"The economic basis for emissions trading is to ensure that the costs of reducing pollution are minimized"

In conversation with Sustainability Outlook, Dr. Anant Sudarshan, South Asia Director of Energy Policy Institute of Chicago (EPIC), gives us insights on Surat’s pilot cap-and-trade program. EPIC has played a central role in designing and implementing the pilot.

India has had a number of top down policies to reduce air pollution which have had lukewarm success. What gaps does cap-and-trade program address that those earlier initiatives did not?

Top-down, command-and-control policies have characterized India’s pollution control efforts, with very limited success. They have also frequently been expensive and inflexible increasing the regulatory burden on industry without corresponding environmental results.

A cap-and-trade scheme is designed to address these concerns. We believe it holds a lot of promise for several reasons. First, the economic basis for emissions trading is to ensure that the costs of reducing pollution are minimized. This is achieved by creating a framework where plants who can reduce pollution at low costs are encouraged to do so through income from the sale of permits. On the other hand plants for whom it is very expensive to abate can buy permits. At the end of every compliance period (say 1 month or 3 months), plants must have enough permits to cover their emissions. When this does not occur, significant environmental damage compensation charges may be immediately applicable. Thus the first benefit is that for industry this regulation is cheaper and more flexible, and easier to follow.

That said, this flexibility to trade is constrained by the total number of permits issued. This quantity is fixed. From a health and environmental point of view, what matters is the total emissions put into the air, and this total is determined by the available permits. The second benefit is that the environmental goal is clear and is directly linked to the quantity that ultimately determines health costs.

Unlike in status quo regulation plant emissions and permit holdings are completely transparent and observed in real time. This transparency is crucial - no matter what rules we write down on paper, top-down regulation that relies on opaque monitoring is very likely to fail. The cap-and-trade scheme by virtue of its design, and through the advanced monitoring technology that is used, inherently promotes both transparency and data quality. This is the third advantage. 

There are various versions of ETS programs in place around the world, some of which are successful and others not. In light of that, how vital is it to design the program keeping in mind the ground realities of industries in Surat? 

It is critical to do so. The scheme has been designed over several years and unlike any other pilot of its kind, is based on repeated and rigorous industry surveys and high quality data from continuous emissions monitoring. The implementation is being overseen by a high-powered committee headed by the Chairman of the Gujarat Pollution Control Board and containing a mix of regulators, outside experts, and leading universities (Chicago University and Yale University). Industry has played an important role in providing input. 

An important characteristic of the scheme is that it is explicitly designed for high quality evaluation of the benefits of cap-and-trade. That is to say, its success will be influenced by locally motivated design, but the outcomes of the pilot will also be rigorously and independently measured. 

How was the overall cap at 150µ/m3 determined? Does the program plan on implementing an annual target that industries will have to comply to?

At this stage the cap has been set based on the total amount of pollution that would be emitted in a given period of time (to start with, one month) if plants all emitted at 150 ug/m3. This number has been chosen because it is the existing concentration standard imposed by the Central Pollution Control Board. Unfortunately this standard is not universally followed and thus the resulting cap - if complied with - will represent a significant reduction in pollution. Going forward the cap may be further tightened or revised depending on GPCB decisions and the pilot experience.

The cap represents a target for total emissions over a fixed period of time. Currently this period is a month, so that compliance is checked at a monthly frequency. This may be modified as industries gain experience and the GPCB gather more information on implementation.

As the cap-and-trade program evolves will features like banking of permits, linkage with other jurisdictions and other pollutants (other than PM) be included?

The primary goal is to implement the current pilot successfully and demonstrate the benefits (and learnings) through a transparent evaluation process. These questions are all legitimate and are being considered but their implementation will also be informed by what we learn through the pilot.

Anant Sudarshan is the Executive Director (South Asia) for the Energy Policy Institute at the University of Chicago. He is also a Senior Research Associate at the Department of Economics, University of Chicago. His present work includes collaboration with India’s Ministry for Environment and Forests to design and evaluate a pilot emissions trading program to regulate industrial air pollution.