Surat Emissions Trading Scheme

Context: Experimental Evidence from the World's first market for trading in particulate matter emissions established in Surat, Gujarat has found that it has reduced pollution by up to 30% among participating industries, and also lowered the abatement costs.

Emissions Trading Scheme

• Emissions trading scheme (ETS) or market is a regulatory tool to cut greenhouse gas emissions, while providing industries with financial incentives to comply with norms and to get them to invest in cleaner technology.
• It is commonly referred to as ‘cap-and-trade’ to emission markets.

How does Emissions Trading Scheme work?

• Cap Setting: Under ETS, regulators set a cap or a limit on the total emissions load that can be released into the air. 
• Permit Allocation: Instead of enforcement through fines or show-cause notices, industries are given emissions permits or allowances, which can be traded among them to meet compliance. Each permit allows industries to release a specific quantity of pollution into the air, such as a kilogram of particulate matter pollution or a ton of carbon dioxide. 
• Trading Mechanism: Plants with pollution-reducing technology save their permits and sell them to those who might need them to make up for their compliance gap. This way, plants with fewer resources get time to gradually shift to cleaner technology, while complying with a cap, and others earn through trading. A minimum floor price and maximum ceiling price are usually set to maintain stability and to keep the scheme attractive.
• Compliance Monitoring: Industries that breach emission caps are penalised, usually on a per tonne cost basis. In some instances, they also have to surrender their permits. To ensure that emissions are reduced, regulators tighten emission caps and issue fewer permits as the ETS matures.

Surat Emissions Trading Scheme:  

• Launched in: 2019.
• It is the world's first ETS targeting particulate matter (PM).
• The scheme was designed and developed by the Gujarat Pollution Control Board (GPCB), J-PAL, EPIC-India, and Yale University
• The initiative represents a shift in India’s environmental governance from command-and-control models to market-based instruments.

How does the Surat ETS work ?

• Cap: Initial cap on emissions was 280 tons/month of suspended particulate matter (SPM) which was later revised to 170 tons/month after real-time emission data was analysed through Continuous Emission Monitoring Systems (CEMS).
• Permit: Each permit was equal to 1 kg of particulate matter emissions, and these permits were only valid during one compliance cycle which lasted 4 to 6 weeks. 80% permits are allocated for free, based on historical emissions and plant capacity while 20% permits are auctioned through a uniform price discovery mechanism.
• Auction: A uniform price auction is conducted at the start of each cycle. Buyers and sellers submit bids, and a single clearing price is discovered. Permit prices were limited to between Rs 5 per kg (floor price) and Rs 100 per kg (ceiling price).  
• Compliance: At the end of a compliance period, industries with sufficient permits to meet their emissions targets are said to comply. Plants posted a bond known as an Environmental Damage Compensation Deposit before the market began. Plants with insufficient permits were fined twice the ceiling price for every unit of emissions above their permits, the study stated. This fine is deducted from the bond.

Significance: It resulted in a 20–30% reduction in particulate pollution, demonstrating a cost-effective, flexible, and scalable alternative to conventional regulation.

Limitations: 

However, this approach suffers from three critical limitations : 

• Resource Constraints: With thousands of polluting units and limited regulatory manpower, real-time monitoring and enforcement are often ineffective and delayed.
• Uniform Compliance Burden: All industries regardless of their size, technological capacity, or financial strength are subject to the same norms, leading to disproportionate challenges for smaller or less-resourced units.
• Regulatory Rigidity: There is little scope for flexibility or innovation. Compliance is rule-based rather than outcome-oriented, and often imposes high transaction costs.

ETS attempt to address these monitoring and enforcement gaps by bringing in more flexibility, and offering incentives for compliance.