Context:

India’s first cap-and-trade system for particulate matter emissions in Surat, Gujarat, has shown promising results. According to a recent study published in The Quarterly Journal of Economics, the Emissions Trading Scheme (ETS) in Surat led to a 20–30% reduction in pollution and cut compliance costs by 11%. This has sparked discussions about expanding this market-based environmental policy model to other industrial regions in India.

What is Cap-and-Trade?

• Cap-and-trade is an innovative environmental policy tool used to control pollution by providing economic incentives. The government sets a cap (limit) on the total allowable emissions from industries and distributes permits accordingly. Companies emitting less than their quota can trade (sell) their unused permits to others.
• This model encourages firms to reduce pollution cost-effectively, invest in clean technology, and monetize their environmental performance.

How It Works:

1. Regulatory Cap Setting: A total emissions ceiling is determined based on air quality goals.
2. Permit Allocation:

• Permits may be freely allocated based on historical emissions (grandfathering).
• Some permits are auctioned, letting market forces set prices.

      3. Trading Between Firms:

• Firms with lower abatement costs reduce emissions and sell permits.
• Firms with higher costs buy permits instead of investing in expensive upgrades.

      4. Penalties for Non-Compliance:

• Strict penalties ensure industries either comply or pay more through fines.

Surat ETS: India’s First Pilot

The Surat ETS, implemented in 2019, covered 317 industries and required Continuous Emissions Monitoring Systems (CEMS). Weekly auctions ensured transparency and prevented hoarding. The cap was revised from 280 tonnes/month to 170 tonnes/month after reviewing pilot data.

Achievements:

• 20–30% pollution reduction
• 11% compliance cost savings
• Robust real-time data via CEMS
• Transparent weekly permit auctions

Challenges:

• Monitoring Issues: High reliance on accurate emissions data; CEMS setup is costly.
• Market Manipulation: Potential for collusion; mitigated via transparent auctions.
• Sectoral Disparities: Varying abatement costs among industries.
• Policy Instability: Frequent policy changes can hurt industrial confidence.

Way Forward:

• Expansion to Other Cities: Proposals for Delhi, Ahmedabad, and others to adopt ETS.
• Wider Coverage: Include other pollutants like SO₂ and NOx.
• Dynamic Caps: Adjust emission limits based on seasons and production.
• Invest in Monitoring: Scale CEMS adoption for accurate and tamper-proof monitoring.
• Stakeholder Engagement: Involve industries, regulators, and citizens in the process.

Conclusion:

• The Surat Cap-and-Trade model has successfully demonstrated how market-based mechanisms can complement regulatory approaches for pollution control. If scaled up and refined, ETS can become a vital pillar of India’s air quality improvement strategy — balancing industrial growth with environmental sustainability.
• This policy also aligns with India’s broader commitments toward climate change mitigation and can be a model for other developing economies.