Compare pollution levels 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
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 five years.
India, like many low-income countries, relies on command-and-control environmental regulations. This means the state determines a universal limit for pollution concentration, and regulators sporadically visit plants to measure pollution and impose sanctions on violators.
A powerful alternative to command-and-control is to regulate pollution with markets. In this study, researchers 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.
The trading system appeared to function well. After each trading period, plants almost always held enough permits to cover their emissions. By contrast, control plants only complied with standards set by command-and-control about two thirds of the time.
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.
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.
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.
Following this study, the Gujarat Pollution Control Board expanded the market to include those plants originally left out. It also launched a second market in the city of Ahmedabad–Gujarat’s largest city and a major industrial hub–and is exploring expanding the market to additional industry clusters and pollutants.
