While a cap & trade scheme is not the only way to address the challenge, it does offer a market-based economically-efficient pathway to achieving pollution reduction.
The commission has been vested with extensive planning, regulatory, investigation and enforcement powers focused on preventing air pollution and improving air quality.
By Mahua Acharya & Amit Kapur
As we write this, Delhi’s air pollution index has been over 500 and climbing closer to 700. From experience, this will climb further in a matter of weeks. Discussions about the problem have resurfaced, but sadly much of the discussion continues to be around who is at fault—where the pollution is coming from and what activity causes it.
In a PIL filed regarding the deteriorating air quality in the National Capital Region (NCR), on October 16, 2020, the Supreme Court appointed a former judge of the Supreme Court to monitor the prevention of stubble burning in the states of Punjab, Haryana, Uttar Pradesh and NCR of Delhi, and submit fortnightly reports. Ten days later, the Union of India told the Court that it proposed a legislation to tackle the problem highlighted in the PIL. The Commission for Air Quality Management in the National Capital Region and Adjoining Areas Ordinance was notified on October 28. On October 29, the Court-appointed monitoring was put in abeyance. The ordinance is reported to have been placed before the Supreme Court and the matter is now listed next on December 8, 2020.
The ordinance dissolved the 22-year-old Environment Pollution (Prevention & Control) Authority and provided for the formation of an 18-member commission for comprehensive protection and improvement of air quality in the air-shed of the NCR, adopting a collaborative approach across various sectors and the five states of Delhi, Punjab, Haryana, Rajasthan and Uttar Pradesh. The commission has been directed to focus on prevention/mitigation of air pollution activities such as stubble burning, industrial emissions, road dust, vehicular pollution, construction activities, biomass burning, etc. The ordinance envisages at least three sub-committees of the commission, dealing with (1) monitoring and identification of causes of air pollution, (2) safeguarding of air quality and enforcement of pollution prevention/mitigation measures, and (3) promoting research and development.
The commission has been vested with extensive planning, regulatory, investigation and enforcement powers focused on preventing air pollution and improving air quality. It has the power to establish codes, parameters and standards; undertake inspections; issue directives to defaulting industries/units including closure and prohibitory orders; an overarching jurisdiction over various statutory, executive and judicially appointed ad hoc authorities; and power to enforce and penalise defaulters. Orders issued by the commission are appealable before the National Green Tribunal.
While all these enforcement measures are good, the law misses an explicit assertion of combining enforcement with a market-based approach to tackle air pollution (a techno-socio-economic issue) by nudging behavioural change.
In economics, an externality occurs when the producer does not have to pay its full cost, and when it affects another party either positively or negatively. If the cost to the society is greater than the cost the consumer is paying for it, then the externality is negative because it imposes this extra cost on the society, which can lead to market inefficiencies. Solving the problem of negative externalities can be costly on its own, as it is often difficult to assign responsibility. Pollution is one of the most common forms of negative externalities present in the world economy. Typically, the party that owns the property rights to the polluted area is responsible for paying the cost, but alternative strategies include taxing the producer. A tried and tested mechanism of polluter-pays is to limit the overall pollution and allow parties to trade amongst themselves—through an emissions trading system. By economic theory, the traded price discovered is the price of the externality provided the market is efficient.
Air pollution is neither a new problem nor India’s alone. air pollution index, air pollution index in delhi, delhi pollution, Environment Pollution, Air pollutionA trading scheme works by setting a ‘cap’ on the total amount of pollutants considered acceptable. Such a cap should steadily be reduced over time until the total pollution reaches the desired long-term target. Emissions are quantified as tonnes of pollutant gases, and a limited number of permits are issued to market players over a set time period. Polluters are required to hold permits equal to their emissions with any shortfalls in permits with respect to actual emissions attracting ‘polluter-pays’ penalty.
While a cap & trade scheme is not the only way to address the challenge, it does offer a market-based economically-efficient pathway to achieving pollution reduction. Its impact is more promising because of competitive forces and the use of markets. Such markets have evolved over decades in the European Union, the US, the UK, and other developed regions.
The US has traditionally used market-based solutions to address many problems. Their Environmental Protection Agency (EPA) embraced the theory of trading in 1976, with the introduction of the ‘offset policy’ that allowed major polluters an alternative means of complying with the Clean Air Act of 1963. The EPA today runs programmes that reduce air pollution from power plants to address several environmental problems, including acid rain and ozone. For example, smog in Los Angeles used to be so bad that people thought it was a Japanese gas attack. California was one of the first to install emissions trading scheme to control air pollution and its success is uncontested: in 2017, California’s GHG emissions declined by over 13% since 2006, its carbon intensity by 30%, while its economic growth increased by over 20%.
The past several decades of experience of handling air pollution has shown that while a strong and effective regulatory regime with notified norms and standards is needed, actual mitigation and prevention with change in commercial and consumer behaviour is achieved when the command and control regime is accompanied by appropriate market mechanisms (like renewable purchase obligations, tradeable renewable energy certificates, and tradeable energy savings under the PAT scheme). A similar system could be tried in India, as some have been contemplating, for reduction in GHG emissions that cause climate change—a much more difficult problem to solve.
An overall cap on pollutant gases such as SOx and NOx could be set, which would decline over time to some (ideally, scientifically determined) acceptable level. Facilities under this cap would be identified, and given some permits. The total number of permits corresponds to the overall cap for the year. These permits could be distributed for free to begin with, or auctioned for a price—the revenue for which could cover the scheme’s administrative costs. Decisions on temporal flexibility could also be made, i.e. whether allowances may be banked, or must be retired in that year. To get the market going, a pilot or regulatory sandbox of, say, two years could be established for pre-identified facilities, and a floor price set through a market fund capitalised through grants or other sources of finance to evolve and stabilise a mechanism suitable for India.
Such a mechanism will facilitate better access to green finance and provide incentive to Indian enterprises to adopt pollution preventing and mitigating processes. It is desirable that the law must provide for appointment of environmental economists, financial experts and market players to the commission and its sub-committees; and require the commission to evolve a suitable market mechanism to enable trading in air pollution.
Acharya is with the Climate Policy Initiative and Kapur with J Sagar Associates. Views are personal