In November 2024, Delhi once again earned the unenviable title of the world’s most polluted city. As is routine by now, the winter months in the Indian capital bring delayed flights due to smog, schools shuttered due to dangerous Air Quality Index (AQI) levels, and millions struggle to breath due to the city’s air that is suffocating them. With over half of the ten most polluted cities in the world being in India, the country is no stranger to the ramifications of AQI levels topping 450—classified as “severe” by the World Health Organization—and the implications of this public health emergency on its most vulnerable populations. Behind these dramatic headlines is a structural crisis, one fueled by rapid industrialization, fossil fuel use, and weak enforcement of environmental regulations. Yet, despite this grim backdrop, change is on the horizon as India embarks on a quiet policy revolution: a national carbon credit trading scheme that has the potential to redefine environmental governance in the Global South.
India’s air pollution is the result of a variety of sources: construction dust, vehicular emissions, stubble burning in agricultural areas, industrial activities, the list goes on. With several stakeholders involved in the process of regulating and limiting these toxic emissions, the issue becomes increasingly bureaucratic. According to the World Bank, air pollution costs India $36.8 billion annually, mainly due to premature deaths, additional healthcare spending, and reduced labor force productivity. Examining the public health effects further, it’s clear that the implications are devastating. Studies have estimated that air pollution kills about 1.5 millions people in India annually and that 40% of the population is estimated to die 7.6 years earlier. These costs are disproportionately faced by those in underserved and vulnerable communities—laborers in industrial hubs or near large traffic corridors suffer the most.
Historically, India’s attempts at addressing air pollution have taken the form of regional, reactive policies such as odd-even vehicle rules, smog towers, not fueling cars older than 15 years, or firecracker bans. While correctly-intentioned, these policies are inadequate at limiting emissions due to their unequal and limited enforcement, suffering at the hands of limited state capacity or communication between national and regional administrative bodies. India’s pivot to market-based solutions signal a promising shift to addressing the vast and structural problems that stand in the way of clean air.
Emissions trading systems (ETS), also referred to as cap-and-trade systems, aim to reduce emissions by limiting the total allowable emissions or emission concentration for firms and then allowing them to buy or sell these emission credits or allowances. This creates a financial incentive for firms with low abatement costs to reduce their emissions as much as possible and then sell their emission credits to firms with higher abatement costs. ETS systems have been successfully implemented in the EU and, as of 2021, in China as well. Regional ETS systems have also been implemented in California, Quebec, and British Columbia. Critical to the success of these systems are transparent reporting, consistent monitoring, and equal enforcement.
India’s first foray into ETS began all the way back in 2012 with the Perform-Achieve-Trade (PAT) program that was implemented by the Bureau of Energy Efficiency (BEE). This targeted heavy manufacturing industries such as steel, cement, and aluminum, reported to have saved 87 million tons of CO₂ by 2020. Critics mention that lax enforcement and a focus on paper savings as opposed to real world ones limit the success of PAT.
More recently, a pilot program instituted and studied in Surat, Gujrat for a particulate matter emissions trading system found great success. Led by researchers Rohini Pande and Nicholas Ryan from Yale University, their randomized trial found that 99% firms complied with the cap-and-trade regulations and that particulate emissions decreased by 20-30%.1 This was a first-of-its-kind particulate matter ETS—the first in the Global South—and the near-perfect compliance and results are a promising reminder of the potential these systems have in countries like India.
While these examples are more regional, in 2023 India introduced its first national carbon market, the Carbon Credit Trading Scheme (CCTS). Its first regulatory phase is expected to launch this year and will mainly focus on firms with large emissions in industries such as steel, power, aluminum, and cement. These industries are also crucial to the country’s export strategy and will help it meet its goal of reducing emissions intensity of GDP by 45% by 2030 compared to 2005 levels, as outlined in its Nationally Determined Contribution (NDC) to the Paris Agreement.
Beyond just reducing emissions, this domestic carbon credit market has several potential benefits for India. It could attract climate finance, via the global voluntary carbon market, to India, where firms in other countries would buy Indian carbon credits to offset their emissions and meet net-zero goals. This market is projected to grow to $50 billion by 2030, representing an attractive financial opportunity for India. Beyond this, the CCTS will also help India prepare for international carbon taxes such as the EU’s Carbon Border Adjustment Mechanism (CBAM), which is slated to be implemented in 2026 and will impose tariffs on carbon-intensive imports from countries that lack a carbon pricing mechanism like an ETS.
Despite the hypothesized benefits, India faces several challenges in properly implementing the CCTS. Perhaps the most pressing shortcoming is the lack of institutional capacity at the moment: without a centralized emissions database or Monitoring, Reporting, and Verification (MRV) system, the scheme is opened up to potential misreporting or fraud. In the early days of the EU ETS, fraud led to the loss of 5 billion euros in taxpayer money.
Greenwashing and serving corporate interests over genuine reform are other risks. Industrial lobbies or corrupt administrative bodies might lead to unequal enforcement of emissions caps that ultimately might allow companies to fall into the narrative of meeting environmental targets without making genuine progress towards them. And, if certain firms are unable to meet these regulations or public transparency and communication are compromised, a national Indian ETS is bound to fail. Above all, this is a project that requires trust, communication, and accountability from all stakeholders.
India’s carbon market is also significant from a global perspective. As one of the world’s fastest growing economies and largest greenhouse gas emitters, India’s foray in markets-based approaches to environmental regulation can offer a model of success for other countries in the Global South. With other developing countries such as Indonesia and Brazil exploring ETS for their key industries, India’s role in global cooperation on these metrics and regulations cannot be understated.
It’s clear that India’s willingness to explore carbon credit markets marks an inflection point in their battle against pollution. While far from a guaranteed success, it will be critical to watch how institutional capacity and enforcement expand to implement a first-of-its-kind scheme at this scale in this part of the world. And if executed with transparency and accountability, India will not only chart a new course for its own citizens but for discussions on environmental regulation and sustainability for decades to come.
Featured/Headline Image Caption and Citation: “Local authorities announced plans to spray water with dust suppressants on roads and use mechanized sweepers to reduce dust” | Image sourced from EPA Images | CC License, no changes made
- Greenstone, Michael, et al. “Can Pollution Markets Work in Developing Countries? Experimental Evidence from India.” The Quarterly Journal of Economics, 27 Jan. 2023, https://doi.org/10.1093/qje/qjaf009. ↩︎
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