In India, much of the population breathes air that is 10 times more polluted than what the World Health Organization considers safe. In a study released April 15 in the Quarterly Journal of Economics, Yale economists Rohini Pande, Nicholas Ryan, and coauthors examine a cap-and-trade market for particulate pollution and find that it dramatically cut emissions, and at a lower cost to industry than traditional regulations.
The researchers worked with the Indian state of Gujarat to launch and evaluate in Surat — a metropolitan area of 15 million people — the world’s first market for particulate matter emissions. The policy required industrial plants to install pollution monitors and to trade emissions permits to keep the total combined emissions under a predetermined level.
The plants that participated in the market reduced particulate emissions by 20 to 30% overall, relative to plants that did not participate, the researchers found. And it cost participating plants 11% less, on average, to abate emissions than plants operating under the traditional regulations.
… [I]t provides a proof of concept. Even in a setting with lower state capacity, a compliance market can work, and often will outperform the command-and-control approach.
The U.S. used an emissions trading market to curb acid rain in the 1990s. The program cut sulfur dioxide emissions by over 40%, showing that emissions trading can reduce pollution cost-effectively. Since then, China, South Korea, and all EU countries plus Iceland, Liechtenstein, and Norway have adopted similar systems to curb carbon emissions. But until now, no emissions market had been tested for particulate matter — one of the most dangerous forms of air pollution, as particles can lodge in the lungs and enter the bloodstream, increasing the risk of heart and lung disease.
India’s traditional efforts to reduce particulate matter emissions included factory closures and steep fines. These “command-and-control” regulations were frequently strict on paper but hard to implement. Market-based approaches offer a cost-effective alternative, though rigorous evidence in the context of air pollution has been limited.
The pilot program in Gujarat ran for one and a half years and led to cost-effective emission reductions, measured by the total particulate emissions mass from individual factory smokestacks. The market functioned almost perfectly, with plants obtaining enough permits to cover their remaining emissions 99 percent of the time. By contrast, those plants outside the market met their pollution limit only 66 percent of the time.
The map shows average concentrations of particulate matter (PM 2.5) in the site of the study, Surat, Gujarat, since 2018, overlaid with the locations of treatment and control plants.
“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,” said Pande, the Henry J. Heinz II Professor of Economics in Yale’s Faculty of Arts and Sciences (FAS) and director of the Economic Growth Center. “Even in a setting with lower state capacity, a compliance market can work, and often will outperform the command-and-control approach.”
Similar programs are now expanding across India since the market trial ended, demonstrating the global potential of market-based pollution controls.
Promising results
Previous research — including studies by the paper’s coauthors — has shown that reducing air pollution across India to meet World Health Organization standards could raise average life expectancy by five years. In their new study, Pande, Nicholas Ryan, associate professor of economics in FAS, and their coauthors examine the persistent gap between India’s ambitious pollution limits and the reality in its cities and explore the potential benefits of market-based pollution controls for lower-income countries.
The Gujarat state government required 317 large, coal-burning plants to install pollution monitors. From there, about half the plants were brought into the cap-and-trade market while the rest continued to operate under traditional regulations. The plants in the market were given a cap on the total amount of pollution they could emit. Those whose operations allowed them to meet the cap more easily could then trade their permits with others who could not meet it.
“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,” said Ryan. “This collaboration is setting a path for environmental policy across India.”
Michael Greenstone of the University of Chicago and Anant Sudarshan of the University of Warwick are co-authors of the research.
The research team combined their pollution and cost estimates, including the fixed costs of setting up the market, to conduct a cost-benefit analysis of a potential market expansion. This analysis found that, under a range of assumptions about pollution’s effects on health and life expectancy, the benefits of the market exceed the costs by at least 25 times. This reflects the low costs of abatement in the market and the high mortality costs of air pollution.
The Yale Economic Growth Center has published a full research summary of the paper.
Following the success of the pilot market, the Gujarat government expanded it to include additional plants. It also launched a second market in the city of Ahmedabad — Gujarat’s largest city and a major industrial hub — and may try cap-and-trade markets with other pollutants, and in other industry clusters and cities. The research team is separately working with the government of the state of Maharashtra to develop a statewide market for sulfur dioxide emissions. And India’s central government is now working to form a national carbon market.
The research team is providing strategic advice to the central Indian government and several other state governments about how to use markets to meet their environmental and climate goals.
“Our study showed that it does not need to cost a lot to reduce emissions,” said Greenstone. “India has the potential to be a model for low- and middle-income countries. We hope to provide the toolkit.”
