Tackling Industrial Emission with Pollution Markets

Can industrial growth and clean air coexist? This article examines how the country’s first particulate matter emissions trading scheme in Surat is setting a new benchmark for clean, cost-effective, and scalable environmental regulation.

India’s industrial growth has brought prosperity and progress—but also pressing environmental challenges. With air pollution emerging as a major public health concern and regulatory capacity often stretched thin, finding innovative, scalable, and cost-effective solutions is more important than ever. One promising approach that has gained momentum over the past few years is the Emissions Trading Scheme (ETS)a market-based mechanism designed to reduce pollution while providing industries with the flexibility to choose their compliance methods, thereby encouraging innovation and cost-effectiveness.

India is leading the way among developing countries in piloting and scaling ETS programs for industrial air pollution. With the successful launch of the world’s first particulate matter (PM) ETS in Surat and scale-ups now underway, the country is demonstrating that clean air and industrial growth can go hand in hand.

Emissions Trading

Traditional pollution control relies heavily on a “command-and-control” approach, where regulators set uniform emission limits and technology standards. While this method has seen some success, it often lacks flexibility, imposes high compliance costs, and fails to reward innovation.

In contrast, an ETS works on the principle of “cap-and-trade.” Regulators set a total emissions cap for a group of industries. Each industry is allocated tradable permits or allowances, which represent their right to emit a certain quantity of pollutants. Industries that reduce emissions below their allowance can sell the excess, while those that exceed their limits must purchase additional permits.

This creates a financial incentive to reduce emissions: the cleaner a unit runs, the more it can benefit from selling its unused allowances. ETS schemes have been widely used globally to address carbon emissions, but Surat’s program was the first to tackle industrial particulate matter (PM) emissions in a rapidly developing urban setting.

Surat PM ETS: A Global First

Launched in 2019, the Surat PM ETS targeted the textile and dyeing units in the city’s industrial cluster-one of Gujarat’s largest and most pollution-intensive hubs. Over 300 industries participated in a pilot where each unit received permits based on a city-wide emissions cap.

The pilot delivered impressive outcomes, validated through a randomised controlled trial (RCT) conducted by our team of researchers. In the initial phase, PM emissions were reduced by 20–30%, with abatement costs approximately 11% lower than those under traditional command-and-control policies. Importantly, this came with no adverse effects on output or employment.

Compliance was nearly perfect, with over 99% of industries in the market cohort of the RCT meeting their permit limits. High trading volumes demonstrated industry buy-in, and the scheme fostered Greater responsiveness to emissions data, strengthening the regulatory system overall.

These results are supported by robust academic evidence, demonstrating that the ETS has significantly reduced particulate emissions while maintaining industrial productivity. The paper also highlights how the scheme enhanced regulatory enforcement through real-time monitoring and accountability mechanisms, setting a new benchmark for environmental regulation in emerging economies (see References).

The Surat ETS was implemented by the Gujarat Pollution Control Board (GPCB), with technical and research support from collaborators, including the Energy Policy Institute at the University of Chicago (EPIC India) and Abdul Jameel Poverty Action Lab (J-PAL). The success of this collaborative effort shows the value of local industry ownership and trust-building in achieving environmental compliance.

Continuous Emissions Monitoring: The Backbone of ETS

At the core of the ETS is a reliable emissions monitoring system, which makes trading credible and enforceable. In the Surat ETS, all the participating industries installed Continuous Emissions Monitoring Systems (CEMS) on their stacks. These devices generate real-time data on particulate matter emissions, which is transmitted to a centralised platform for compliance verification.

The deployment of CEMS created a new wealth of granular emissions data, significantly enhancing transparency and regulatory oversight. Over time, industries began using this data to track performance, adjust operations, and even compete in reducing pollution—something rarely seen in traditional compliance systems.

Building Trust through Better Data

Of course, installing CEMS is only the first step. Ensuring high-quality, reliable data required deliberate investments in protocols, capacity building, and quality control. In the Surat pilot –

• A CEMS Quality Protocol was developed to standardise calibration, maintenance, and data validation practices.
• Third-party auditors and government engineers conducted cross-verification using manual stack testing.
• Industries received training to interpret their data and take corrective actions independently.

The results were transformative. Initial teething issues gave way to a mature system where CEMS data not only enabled trading but also helped industries understand and optimise their pollution control processes.

Today, Surat hosts one of India’s Richest repositories of real-time industrial emissions data. This high-frequency dataset enables evidence-based policymaking—benefits that extend far beyond the ETS itself.

Scaling Up the Approach

Following the success in Surat, similar cap-and-trade programs are now being designed in other states across India, tailored to local industries and pollutant concerns. The aim is to establish a national framework for emissions trading that can be applied to multiple pollutants, including sulfur dioxide (SO₂), nitrogen oxides (NOx), and carbon emissions.

Several factors are critical for scaling up—

• Stakeholder buy-in: Early engagement with industries, regulators, and civil society is essential.
• Robust monitoring infrastructure: Scaling CEMS across industrial belts requires investment, standardisation, and training.
• Legal frameworks: State-level notifications and compliance mechanisms must align with the national environmental regulatory structure.
• Capacity building: Regulators require support to interpret emissions data accurately, operate trading platforms, and effectively manage market operations.
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Benefits to Industry

Industries participating in the Emissions Trading System (ETS) experienced a range of tangible benefits. The system offered flexibility, enabling companies to either invest in reducing emissions or purchase permits, allowing for cost optimisation based on their strategies. It also created strong incentives for efficiency, as facilities that emitted less than their allocated cap could sell excess permits and generate additional revenue.

Moreover, being part of a transparent, science-backed program improved stakeholder credibility and regulatory goodwill. Access to real-time emissions data further empowered data-driven decision-making, operational improvements, cost monitoring, and internal benchmarking.

Benefits to Regulators

From the perspective of environmental regulators, the ETS delivered several institutional benefits:

• Improved compliance and transparency: Real-time emissions tracking enabled proactive enforcement rather than reactive.
• Lower monitoring burden: Automated data collection reduced the need for frequent manual inspections.
• Public health gains: The reduction in PM emissions contributes to better air quality and associated health benefits.
• Cost-effectiveness: The system enables regulators to achieve more with fewer resources by shifting focus to outcomes rather than inputs.

The Road Ahead

As the Emissions Trading System (ETS) expands, it faces several key challenges and priorities. One Major concern is maintaining consistent data quality across different units and sectors to ensure accuracy and transparency. At the same time, there is a need to strengthen regulatory capacity for monitoring and enforcement.

Designing cap-setting mechanisms that reflect real-world performance is also essential to maintaining system credibility and effectiveness. Additionally, creating financial incentives for early adopters and technology innovators will be crucial in driving broader participation and accelerating low-carbon advancements.

What began as a pilot in Surat is now evolving into a scalable, institutionally grounded model for industrial air pollution control in India.

Conclusion: A Model for Cleaner, Smarter Growth

India’s ETS journey demonstrates that market-based regulation is not only feasible in low- and middle-income contexts, but it can also be transformative. With real-time data, industry engagement, and regulatory innovation, it is possible to create cleaner air without compromising industrial competitiveness.

The Surat pilot provides a tested and successful example of how such systems can be implemented—even in complex industrial settings—and scaled for broader impact. With the Right support, India’s emissions trading programs can serve as a model for other countries seeking low-cost, high-impact solutions to industrial pollution.

References

Greenstone, M., Pande, R., Ryan, N., & Sudarshan, A. (2025). Can Pollution Markets Work in Developing Countries? Experimental Evidence from India, The Quarterly Journal of Economics, Volume 140, Issue 2, May 2025, Pages 1003 – 1069.