THE UNIVERSITY OF CHICAGO
BFI
Becker Friedman Institute
Unlocking the Power of Markets as a New Tool for Regulating Pollution
How the world’s first particulate pollution market in India reduced pollution and increased industry profits.

Interactive India Pollution Monitor

Compare PM2.5 pollution levels—measured in kilograms per month—under command-and-control versus a market-based approach. Click through each period to see how emissions and reductions evolved over time. The white horizontal lines within the meters indicate averages.

TRADING PERIODS


Command & Control
1273
PM2.5 RELEASED/MONTH
Market
963
PM2.5 RELEASED/MONTH
24%
Market Pollution Reduction
Background

In India, nearly the entire population of 1.4 billion people breathes air more polluted than World Health Organization standards for particulate matter, often by a factor of 10 or more. Reducing air pollution throughout India to the World Health Organization standard would, by some estimates, increase Indian life expectancy by an average of 3.5 years.

Command & Control Model

India, like many countries in the Global South, relies on command-and-control environmental regulations. This means the state determines a universal limit for pollution emissions, and the Gujarat Pollution Control Board sporadically visits plants to measure pollution and impose sanctions on violators. 

Pollution Market Model

A powerful alternative to command-and-control is to regulate pollution with markets. In this study, researchers affiliated with the Energy Policy Institute at UChicago and J-PAL collaborated with regulators in the Indian state of Gujarat to design and evaluate the world’s first particulate-matter emissions market among industrial plants in the city of Surat. 

They randomly assigned 162 plants to participate in the market, and 156 to remain under command-and-control, and measured how the new pollution market affected plant compliance, pollution emissions, and abatement costs.

Finding #1: Improved Compliance

The trading system virtually eliminated non-compliance. Plants in the market held enough permits to cover their emissions 99% of the time. By contrast, plants outside the market following conventional rules didn’t comply about a third of the time.

Finding #2: Reduced Pollution Emissions

The plants in the markets also polluted less.

On average, emissions were 20-30% lower in plants randomized to participate in the new market, compared to those that remained under command-and-control.

Finding #3: Increased Profits

Finally, the authors find that the markets not only reduced pollution, but also lowered abatement costs by 11%  compared to command-and-control regulations.

Finding #3

Finally, the authors find that the markets not only reduced pollution, but they made it cheaper to do so.

Under traditional command-and-control regulation, all firms are required to reduce pollution to the same level, regardless of their individual costs. 

However, some firms can cut (abate) emissions more efficiently than others. This uniform approach leads to higher overall abatement costs.

Under traditional command-and-control regulation, all firms are required to reduce pollution to the same level, regardless of their individual costs. 

However, some firms can cut (abate) emissions more efficiently than others. This uniform approach leads to higher overall abatement costs.

In a market-based system, firms that can reduce emissions more cheaply can sell their permits-to-pollute to others, allowing the same total emissions reduction at a lower overall cost.

The difference between the two curves is the savings from allocating permits through a market instead of using command-and-control.

At the emissions cap level (vertical line), firms in the market spend 11% less to achieve the same environmental outcome. 

The success of the Gujarat pilot led to the creation of the Emissions Market Accelerator, a partnership between the Energy Policy Institute at the University of Chicago (EPIC) and the Abdul Latif Jameel Poverty Action Lab (J-PAL). The Emissions Market Accelerator is currently working with government partners in India to set up cap-and-trade markets in three states and is in discussions with other Indian states and international jurisdictions—aiming to bring cleaner air to 1 billion people across the Global South by 2030.

In late 2025, the research team was named as finalists for the Earthshot Prize, a global environmental award, for this work.

DEEPER DIVE

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