[[{“value”:”India has some of the worst air pollution in the world. India regulates pollution but it uses a command and control approach with criminal penalties, a system in tension with enforcement given low-state capacity. The result has been widespread corruption, inefficiency, and poor enforcement of pollution controls. In a very important paper, Greenstone, Pande, Ryan
The post Reducing Pollution in India with a Cap and Trade Market appeared first on Marginal REVOLUTION.”}]]
India has some of the worst air pollution in the world. India regulates pollution but it uses a command and control approach with criminal penalties, a system in tension with enforcement given low-state capacity. The result has been widespread corruption, inefficiency, and poor enforcement of pollution controls. In a very important paper, Greenstone, Pande, Ryan and Sudarshan report on an experiment with a market for particulate matter in Surat, India. In fact, this is the first particulate-matter market anywhere in the world.
The experiment created two sets of firms, the treatment set were required to install continuous emission monitoring systems (CEMS) which measured the output of particulate matter. The control set of firms remained under the command and control system which required the installation of various pollution control devices and spot checks. Firms were randomly assigned to treatment or control. Pollution at treatment firms was capped and permits were issued for 80% of the cap so firms could pollute at 80% of the cap for free. Permits for the remaining 20% of the cap were sold at auction and trading was allowed. Treatment plants which polluted more than their permits allowed paid substantial fines, about double the cost they would have paid to buy the necessary permits.
The one and half year experiment revealed a great deal of importance. First, the CEMS systems and the switch to financial penalties reduced the cost of enforcement so that essentially all firms quickly came into compliance. Second, trading was vigorous, which indicated that firms have heterogeneous and changing costs. Moreover, by allowing for a more information rich market the costs of achieving a given level of pollution fell. Pollution costs were 11% lower in treatment firms compared to control firms at the same level of pollution. The value of trade in lowering abatement costs illustrates Hayek’s idea that one of the virtues of markets is that they make use of information of particular circumstances of time and place. In fact, since the costs of achieving a given level of pollution were low, the authorities decreased the cap so that the treatment firms reduced their pollution levels significantly relative to the control firms.
The CEMS systems were a fixed cost but because abatement costs decreased, the overall expense was reasonable. The need for monitoring systems and procedures highlights Coase’s insight that property rights in externalities must be designed and enforced, the visible and invisible hand work best together.
Using estimates on a statistical life-year in India of $9,500 (about 1/10th to 1/30 the level typically used in the US) the authors find that the benefits of substantial pollution reduction exceed the costs by a factor of 25:1 or higher.
I have emphasized (and video here) that there are significant productivity gains to reducing air pollution which would make these benefit to cost ratios even higher. Less pollution can mean more health and more wealth.
The authors are especially to be congratulated because this paper began in 2010 with discussions with the Gujurat Pollution Control Board. It took over a decade to implement the experiment with the authors helping to design not just the market but also the technical standards for CEMS monitoring. Amazing. The success of the system is already leading to expansion across India. Bravo!
Hat tip: Paul Novosad.
The post Reducing Pollution in India with a Cap and Trade Market appeared first on Marginal REVOLUTION.
Data Source, Economics, Uncategorized, india, pollution
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