Nobel Prize Economics: Lab Abhijit Banerjee and Esther Duflo set up supports world’s first emission trading scheme in Gujarat

The ETS is a market in which the traded commodity is particulate matter emissions.

5 min readAhmedabadOct 15, 2019 07:58 AM IST First published on: Oct 15, 2019 at 03:11 AM IST

Abhijit Banerjee, nobel prize economics, Gujarat, Gujarat Emissions Trading Scheme, nobel prize, nobel prize for economics, trade particulate matter, Gujarat Pollution Control Board, Gujarat Pollution, air polluting, Indian express

Pollution Control Board (GPCB) sets a cap on the total emission load from all industries.

Indian-American Abhijit Banerjee and his wife Esther Duflo who won this year’s Economics Nobel have their work making an impact in Gujarat. They helped set up the Abdul Latif Jameel Poverty Action Lab (J-PAL) in 2003 at the Massachusetts Institute of Technology (MIT) and J-PAL is one of the primary agencies working on a novel Emission Trading Scheme (ETS) — first of its kind in the world — launched a month ago in Surat.

Banerjee and Duflo are on the Board of Directors of J-PAL that has been suporting the pilot ETS scheme where 155 units in Surat are trading particulate matter in a region where air pollution levels are high. The ETS scheme is aimed at reducing the pollution and at the same time minimising the cost of compliance for the industry.

“On October 16, the first compliance period will finish. Till October 13, 83,642 kilograms of particulate matter worth Rs 4,99,060 has been traded on the ETS by the 155 participating companies,” an official of the Gujarat Pollution Control Board (GPCB) which is spearheading this project told The Indian Express.

On Monday, Rajya Sabha MP and former environment minister Jairam Ramesh tweeted; “Delighted that Abhijit Banerjee and Esther Duflo have won this year’s Economics Nobel. As minister of @moefcc in 2010, I had asked Duflo to work on market instruments for pollution control. I’m glad that system is now in use in Gujarat.”

On the first day of the launch of ETS on September 16, only 88 industries took part and permits worth Rs 2.78 lakh were traded. These 155 industries from sectors, including textiles, chemicals and sugar, are spread over an area of 50-30 sq km in Surat, South Gujarat. These industries use either coal or bagasse (residue after juice is extracted from sugarcane) as fuel, thus emitting a high amount of ash. The participants were selected on the basis of the size of their chimneys — those with a diameter of 24 inches or more.

Read | Nobel Prize winner Abhijit Banerjee: Indian economy on shaky ground

The ETS is a regulatory tool aimed at reducing the pollution load in an area and at the same time minimising the cost of compliance for the industry. It is a market in which the traded commodity is particulate matter emissions. The GPCB sets a cap on the total emission load from all industries. Industries can buy and sell the ability to emit particulate matter, by trading permits (in kilograms) under this cap. For this reason, ETS is also called a cap-and-trade markets.

At the beginning of every one-month compliance period (during which one emission permit is valid), 80 per cent of the total cap of 280 tonnes for that period is distributed free to all participant units. These permits are allocated based on an industry’s emission sources (boilers, heaters, generators) as it determines the amount of particulate matter emitted.

GPCB will offer the remaining 20 per cent permits during the first auction of the compliance period, at a floor price of Rs 5 per kilogram. Participating units may buy and sell permits among each other during the period. The price is not allowed to cross Rs 100 per kilogram or fall below Rs 5 per kg, both of which may be adjusted after a review.

“During the ongoing first compliance period, the participating industries were found to be trading well below the permissible cap of 280 tonnes. On an average, the emissions are around 205 tonnes. This means, the industries have cut back on their emissions so far,” the official from GPCB said. Officials associated with the project point out that these permits traded under the ETS are not a way to allow industries to keep polluting.

Read | Man who recommended high taxes won Nobel: BJP MP Anant Hegde on Abhijit Banerjee

Purchasing permits is only an interim measure for many of these units who find it financially difficult to install air pollution control measures. In other words, it helps in buying time and make investments later. So the idea of the scheme is also to make sure that some units realise that it is cheaper to install APCM and reduce emissions rather than buy permits at a higher cost that will vary due to the bidding process.

Apart from J-Pal, Energy Policy Institute at the University of Chicago in India, National Commodities and Derivatives Exchange e-Markets Limited (NeML), and South Gujarat Textile Processors Association are the other partners in the project.
The trading happens on the ETS-PM trading platform hosted by the National Commodities and Derivatives Exchange e-Markets Limited (NeML). All participants must register a trading account with NeML. Transactions are linked to the bank accounts of the users, who can view updates through these accounts.

There are two types of auctions. In the Uniform Price Auction every Tuesday between 3 and 5 pm, the week’s permit price is discovered by participating members through bidding. There is a continuous market between Wednesday and Monday (2 pm to 5 pm) where members will buy and sell permits whose prices are fixed every Tuesday. For a true-up period of 2-7 days before the completion of the compliance period, units may continue to buy and sell any remaining permits at the final auction price to meet their compliance obligations.