An act of commission on emissions

India's growth miracle has improved the lives and prospects of millions of people, but it is taking a toll on the country's environment. High levels of air and water pollution are shortening people's lives and threatening vital ecosystems. What's the best way for India to continue to increase the standard of living of its citizens while preventing further environmental harm?

A promising solution lies in the ministry of environment and forests' recent decision to test-pilot a market-friendly emissions-trading system. This system offers the potential to produce a cleaner environment without unnecessarily penalising the industries that are the vital engine of India's spectacular growth.

India currently relies on a traditional command-and-control approach to reducing pollution. This method dictates that industry install particular pollution-abatement technologies or achieve fixed concentration norms for emissions. There are several fundamental problems with this approach.

First, focusing on emissions concentrations ignores the total impact of emissions on the environment. An area with many industries may be badly polluted even if all are in compliance. An emissions-trading system will focus on total emissions to strictly limit net adverse environment impact, as mandated by the Environment (Protection) Act 1986 and accompanying rules.

Second, traditional regulation imposes unnecessarily heavy costs on firms. The reason is simple. Some firms will find it less expensive to reduce pollution than others. Command-and-control ignores this difference, requiring the same reductions by all industries, even though it would cost society less, on the whole, if the industries that found it cheaper to reduce pollution cut emissions more. Plus, the industries doing the greater cutting would benefit from receiving payments from the industries doing less.

Third, the current system is opaque and does not gain the confidence of regulated industries or the public. Fixed concentration norms bring complaints among industries that the current system is unfair, in not accounting for the scale of emissions. Further, there is a sense that there is an unequal treatment of violation and general unpredictability in the regulatory process. The public can see national ambient air standards tightening without corresponding improvements in air quality and feel that the current system is failing them.

These problems make it difficult to enforce current regulations and to introduce new regulations. This dynamic endangers the health and well-being of Indians.

An emissions-trading system is a proven tool to improve the trade-off between economic growth and environmental quality. Emissions trading can reduce all industries' compliance costs and provide regulators with a less costly and more effective way to limit overall emissions.

It gives an incentive for industries to identify inexpensive ways to reduce pollution and for emissions reductions to be done by the industries that find it least expensive to do so. This has been demonstrated in the famously successful sulphur dioxide and nitrous oxide markets in the US, as well as in other countries. The ministry of environment and forests has announced a pilot scheme for emissions trading for particulate matter in three Indian states.

Particulate air pollution is widely believed to be the most dangerous form of air pollution. Our own research has demonstrated that it leads to increased rates of infant and substantially reduced life expectancies. The pilot scheme will set and enforce caps on total particulate emissions from point sources. Permits under the cap will be allocated to polluting firms either directly or through an auction. These firms will then be able to choose to either reduce their own emissions, or buy permits from firms that can abate more cheaply. Continuous monitoring of emissions and a public market will make this regulatory process transparent. Further, they will allow pollution levels to be controlled effectively, with minimal costs to both regulators and to firms.

The pilot scheme will be rigorously evaluated through a randomised trial. The results of the pilot will then be used to determine the viability and effectiveness of roll-out to other areas and pollutants. Over the longer run, it will help make participating in global carbon markets a more feasible option for India.

The scheme puts India at the forefront of environmental innovation. To the best of our knowledge, India's scheme will be the first emissions-trading programme in any developing country. Remarkably, only a few weeks after India's programme was launched, China announced its own plans to pilot emissions-trading schemes in six provinces in 2012. Most importantly, though, India's move into market-friendly regulation represents an effective and efficient way of facilitating the high rates of growth that are transforming the lives of hundreds of millions of Indians, without unnecessarily harming human health and the environment.

Greenstone is a professor of environmental economics at MIT. Pande is a professor at Harvard's Kennedy School of Government

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