Mains Syllabus: GS II - Government policies and interventions for development in various sectors and issues arising out of their design and implementation; GS III - Conservation, environmental pollution and degradation.

Why in News?

A new study found that Gujarat’s cap and trade system delivered both environmental and economic benefits.

What is Gujarat’s emissions trading scheme (ETS)?

• Gujarat’s ETS – It is the world’s first market for trading in particulate matter emissions, launched in Gujarat’s Surat.
• The programme, operational for over five years, was the first of its kind globally for particulate matter and India’s first pollution trading scheme of any kind.
• Developed by - Gujarat Pollution Control Board (GPCB), in collaboration with the Energy Policy Institute at the University of Chicago.
• Features of the scheme - Under the programme, 318 large coal-using industrial plants were required to install Continuous Emissions Monitoring Systems (CEMS).
• Real time tracking of pollution – It allowed thereal-time tracking of particulate matter emissions, shifting from the earlier system of periodic spot checks.
• Emission cap - GPCB set an overall cap on the total mass of particulates that could be emitted collectively by all plants over a compliance period.

Initially, GPCB capped total particulate emissions at 280 tonnes per month.

• Up to 80 per cent of the total cap was distributed for free, proportional to a plant’s emissions potential and the remaining 20 per cent were auctioned off weekly.
• Permit Trade - The plants could then trade these permits, creating a financial incentive to reduce emissions where it was cheapest to do so.
• Penalties - Any firm that failed to hold sufficient permits to cover its emissions at the end of a compliance period faced penalties based on the size of the shortfall.

What are the benefits of emission trading scheme?

• Environmental impact - By setting a cap on emissions, ETS ensures that overall pollution levels decrease over time.
• In the Gujarat’s pilot project, Particulate emissions were reduced by 20 to 30 %.
• Cost-effectiveness - ETS allows businesses to reduce emissions in the most economical way by trading allowances.
• Companies that can reduce emissions at a lower cost can sell their surplus allowances to others.
• Due to the ETS in Surat, Pollution abatement costs dropped by over 10 %.
• Economic incentives - Companies are financially motivated to reduce emissions, as they can profit from selling unused allowances.
• Flexibility - Businesses have the freedom to choose how they meet their emission targets, whether by reducing emissions directly or purchasing allowances.
• Encourages innovation - ETS drives technological advancements as companies seek innovative ways to reduce emissions and stay competitive.
• Improved compliance with environmental regulations - Compliance with environmental laws rose to 99 per cent among participating plants.

What are the challenges in implementing emission trading scheme?

• Allocation of Allowances- Establishing the correct emission cap level, deciding on the method for allocating emission allowances (auction vs. free allocation) will be challenging.
• Monitoring and reporting - Ensuring accurate and reliable monitoring and reporting of emissions is crucial for the integrity of the scheme and requires significant investment in technology and infrastructure.
• Price fluctuation - The market-based nature of ETS can lead to volatile prices for emission allowances, making it difficult for companies to plan and invest in low-carbon technologies.
• Carbon Leakage - Companies may relocate production to countries with less stringent emission controls to avoid the costs associated with the ETS, undermining the environmental benefits of the scheme.
• Diversion of responsibility - The costs of purchasing emission allowances may be passed on to consumers, potentially leading to higher energy prices and disproportionately impacting low-income households.

What lies ahead?

• Adopting continuous emission monitoring systems and standardized reporting protocols can ensure data accuracy and transparency.
• Enhancing verification processes with third-party audits to maintain market integrity.
• Introducing price floors and ceilings to mitigate volatility and provide investment certainty for low-carbon technologies

References

1. DownToEarth | Can pollution markets work?
2. ICAP | Indian-carbon-credit-trading-scheme