The world's first cap-and-trade market specifically targeting particulate pollution has been evaluated in a new study co-authored by University of Chicago scholars, highlighting a successful model that reduces pollution, lowers costs, and enhances regulatory enforcement. This study, published in the May edition of The Quarterly Journal of Economics, focuses on a pollution market in the Indian state of Gujarat that has been operational for over five years.
Michael Greenstone, the Milton Friedman Distinguished Service Professor in Economics at UChicago, remarked, “The market delivered a rare win-win-win by reducing pollution, decreasing abatement costs, and raising government’s success at enforcing the law.” Greenstone notes the interest from other governments seeking to balance economic growth and environmental quality, as his team collaborates with the Gujarat Pollution Control Board and other regions.
The study was a collaborative effort involving Greenstone, Yale University's Rohini Pande and Nicholas Ryan, and Anant Sudarshan from the University of Warwick. It targeted 317 large coal-burning plants in Surat. The plants were required to install pollution monitors, with some participating in the market and others operating under existing regulations. The market participants reduced emissions by 20-30% and benefited from an 11% reduction in abatement costs.
Nicholas Ryan stated, “We have worked with the Gujarat Pollution Control Board for over a decade on testing policy interventions,” highlighting the significant impact of the collaboration on policy across India.
The study found that the market offers a high benefit-to-cost ratio, exceeding costs by at least 25 times. Sudarshan emphasized, “Under the market, both the efficiency of the trading platform and the higher level of compliance allowed regulators to reach their environmental goals, while lowering abatement costs for plants.”
Due to its success, the Gujarat government has expanded the market to include more plants and launched another market in Ahmedabad, with plans for further expansion. The research team is also developing a sulfur dioxide emissions market in another Indian state and advising other governments on market-based environmental solutions.
Pande reflects on the project’s implications, stating, “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 that even in a setting with lower state capacity, a compliance market can work.”
The work is affiliated with the Energy Policy Institute at the University of Chicago’s India program (EPIC-India), J-PAL South Asia, and Yale University's Economic Growth Center. The initiative has been supported financially by J-PAL’s King Climate Action Initiative, J-PAL South Asia's Solutions and Advancements through Research for Water and Air, and Alliance for Scaling Policy Impact through Research and Evidence.