New Delhi: On World Environment Day on June 5, 2019, Gujarat launches the world’s first-ever market-based particulate pollution regulation system as a pilot project. The system provides economic incentives to industrial units that successfully control their emissions of particulate pollutants. The government sets a cap on particulate emission levels and then allows industries to buy and sell permits in order to stay below the cap. Permits are certificates earned by companies that have achieved emissions reductions to meet their targets, which they can sell to companies that have failed to meet theirs. This could work better than India’s current command-and-control approach to pollution regulation, which has resulted in high levels of non-compliance, caused also by the lack of high-quality information.

Indian cities have some of the world’s most toxic air and eight of 10 Indians breathe toxic air that killed 1.2 million in 2017--more than tuberculosis, diarrhoea, pneumonia and malaria. The country’s average levels of particulate matter, or PM 2.5--particles that are 30 times finer than a human hair and can enter the bloodstream to cause heart disease, stroke, diabetes, etc.--are eight times the World Health Organization standard and the fourth highest in the world.

Gujarat is launching this novel cap-and-trade programme for particulate pollution in Surat, a densely populated industrial centre where textile and dye mills release a significant amount of particulate pollutants. Since 2011, the Gujarat Pollution Control Board (GPCB) has been working with the Energy Policy Institute of University of Chicago (EPIC-India), the Abdul Latif Jameel Poverty Action Lab (J-PAL South Asia) and Evidence for Policy Design (EPoD) at Harvard University (EPoD–India) to evaluate the impact of emissions trading in Surat.

Can the cap-and-trade programme solve India’s air pollution problem due to non-compliance by industries? Yes, said Michael Greenstone, the director of EPIC, in an interview with IndiaSpend. Greenstone, the Milton Friedman Professor in Economics at the University of Chicago, has served as the chief economist to the council of economic advisers attached to former US president Barack Obama. He is of the view that the Gujarat programme could become a “very powerful tool in the tool-chest” for reducing particulate pollution in other parts of the country.

Edited excerpts:

How does the cap-and-trade programme function and how is it being structured in Gujarat?

Because of the poor visibility of reliable information on emissions, the GPCB had to rely on command-and-control regulations, meaning directly ordering industries to install some particulate pollution abatement equipment. Even if you, as an industry, have an idea of how you might be able to reduce your emissions in a different way that is less expensive, there is not enough flexibility in the current system for that. What the cap-and-trade programme does is that it removes the older mandates and lets industries figure out what is the cheapest way to comply [with pollution regulations].

For some of them, the compliance will be very expensive and they will buy permits from other industries who have figured out how to cut their particulate pollution in a less expensive manner. For example, let's just say that industry A has some engineers who actually know how to reduce particulate emissions coming out from stacks in an inexpensive way and industry B is finding it very hard to reduce their particulates because of the way their production style works. So, what industry A will do is: they will do more reductions of emissions than they are actually required to and they will take these excess reductions and sell them to industry B. For industry B, buying the excess reductions from industry A will be cheaper than trying to reduce the emissions on their own because their production process is not so flexible. So, this system really unleashes market forces in the name of the environment.

Have such programmes been used in India or other countries before?

India has never had an emissions trading scheme or any kind of market-based approach to tackling particulates pollution. Indeed there is no cap-and-trade market in particulate emissions anywhere in the world. Thus far, pollution markets have historically been used only in developed countries, as efforts to control sulphur dioxide (SOx) and carbon emissions.

However, there are two cap-and-trade markets in India. The first is the renewable energy certificates scheme and the second is the Bureau of Energy Efficiency’s (BEE) Perform, Achieve, Trade (PAT) scheme. Both of them have faced some challenges but are addressing different problems.

Is Surat’s cap-and-trade programme in any way connected to the PAT scheme?

No, the PAT scheme targets a set of 500-odd designated consumers across India who are very large users of energy. So one difference is that the PAT has very limited coverage. Secondly, the PAT encourages trade in energy efficiency certificates. Energy efficiency is not the same as pollution (it is possible to burn less fuel but to emit lots of pollution because there is no effort to filter pollution from the smoke). Having said that, one of the ways in which plants can reduce pollution is to burn less fuel. Thus a side-effect of the emissions trading scheme might be improved efficiency, and if so, it would be a useful way to extend this to smaller plants that the PAT leaves out.

What was the journey of this idea in Gujarat?

The programme in Surat is a result of a multi-year process that we have been working on with the GPCB. The first and the most complicated step in the process was to develop protocols for continuous emission monitoring of particulate matter coming out of stacks, which did not exist. So we helped develop them and later these protocols also became a part of the country’s environment ministry and Central Pollution Control Board's (CPCB) policy. The second step was installing a continuous emission monitoring system (CEMS)--a network of sensors installed at Industries sending live readings of stack pollution--working and providing reliable information, which we could successfully do, after which the environment ministry ordered 17 highly polluting sectors [such as pulp and paper, distillery, sugar, tanneries, power plants, and iron and steel] to mandatorily install CEMS. But getting those CEMS to produce reliable data is another step. GPCB has been leading a very important effort--for which we have been providing a little help on the side--to get CEMS installed in Surat to operate reliably.

Therefore, this programme is potentially a revolutionary step in environmental enforcement in India. Whereas previously the GPCB really only got particulate pollution readings from the plants for 15 to 20 minutes once or twice a year, now they are getting minute-by-minute readings.

It is in the next phase of the programme that we are trying to set up a cap-and-trade programme for particulates in Surat, which would be a dramatic step forward in pollution enforcement. Two important things related to this: A) it is a pilot but our expectation is that it would be very effective in reducing particulate pollution; B) relative to the current system, it would be less expensive for industries. Currently, regulators have such poor information available to them about emissions that it becomes very complicated and costly for them to regulate, but the new model would make things much more predictable and give industries a clear signal. So, cap-and-trade would not only reduce pollution and improve health but also reduce the cost of compliance for industries.

How would a cap-and-trade programme avoid non-compliance if industries decide to pay and pollute?

What is at the heart of the cap-and-trade market for pollution is that you define the total amount of particulate emission that is allowable across all industries that are part of the system. And yes, some industries would be able to pay and pollute but that is only because they will be paying some other industry to reduce. And here in this system what the cap will do is to guarantee that the total level of pollution across all industries does not supersede the defined levels of allowed particulate emissions in the region. Some people get caught on that industry-A got to pollute more, but the thing is people who breathe polluted air do not care if the pollution came from industry A or industry B, they just care about the overall quality of air. So, this is what government can control by setting the overall cap without getting into the business of industries. This programme in Surat would be for a fixed set of industries and the government will only have to set a cap and convey the overall emission reductions to these industries. Rest, the cap-and-trade market would ensure.

Can the programme solve the air pollution problem in other parts of the country too?

If the programme in Surat proves to be effective, it could be expanded to other sources of pollution, other pollutants and other parts of the country. The Surat programme is important because this has the potential to be a demonstration of proof of concept that this can work in India. Once you've done that, you have placed a new very powerful tool in the tool-chest for reducing pollution that can be applied anywhere and for any pollutant. The power of the tool lies in the fact that it reduces the abatement cost for industries and achieves environmental goals.

But would the current regulation laws support the programme or will it need structural reform?

Right now, the laws are not very flexible for dealing with violators. The current system only allows the regulator to either put an infinite penalty on polluters or shut them down. Between doing little and shutting them there is not a lot of space for regulators. So the need is that the core of the regulatory system in the country needs to enfranchise the idea that you can have monetary charges and not just criminal charges or shutting the plant down. The current laws can be read to accommodate that, I think, but they do not decisively create space for it. And, this may not be a challenge for the programme in a particular state with a state pollution control board interested in it, but for widespread adoption, this definitely is a big challenge.

Another thing is that in the current system a lot of the rules are written keeping in mind physical inspection by a government inspector. But CEMS is a completely new ball game and, I think, the rules probably are not quite as tuned to these new technologies.

As you said, the ministry of environment has ordered 17 sectors to mandatorily install CEMS. The ministry is still in the process of streamlining this new aspect of pollution regulation in the country. Are there any notes from the Gujarat project that could be useful?

In Gujarat, a key step was how to get the devices calibrated to detect a certain pollutant in stack emissions. Calibration is a very tricky part--you can calibrate these continuous monitors to show low levels of pollution or you can calibrate them to show the exact amount of emission. So, the industries not interested in spending money to abate pollution would want to calibrate it in a particular way. Hence, continuous auditing and calibration by a third party that does not have financial stakes in the industry is necessary. This was tough and there was definitely some experimentation with that, but we kind of cracked this problem in Gujarat. And there is definitely an opportunity for the environment ministry to apply those learnings throughout the country.

(Tripathi is a principal correspondent with IndiaSpend.)

This is the third of a four-part series on India’s air pollution policies and their impact. You can read the first part here, the second part here and the fourth part here.

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