World's first air pollution trading scheme yields results

8/5/2025 6:09

Using a

carbon market-like tool to control air pollution can help

developing countries such as India where the standard approach

of limiting the emissions with policy making is falling short, a

new study has found.



Air pollution is one of the most pressing health issues in

India, where the country's 1.4 billion people breathe air

exceeding the World Health Organization's guidelines for

particulate matter (PM).



Those are particles finer than human hair that can cause

severe health issues such as respiratory infections and lung

cancer.



This pollution costs the average Indian resident 3.5 years

of life expectancy.



Industry is one of the major sources of air pollution in the

country, and policymakers have struggled to deal with it by

taking the standard approach of creating and enforcing laws

around emission limits.



In fact, national PM 2.5 -- particulate matter 30 times

finer than human hair -- concentrations in India increased by

11.6% over the last two decades.



To find an alternative, economists from the University of

Chicago and Yale University in the United States and the

University of Warwick in England collaborated with the Gujarat

Pollution Control Board in West India to pilot a one-of-its-kind

emission trading scheme (ETS) to control air pollution.



The pilot has run since 2019, and results published in the

May issue of The Quarterly Journal of Economics show that the

ETS reduced emissions by 20% to 30% in coal-burning plants that

participated with nearly 100% legal compliance compared with

those using a standard policy approach.



The ETS pilot delivered "a rare win-win-win" by reducing

pollution, decreasing abatement costs and raising government's

success at enforcing the air pollution control law, said Michael

Greenstone, Milton Friedman Distinguished Service Professor in

Economics at the University of Chicago, one of the architects of

the pilot.



"And it did all this in a setting where there was great

scepticism that pollution markets could work," he said.



However, such market tools should only be used to control

air pollution in industries where a change in fuel like coal to

gas or a change in technology to better filtration systems, for

instance, fails to cut pollution, said independent experts.



The ETS should not become a version of the "polluter pays"

principle in which industries emit pollution as usual and simply

pay small fines, cautioned Swagata Dey, an expert on air

pollution control policies with the Center for Study of Science,

Technology and Policy (CSTEP), an Indian think tank.



"Rather, such schemes should be used only for industries

wherein process optimization and change in fuel usage are

difficult to achieve in the short term," she said.



THE PILOT



Touted as the world's first market-based scheme to

control air pollution in an industrial cluster, the ETS piloted

with 317 large coal-burning plants, one of major sources of air

pollution in Surat, Gujarat.



About 162 plants were brought into the market, while the

remaining plants were kept under the existing standard pollution

control regulations and spot-checked by the pollution control

board to ensure they met the emission limit.



The plants in the market were brought into a cap-and-trade

system in which a limit is set on the total allowed PM emissions

and is lowered periodically.



Plants receive permits to emit a certain amount of

pollution, and a plant that can easily reduce its pollution with

a technology or fuel change can then trade these permits with

the ones that find it harder to cut pollution.



Plants under the Surat ETS not only cut their overall

pollution, but they held enough permits to cover their legal

compliance 99% of the time, while the plants outside of the ETS

met their pollution limit at most 66% of the time.



And it cost plants under the ETS 11% less to cut emissions

compared with the plants under the command-and-control

regulations, the study said.







CHALLENGES



The Surat ETS is partly based on one of the largest such

programs in history, the U.S. sulfur dioxide emissions trading

scheme -- to deal with acid rain -- that slashed pollution by

40% between 1980 and 2003.



Based in part on the U.S. example, successful trading

markets have been adopted for a variety of pollutants in Canada

and Europe.



Yet low-income countries have so far not followed these

examples.



That is due to countries lacking monitoring and regulatory

capacity, said Pallavi Pant, an air quality scientist and head

of Global Initiatives at the Health Effects Institute, a

U.S.-based non-profit.



"The relevant departments or ministries [in developing

countries] may often lack financial and technical capacity, or

even the personnel to effectively implement solutions," Pant

said.



The Surat ETS pilot offers an interesting model that can

help generate better data and tracking mechanisms for particular

pollution sources, Pant said.



However, it remains to be seen how easily and quickly such a

system can be scaled up, especially considering the capacity

gaps at state pollution control boards in India and the lack of

data and technology, she said.