Michael Greenstone, Rohini Pande, Nicholas Ryan, Anant Sudarshan
In the coming years, India must meet the twin challenges of achieving rapid economic growth and cleaning up the environment. To do so, India needs environmental regulation that is highly effective while imposing minimal costs on industry. Unlike existing commandand-control regulations that impose high costs, provide no flexibility, and are enforced by costly and time-consuming criminal penalties, Emissions Trading Schemes (ETS) provide a transformative alternative with a track record of success around the world.
An ETS, or “cap-and-trade” system, caps the amount of pollution allowed from regulated industries and allots permits to plants. Plants that can inexpensively cut pollution can then make money by selling their permits to other factories. In this way, the system uses the power and flexibility of markets to deliver the win-win-win of simultaneously (i) reducing total cost of regulation, (ii) increasing firm profits, and (iii) protecting citizens from air pollution.