A Market Friendly Emissions Scheme (MFES) as a regulatory instrument can transform the trade-off between environmental quality and growth for the betterment of the Indian environment. India is facing challenges with pollution on both local and global scales. It must develop new regulatory instruments to meet these challenges, just as the world must agree on a new framework to address global climate change.
Introducing a MFES , will be a leap forward from both a regulatory and economic perspective. From the perspective of polluting firms, it can reduce compliance costs and make the regulatory environment more predictable, raising investment and growth. In the longer run, the reduced costs of compliance can also make it easier to introduce new regulations that increase environmental quality. The scheme also has direct health benefits (Greenstone et al, 2011) as it reduces Particulate matter emissions in heavily populated areas.
Scope and Location of the pilot
Gujarat, Maharashtra and Tamil Nadu are the leading industrial states of India. Growth in industry has contributed to growth in emissions of various pollutants in air and water, including particulate matter. Throughout India, urban areas have high levels of particulate matter that are known to be harmful for health. Under the new, stricter National Ambient Air Quality Standards, many industrial regions must significantly cut particulate emissions to move towards the more stringent, uniform standards now in place.
Achieving such cuts will be easier and less costly under an emissions trading scheme than with traditional, command-and-control regulation. Even under perfect compliance, the present system of concentration norms does not impose any limit on the total emissions in industrial areas. To limit emissions, environmental regulators have had to impose blunt restrictions on new investment and industrial growth. An emissions trading system that caps total emissions is a more flexible, and therefore less costly, way to restrict total emissions from industry.
The pilot emissions trading scheme will cover 1,000 industries in close proximity to the largest metro areas in Gujarat, Maharashtra and Tamil Nadu. The industries will be selected by geographic area, sector and parameters like boiler capacity and fuel type that are indicative of capacity for pollution emissions. State Pollution Control Boards will determine the precise criteria for eligibility and mandate and enforce the emissions trading scheme as the only form of regulation for particulate matter for all industries deemed eligible. The pilot scope will include a significant fraction of large particulate emitters in each metro area covered, which are a small share of all industries in each state.
Objectives
Piloting an ETS will enable the Ministry of Environment & Forests to cap total pollution emissions in select areas and increase regulatory transparency and accountability. The pilot emissions trading scheme will be rolled out as a randomized-controlled trial to enable rigorous evaluation. Such an evaluation will provide gold-standard evidence on the environmental and economic benefits of the scheme. Pollution emissions will be measured in real time using continuous emissions monitoring, and economic adjustments will be measured with regular unit surveys. Backed by this evidence, the pilot scheme will provide a model for expansion within India and a framework for implementing global environmental policy.
Key environmental laws and regulations
The regulatory framework and technical capacity to implement emissions trading and achieve these ambitious goals already exist. The Ministry is empowered by the Environment (Protection) Act, 1986 and accompanying rules to limit net adverse environmental impact from industrial activity and is ready to apply this power to support an emissions trading scheme. The State Pollution Control Boards have the power to implement such a scheme on the ground by modifying the terms of environmental Consent. A variety of public and private organizations in India will be brought together to improve the standard of emissions monitoring and implement emissions trading.
In 1997 the MoEF created a task force to evaluate Market Based Instruments for industrial pollution abatement. Their report that summarises meetings with industry representatives, universities and government agencies across the country is available here: Report of the Task Force 
Organizational framework
The project will be a collaboration between several governmental and non-governmental parties. The Ministry of Environment & Forests will introduce the required regulatory framework for an emissions trading scheme. The Central Pollution Control Board will set technical standards for continuous monitoring and review bids. The State Pollution Control Boards will revise industry Consents, implement the adoption of continuous monitoring and enforce the requirement of holding permits to emit. The evaluation of this scheme will be led by two of J-PAL’s Board Members, Professor Michael Greenstone, MIT and Professor Rohini Pande, Harvard University as well as Nicholas Ryan, MIT and Anant Sudarshan, Harvard Kennedy School and J-PAL South Asia. The evaluation is being undertaken by J-PAL South Asia at the Institute for Financial Management and Research (IFMR). J-PAL South Asia will monitor the progress of the scheme and evaluate its effect on pollution emissions and industry costs.
