Gujarat to launch India’s first carbon trading market among large polluters
This market’s purpose is to reduce carbon emissions and to do so inexpensively as there is an urgent need for rapid economic growth.
New Delhi: The Energy Policy Institute at the University of Chicago Trust in India (EPIC India) and the Abdul Latif Jameel Poverty Action Lab (J-PAL) signed a Strategic Partnership agreement with the Gujarat government to set up India’s First Carbon Trading Market on Monday. The market will allow industries and power plants in Gujarat to trade CO2 permits and an overall cap will provide the government a flexible tool to meet climate goals. The market will be the first of its kind among today’s emerging economies, outside of China, said Michael Greenstone, Director of the Energy Policy Institute at Chicago (EPIC) and Milton Friedman Distinguished Service Professor. Greenstone believes a cap and trade carbon market can significantly reduce CO2 emissions and facilitate faster economic growth, than is possible from other approaches. Excerpts from an interview:
Q. How will the cap and trade scheme work in Gujarat? Can companies from outside interested in trading also participate?
A. The Government today announced that it will launch a CO2 cap-and-trade market. It builds on Gujarat’s success in launching India’s first emissions market, which was for particulate air pollution, that the CM recently announced will be scaled up throughout Gujarat. The success of the Gujarat experience at providing a win-win in that it reduces pollution while minimizing the costs on industry mirrors the experiences of the US, EU, and recently China with pollution markets. For now, the proposal is to identify large emitters (i.e large energy users) in the power and manufacturing sector in Gujarat and setting a maximum level of CO2 emissions (i.e., a cap). Gujarat would then be issuing permits equal to this target and allow firms to trade. This allows industries that can reduce their emissions inexpensively to receive payments from those that find it more costly to do so. The initial proposal is that this market be restricted to existing participants and new entrants in these sectors, although there is flexibility to allow others to participate over time. Importantly, the cap is likely to both facilitate increases in electricity consumption and, at the same time, be consistent with India’s Paris commitment to reduce the economy’s carbon intensity.
Q. What are your hopes from this cap-and-trade scheme? How will it help reduce emissions in Gujarat?
A. Dating back to Modi’s time as CM, Gujarat has been a leader in adopting innovations for environmental regulations, often setting the standard for what is to follow in India and the subsequent South Asian region. A notable example is the reform of their environmental audit program after rigorous evaluation that began more than a decade ago. More recently, my colleagues and I found that their ETS pilot for particulate in Surat reduced emissions by 24% with little cost for industry. Based on experiences from Surat and other places around the world, my expectation is that this cap-and-trade market for carbon will significantly reduce CO2 emissions and facilitate faster economic growth, than is possible from other approaches to meeting India’s COP26 commitments. It is designed to be in conjunction with the most significant industrial players in one of the foremost industrial states of the country and in this respect can serve as a model for the rest of India and other parts of the world. Of course, it is critical that these efforts be rigorously evaluated and indeed this is Gujarat’s plan-- my colleagues and I are deeply humbled by the opportunity to help with these efforts.
Q. Why was Gujarat selected for this pilot scheme?
A. I think the better question is why did Gujarat choose to do the pilot? The short answer is that this is straight out of the Gujarat Government’s playbook of innovation on environmental regulation and other areas. Gujarat has a history of being a leader in environmental policy in the country. They set-up the first dedicated Climate Change Dept. in the country in 2009. The University of Chicago and J-PAL South Asia have a long-standing relationship with several related departments in the Gujarat Government and several examples of working together for more than a decade. Before this, we partnered and researched how to make Gujarat’s environmental audit procedure more transparent and efficient. The Government took the results and reformed policy. For the past several years, we have been successfully providing advice to the Gujarat Pollution Control Board on the world’s first Emissions Trading Market for Particulate matter with 300 industries in Surat, which has been enormously successful. To borrow from my home country, many of the most important US environmental policies were first piloted in the state of California and then taken up nationally. Gujarat is fast becoming the California of Indian environmental policy by serving as the laboratory for the most important policy ideas. But even more broadly, Gujarat is an absolute global leader in its commitment to testing environmental policy reforms in the most rigorous ways possible before scaling them up.
Q. How can the environmental integrity of the scheme be ensured so that it is not used by companies for cheap carbon credits?
A. This market’s purpose is to reduce carbon emissions and to do so inexpensively as there is an urgent need for rapid economic growth. The key is to align this with India’s broader commitments and this is the aim. Of course, it is vital that the reductions in carbon emissions are real and a key feature of our partnership with the Government is to help ensure that this is the case in practice.
Q. What are features of the California carbon market that this scheme will adopt?
A. A few key features will be similar by design to the California, Quebec, Regional Greenhouse Gas Initiative of US, and EU cap-and-trade markets for CO2. The details remain to be determined but it will undoubtedly share core cap-and-trade scheme structures like a set cap, safeguards against price spikes, and a mix of allocations and auctions of permits to help industries make the transition. While still in the design phase, there is an aim to cover the same greenhouse gas pollutants covered by the California market currently.
Q. How do you see carbon trading globally help reduce emissions? What are the challenges in developing a global carbon market?
A. I landed in Delhi on Saturday night and the very high temperatures reminded me immediately of the urgency that we face in finding solutions to the climate problem. The great challenge is to find ways to do so that also recognize the urgent need for increased energy consumption and rapid economic growth in India (and elsewhere). Carbon markets are among the very most promising approaches. For now, the challenge is to get them working in as many places as possible. Linking regional carbon markets globally has the potential to supercharge their benefits, but walking comes before running and will ultimately be up to each government.
Q. Environmentalists have raised a number of concerns about greenwashing. There was also this issue of cheap credits during Clean Development Mechanism (CDM). How do you think that can be prevented?
A. Greenwashing can be avoided with mandatory cap-and-trade markets, like the Gujarat one, by not allowing “carbon offsets” to substitute for emissions reductions among participants. I’m unaware of a plan to allow offsets in the Gujarat market.