Emission Trading | Will ETS scheme help India fight air pollution?

Millions of people in India inhale severely polluted air, full of PM_2.5 particles along with toxic gases like carbon monoxide, sulphur dioxide, and nitrogen dioxide. According to IQ Air, India was the fifth most polluted country in the world in 2021, with PM_2.5 levels that were 11 times higher than the WHO’s guideline value. The World Air Quality Report states that 63 cities in India were among the top 100 most polluted places in the world, with 10 Indian cities ranking in the top 15. Data from the Energy Policy Institute at the University of Chicago suggested that people living in Delhi could add up to 10 years to their lives if  PM_2.5 levels are brought down to the mandated WHO guideline levels.

Moreover, a study done by the Lancet Commission on Pollution and Health revealed that air pollution was responsible for a whopping 16.7 lakh deaths in 2019—almost 17.8 percent of all deaths in India that year.

All statistics indicate that India’s PM_2.5 levels are a major concern, in terms of the impact it has on our economy, workforce, and the standard of life of its citizens. Addressing this issue requires a critical analysis of the causes behind this problem, i.e., the major contributors to air pollution, especially PM_2.5 particles, in India. Researchers from the Washington University in St Louis conducted a study to record PM_2.5 exposure and the sectoral contributions to PM_2.5 levels in different countries, including India. Their analysis revealed that all residential and commercial cooking, lighting, and heating was the major source of PM_2.5 matter, accounting for 28 percent of PM_2.5 levels in India in 2017. Industrial activity was the second largest contributor accounting for 15 percent of PM_2.5 matter in India’s atmosphere.

Moreover, industrial processes are also leading contributors of harmful nitrogen and sulphur compounds in the air, which have severe short- and long-term consequences. Consequently, targeted intervention to reduce the emission of pollutants by the industrial sector could go a long way in reducing air pollution in India.

The Indian government has taken steps in the right direction recently. The Lok Sabha tabled the Energy Conservation (Amendment) Bill, 2022 last month to amend the Energy Conservation Act (ECA), 2001 and this bill was passed on August 8, 2022. Intended to bring a renewed focus on sustainability and support India’s transition to a net-zero economy by 2070, the Act has several provisions to effectively decarbonise India.

Most notably, the Act empowers the Government of India (GoI) to establish a carbon credit trading scheme in India, and thus, establish a legal framework to create India’s first-ever compliance carbon trading market. This decision will likely have a huge impact on India’s industrial sector and could lead to reductions in industrial emissions, increased investments in clean energy, and increased energy efficiency among private sector firms.

Emission Markets Explained

At their core, emission trading systems (ETS) put a price on emissions of harmful gases such as CO2, N2O, etc. to internalise the negative external effect they have on people. In other words, firms which release these gases during their industrial process are held accountable and are taxed for these emissions, to account for the harmful impact they have on people’s health. These markets are meant to incentivise firms to innovate and transition to cleaner, ecofriendly industrial processes which lead to cleaner air for the general populace, whilst generating significant revenue for the government—a win-win situation for all.

The most common form of emission market in practice is cap-and-trade models, wherein the government sets an overall ‘cap’ on the total emissions from a specific industrial sector. The government then allocates or auctions permits to regulated firms, giving the firms the right to emit a specified amount of pollutants. These permits can be traded freely on environmental exchanges, and the market forces of supply and demand fix a specific price for these permits. If firms exceed their allowance of emissions, they are severely fined. Over time, the government lowers the overall cap so that total emissions will fall.

Thus, emission markets utilise a carrot-and-stick-approach to catalyse the transition to the green economy:

i) By forcing firms to purchase these permits to release emissions, the government increases the cost of production for these firms.

ii) Accordingly, firms which can transition to cleaner production processes can lower costs and secure a competitive advantage.

Moreover, firms that can make this transition quicker are able to secure higher profits, as they can sell their unused permits on the exchange and earn additional revenue.

ETS initiatives have been implemented around the world for a long time, with the EU-ETS scheme being the first international carbon market established in 2005. Currently, there are 32 ETS initiatives in place around the world, covering 38 national and 31 subnational jurisdictions. Notably, China, the world’s largest emitter of greenhouse gases, implemented its own mandatory ETS initiative in 2021 and is currently home to the world’s largest carbon market.

ETS and Air Pollution

While the main focus of ETS initiatives is to reduce greenhouse gas emissions and tackle global warming, they can also play a key role in reducing air pollution through direct and indirect channels. Some of the key ways in which ETS schemes can lead to cleaner air include:

ETS pilots aimed at reducing particulate have already been piloted in India and have yielded promising results. In Gujarat, the Gujarat Pollution Control Board (GPCB) along with researchers from the Abdul Latif Jameel Poverty Action Lab (JPAL) and The Energy Institute at the University of Chicago launched the world’s first ETS scheme for particulate matter (PM₁₀) in 2019. The experiment has resulted in a 24-percent reduction in PM₁₀ pollution, with over 90 percent of the regulated plants providing data on pollution. With the success of the pilot in Gujarat, pilots are also being organised in other regions, including Punjab.

ETS initiatives have proven to be effective in reducing carbon emissions—the EU-ETS scheme has decreased carbon emissions by 43 percent since 2005. However, the co-benefits of these schemes, especially in terms of reducing the toxic gas emissions and stimulating eco-friendly innovation, are often overlooked. Moreover, using a similar framework for particulate matter, governments can tackle air pollution via a new, highly effective mechanism.

It is noteworthy to say that ETS initiatives on their own cannot solve India’s air pollution problem. While a useful tool to tackle industrial emissions, these schemes do not address pollution from other sources, such as crop burning, household fuel consumption, and the transport sector. The government needs to scale up funding for existing air pollution reduction programmes, such as the National Clean Air Programme (NCAP), and launch more targeted interventions to tackle the different facets of this issue effectively. However, by paving the way for the creation of carbon markets in India, and with the launch of pilot ETS schemes for particulate matter in different states, India seems to be on the right path to address its air pollution problem.

(This article first appeared in the ORF.)

Suryaansh Jain, writes for ORF. Views are personal, and do not represent the stand of this publication.