Why in News?

A recent study published in the Quarterly Journal of Economics highlights the success of the world’s first market for trading particulate emissions, implemented in Surat’s industrial cluster.

The study, covering 162 textile plants over nearly two years, found that those participating in the emissions trading system reduced pollution by 20–30%—significantly more than those under conventional regulation.

Market participants had permits for 99% of their emissions, while non-participating plants violated norms nearly one-third of the time. The findings support emissions trading as an effective pollution control tool, building on global models from Europe and China.

What’s in Today’s Article?

• Emissions Trading Scheme (ETS)
• Criticisms of Emissions Trading Schemes (ETS)
• Overview of the Surat Emissions Trading Scheme (ETS)
• Significance of Emissions Trading Markets

Emissions Trading Scheme (ETS)

• An ETS is a regulatory mechanism aimed at reducing greenhouse gas or particulate emissions by offering financial incentives for industries to comply with pollution norms and invest in cleaner technologies.
• Working of ETS – The Cap-and-Trade Model
  • Cap on Emissions: Regulators set a limit (cap) on the total allowable emissions.
  • Permits Allocation: Industries receive permits representing the right to emit a specific amount of pollutants (e.g., 1 kg of particulate matter or 1 ton of CO₂).
  • Trading System: Plants that reduce emissions can sell their unused permits to others, creating a financial incentive for cleaner operations.
• Benefits for Industries
  • Flexibility: Industries with fewer resources can buy permits while gradually transitioning to cleaner tech.
  • Revenue Opportunity: Efficient plants can earn by selling surplus permits.
• Price Controls and Penalties
  • Price Stability: Regulators set a minimum (floor) and maximum (ceiling) price for permits to keep the market attractive and stable.
  • Enforcement: Industries exceeding caps face penalties or must surrender permits.
• Long-Term Impact
  • As the ETS matures, regulators reduce the total number of permits, pushing industries toward adopting cost-effective, cleaner technologies.

Criticisms of Emissions Trading Schemes (ETS)

• Over-Allocation of Permits
  • In several cases, regulators issued too many permits, leading to low permit prices.
  • This reduced the incentive for industries to invest in cleaner technologies.
  • Example: The Le Monde investigation (2023) found surplus permits in the European ETS, undermining its environmental goals.
• Weak Regulatory Oversight
  • Lack of strict monitoring and transparency has hampered market effectiveness.
  • Actual environmental impacts have been difficult to assess due to insufficient oversight.
• Industry Lobbying and Free Permits
  • In the U.S., fossil fuel companies have lobbied to delay cap tightening and secure free permits.
  • This turned ETS into a “pay-to-pollute” system rather than an emissions-reduction mechanism.
• Design Flaws in China’s ETS
  • China’s carbon market uses emissions intensity (per unit of output), not absolute caps.
  • This approach doesn’t guarantee total emissions reduction, especially as production increases.
• Environmental Injustice
  • A 2018 PLOS Medicine study on California’s ETS found:
    • Regulated plants were mostly located in disadvantaged communities.
    • Emissions actually increased in these areas between 2011 and 2015, raising equity concerns.

Overview of the Surat Emissions Trading Scheme (ETS)

• Launched in 2019, Surat-ETS is the world’s first market-based pilot to control particulate matter pollution.
  • It is also India’s first for any pollutant.
• Targeted 342 highly polluting industries, primarily using coal, lignite, and diesel.
• Developed by the Gujarat Pollution Control Board (GPCB) with researchers from J-PAL, EPIC, and Yale University.
• Impact of the Surat ETS
  • The scheme significantly improved compliance and emission control.
  • Provided a cost-effective, transparent, and flexible approach to reducing pollution in an industrial cluster.

Significance of Emissions Trading Markets

• Limitations of the Traditional Command-and-Control System
  • Pollution regulation in India follows a top-down approach enforced by the Environment Ministry, CPCB, and SPCBs.
  • Non-compliance results in fines, shutdowns, or bureaucratic delays.
  • Uniform regulations apply the same standards to all industries, regardless of their size or resources.
  • This favors larger plants that can bear the costs and influence regulatory decisions.
• Challenges in Monitoring and Enforcement
  • With limited manpower and resources, regulators struggle to monitor thousands of industries effectively.
  • High enforcement costs make the system inefficient and reactive, rather than preventive.
• How Emissions Trading Markets Help
  • ETS introduces flexibility by allowing industries to trade emissions permits based on their actual performance.
  • Offers financial incentives for pollution reduction instead of relying solely on penalties.
  • Supports a customized compliance path, helping resource-constrained industries gradually adopt cleaner technology.
  • Shifts focus from enforcement to market-driven solutions, improving efficiency and accountability.