India has the worst air pollution in the world. India regulates pollution but uses a command and control system with criminal penalties, a controversial system and enforcement delegated to the lower state. The result has been widespread corruption, ineffectiveness, and poor enforcement of pollution control laws. In a very important paper, Greenstone, Pande, Ryan and Sudarshan report on an assessment of the particle market in Surat, India. In fact, this is the first particle-matter market anywhere in the world.
The experiment consisted of two sets of firms, the treatment set was required to install continuous emission monitoring systems (CEMS) that measure emissions. The regulatory set of firms remained subject to a command and control system that required the installation of various pollution control and spot inspection equipment. Firms are randomly assigned to management or control. Pollution from treatment plants was cut and permits were issued at 80% of the rate so that the plants pollute 80% of the cap for free. Permits for the remaining 20% of the cap were auctioned and trading was allowed. Treatment facilities that pollute in excess of their permits have been allowed to pay large fines, nearly double the cost they would have paid to purchase the required permits.
A one-and-a-half-year test revealed great value. First, CEMS systems and the shift to financial penalties have reduced enforcement costs so that all firms can quickly comply. Second, trade was dynamic, which indicated that firms had variable and variable costs. Furthermore, by allowing a more information-rich market the cost of achieving a certain level of pollution is reduced. Pollution costs were 11% lower in treatment firms compared to control firms at the same pollution level. The value of trade in reducing costs reflects Hayek’s idea that one of the virtues of markets is that they use knowledge of specific time and place conditions. In fact, since the cost of achieving a certain pollution level was low, the authorities lowered the standard so that the treatment firms reduced their pollution levels significantly compared to the control firms.
CEMS systems were a fixed cost but because the amortization costs decreased, the overall cost was reasonable. The need for monitoring systems and processes highlights Coase’s understanding that property rights must be designed and enforced, the visible and invisible hand working very well together.
Using estimates of a statistical life year in India of $9,500 (about 1/10th to 1/30 the rate commonly used in the US) the authors found that the benefits of large emissions reductions outweighed the costs by a factor of 25:1 or more .
I have emphasized (along with the video here) that there are significant productivity benefits to reducing air pollution that would make these benefits cost-effectiveness even higher. Reducing pollution can mean more health again more wealth.
The authors should be especially congratulated because this paper started in 2010 through discussions with the Gujarat Pollution Control Board. It took ten years of research and authors to help shape not only the market but also the technical standards for CEMS monitoring. Amazing. The success of this program is already leading to expansion across India. Bravo!
Hat tip: Paul Novosad.
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