain a specified pollution target at the minimum possible price," said Sudarshan. Sudarshan argued that there is flexibility in a trading mechanism compared to the usual regulatory framework, which fixes targets for every plant and often the technology or methods that must be used to achieve it. This, he said, can be very expensive and also a drag on growth.

How are emissions monitored and what is the cost of non-compliance?

Emissions during the trading period are monitored using CEMS data. If more than 50% of a unit's CEMS data are missing or irregular during the trading period, the unit's prior emissions dating back to three months are used to compute emissions.

An environmental damage compensation of Rs 200/kg is imposed for every kilogram of emissions over and above the permits that a unit holds, at the end of the trading period, per GPCB. Participating units also have to submit an 'Environmental Damage Compensation Deposit', which varies from Rs 2 lakh for small units to Rs 3 lakh for medium-scale units and Rs 10 lakh for large-scale industries.

Has the scheme helped reduce pollution?

Although a full-scale analysis of the pilot initiative in Surat has not yet been published, there are some early indications of a reduction, per Sudarshan, who is assessing the scheme's effectiveness along with colleagues from the universities of Chicago and Yale. Of 317 industrial units in Surat being analysed, 162 participated in the emissions market.

"We found that plants randomly assigned to participate in the market reduce pollution emissions by 24% relative to control plants [under usual air quality control regulation]," said Sudarshan. However, he added a caveat that these are very early results and pointed out that more data are being collected.

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