Emissions trading as an environmental innovation in India: Measuring the policy impact on emissions and abatement costs

Growth in developing countries has improved living standards for millions, but has led to high pollution concentrations and serious public health damages. Market based environmental regulation can reduce the costs of pollution reduction and thus transform the trade-off between environmental quality and growth.

This study will measure the effects of a pilot emissions trading system for particulate matter on plant emissions and abatement costs using a randomised-controlled trial design implemented jointly with environmental regulators in three Indian states. Emissions trading systems (ETS), also known as cap-and-trade, have limited emissions in developed nations at a much lower cost than command-and-control regulations. The Indian pilot will be the first ETS in a developing country and the first rigorous randomised-controlled trial of an ETS.

Key initial research findings:

• Emissions trading requires highly accurate monitoring verification of industrial emissions: To enable trade of permits, regulators must verify the total emissions from each industrial plant. Continuous emissions monitoring systems (CEMS) at all participating sources are essential to have a trusted and reliable market-based regulation.
• Permits should be allocated through an auction: Auctioning is the preferred method of allocation to show that the government is establishing a right to emissions and to send clear price signals to participating units from the very start of the scheme.
• A price ceiling can stabilise the permit market: A price ceiling is a maximum allowable permit price. The price ceiling level is intended to be high enough to deter industries from purchasing at the ceiling price as a primary means of abatement yet low enough that, should the price reach this level, abatement costs would not induce financial distress or non-compliance at heavily emitting units.
• Trade can occur across industrial clusters but each cluster should have a local sub-cap: Completely free trade across distances farther than particulate matter typically travels in the air would allow a concentration of pollutant emissions in a single region. This can be prevented by limiting not only overall emissions but also emissions within each cluster.

Progress in implementation:

• Identification of industry clusters/regions: The regulators have selected the industrial regions for the pilot ETS, and have selected the preliminary participating industries, which will be finalised after a baseline survey.
• Continuous Emissions Monitoring Systems (CEMS) technical readiness: Continuous Emissions Monitoring Systems can improve compliance by transmitting real time data on emissions to the environmental regulator. For the pilot, participating industries will be required to install Continuous Emissions Monitoring Systems (CEMS). In preparation, draft standards for CEMS systems, including standards for installation, calibration, and maintenance have been prepared.
• Baseline survey: A detailed questionnaire has been designed to gather information on the condition of pollution abatement equipment, the level of particulate concentration presently produced by industry and to estimate marginal abatement costs at the industry and cluster level. The baseline survey will be used to finalise the participating industries, and the market design.