#10 - Best of Air Pollution Episodes - Impact, China's War on Pollution and India's innovative cap-and-trade approach
Ft. Dr. Hasenkopf, Dr. Debb and Dr. Trimarchi
Transcript
Arvid Viaene: Today I’m trying a new format: a research-focused best-of from three earlier episodes. Air pollution remains a major public-health and economic issue in the world’s two most populous countries. Instead of a single narrative, you’ll hear a comparative analysis: first, the global health and exposure context; then the institutional mechanics that delivered reductions. In China, central standards and monitoring were tied to performance incentives for local leaders—classic command-and-control with enforcement capacity. In India, a more decentralized system allowed states—like Gujarat—to pilot cap-and-trade for particulates, using continuous monitoring and permit auctions to discover lower-cost abatement and build compliance.”
Arvid Viaene: But first things first, let’s hear some global estimates of the impact of air pollution from Christa Hasenkopf, director of the clean air institute at the Energy Policy Institute of Chicago.
Christa Hasenkopf: Globally, we estimate with research we’ve done at EPIC that currently people are losing about two years of life expectancy due to air pollution and really just one specific type of air pollution, PM 2.5, which is essentially smoke. And that’s more than AIDS, malaria combined. And so it’s actually estimated that air pollution has the largest impact in terms of mortality and morbidity combined on public health, which is, I think, astounding. And then, depending on where you look across the world, it can be the number one driver of mortality, especially in countries in Asia and Africa. And then to your question of how, essentially, I think we all know it doesn’t feel good to breathe in pollution and we know it doesn’t feel good on our lungs and it can cause respiratory issues and long-term things like lung cancer. But something a little bit harder to realize without actually having yeah research is that essentially air pollution, especially PM 2.5 particles, these very tiny particles, you breathe them in, they get throughout your entire so body and every single organ can be affected, but it can cause heart attacks, strokes, COPD, and really exacerbates any other issue in your body as well.
Arvid Viaene: Let’s go from the global picture to a large-scale policy response. In China, public access to monitoring data helped put air quality on the agenda, and by 2013 the government declared a ‘war on air pollution.’ We’ll start there, then look at what changed on the ground.
Christa Hasenkopf: It was whoever at the State Department had programmed the information that goes went out to Twitter at the time, on an automatic basis. They never expected the air pollution to get above a certain level, so they had a jokey tag for the pollution levels when it got above this apocalyptic level, what it was called in the media. It was beyond index, and it had a very inflammatory phrase associated with it, and that made headlines, and I think that really got people’s attention. But I also think it was people having the app that pulled data that and saying, oh, wow, maybe I shouldn’t go outside right now. Oh, wow, it’s bad again. And then seeing it compared to various places, I think I think that was a big driver and gave it some immediacy.
Arvid Viaene: So this led to China declaring a war on air pollution in 2014 and leading to a lot of government decisions. Back to Christa
Christa Hasenkopf: That’s right. That’s right. It is. And it’s been stunning, about 40% reduction in the past 10ish years, which when we compare that to, say, for example, the U.S.’s progression, that’s been much, much faster and shows what can happen. In terms of how they did it, it to me, , it’s a perfect example of air pollution. We know how, technically, we all do know how to solve the issue. It comes down to social and political will. At that moment in 2013, there was an uproar, I guess, of political and social will. And it resulted in them declaring war on air pollution. It also meant that the government put forward a lot of resources monetarily to do it, and also political will to enforce policies that were quite strict. So moving certain industries outside of cities or placing them strategically where they’re not necessarily downwind of the of city and a population. It meant closing down certain coal-burning factories. It meant pretty stringent policies that they then had enforcement mechanisms to see through. And it also meant a huge expansion of their monitoring to make sure this was what they’re doing actually working. It also meant with that monitoring, the data was more open and so people could actually see what was happening.
China’s political structure and The Impact of the US-China Trade Wars
Arvid Viaene: In my episode with professor Lorenzo Trimarchi, we went into more detail to how China implemented incentives for local political leaders to hit the environmental targets. Let’s hear from Lorenzo:
Lorenzo Trimarchi: “And de facto, what I think is fascinating about the Chinese Communist Party is that more they are more organized like what we would consider a private corporation than a public administration board in Europe, because fundamentally they have these public officials that are more corporate executives with a performance contract. And they all compete in a tournament under which they will be selected for a higher level of power, based on some performance indicator established by the hierarchy.”
“Then in the 2000s, starting from 2008, we all remember with the Beijing Olympic Games, the pressure that the Chinese citizens were made on government to fight pollution. And in the 2010 year, we had this war on pollution declared by the Chinese government, and then environmental standards became more and more important for promotion.”
Arvid Viaene: Monitoring and enforcement only scale if local officials are rewarded for hitting targets. In our conversation with Prof. Lorenzo Trimarchi, we dig into how China’s promotion system made environmental outcomes part of local performance metrics.
Lorenzo Trimarchi: And this preliminary evidence and surprise was pointing at the trade world triggering an increase in pollution in China. Why is that surprising? Because as a trade economist, we tend to think about tariffs mainly as a negative income shock, especially for developing countries. So we expect, okay, China is a country heavily specialized in the manufacturing. If we give a large trade shock, we expect China to reduce income and therefore to decrease pollution.
Arvid Viaene: But that is not what Lorenzo and his co-authors oberved. So they digged deeper and found that the the trade-war had an impact on policy:
Lorenzo Trimarchi: We started to investigate if the trade war had an effect on environmental regulation. And the answer is yes. This is the most robust part of our paper. So environmental regulation seems to be affected by the trade war in a way that the trade war induced an easing in environmental regulation for China. So this is the first big result. A negative shock in trade policy seems to have negative effect on environmental emissions.
Cap-and-Trade Market in Gujarat
Arvid Viaene: That trade shock underscores how policy can adapt to economic pressure. India faces a different institutional landscape, more decentralized authority at state level, so solutions evolve differently. In Gujarat’s industrial cluster, regulators tested a cap-and-trade market for particulates, using continuous monitoring to turn limits into tradable permits. Here’s Dr. Kaushik Deb on how that worked.:
Kaushik Debb: “But knowing that this is a new solution and this is something that’s never been tried anywhere in the world— so the world’s first particulate-matter market, ladies and gentlemen, was launched and delivered in India and has been functioning for the last five years, as I said. To make sure that we were actually designing a solution that’s real and delivers answers and reduces pollution, we divided this industrial cluster into two groups.
So the control group stayed within the existing command-and-control regime, while the treatment group was put under a cap-and-trade scheme.
The biggest result— I think the biggest result that the regulator was most interested in— is the level of compliance in the market. In the command-and-control group, the level of compliance was about 64%. Which is really what the regulator wanted to solve for. Because in the market, the level of compliance was almost 100%. There was just one compliance period in which two industrial units did not meet their emission targets. And for the regulator, that kind of pretty much solves the entire problem, right? You are able to achieve 100% compliance to an environmental standard that you want to achieve.
What do the local people want? They want an improvement in air quality. And for every compliance period, the emission performance of the treatment group— the folks who were there in the market— their emissions were lower by about 20% to 30%. So very significant and a chunky reduction in particulate-matter emissions that came from this particular experiment.
Arvid Viaene: Beyond compliance and lower emissions, a key question is adoption: do firms have a cost-based reason to prefer the market? Kaushik explains the cost side and why participation rose once results were public
Kaushik Debb: Now, how do we bring industry on board? You and I know this, right? Markets are an efficient tool. The whole point of efficiency is to reduce costs, to improve efficiency. And the folks in the market were able to meet their targets at a cost which was almost 11% to 12% lower than the folks who were there in the command-and-control regime. So there is a very clear incentive for industry to be in the market, which kind of is also evidenced by the fact that once these results came out, All of those folks who were not there in the market— who were in the command-and-control group— clamored to be included, to join the market.
And you would recall the Acid Rain Program from the U.S. I mean, that had a benefits-to-cost ratio of about 50-something to one. This city of 16 million— with this reduction in emissions, this improvement in compliance cost, this cost of whatever treatment plants, treatment systems that they needed to put in— this cost-benefit ratio is well over 200.
So it’s— I mean, you can imagine the impact that this is having. And all of this took place without a single new dollar or rupee being spent by the Pollution Control Board. So no increase in regulatory capacity.
Arvid Viaene: So let’s hear his main take-away of this experiment in Surat:
Kaushik Deb: So what this experiment really kind of does prove is that, classically, we always think that market-based solutions are so complex, so complicated— how do regulatory environments with limited regulatory capacity deliver these really complicated solutions? What this market— what this experiment— proves is that these are the right tools to be used with limited regulatory capacity.
And these are the right tools that ensure that, with limited regulatory capacity, you can achieve the kind of emission performance that you want with lower costs. And lower costs, if you kind of think this through, are essentially an opportunity for industry to grow.
Arvid Viaene: Kaushik is also implementing this vision. Because setting up a new cap-and-trade market takes a lot of effort and learning by doing. But now they are taking the lessons from Surat and using it to implement it in other states.
Kaushik Debb: So Gujarat was an exercise that Michael Greenstone and his colleagues started way back in 2008–09. And if I add up every year that went into getting Gujarat up and running, I can easily think that this was an exercise that took about 10 to 15 years.
And this exercise took that long because this had never been done before, and every problem as it came up had to be solved. And this ranged from finding the right legal language for the regulation to identifying which emission-monitoring devices will meet these standards, their installation and calibration protocols, vendors who’d make this available, who would be the auditors for this, who would set up the trading platform, the data quality control and quality-assurance protocols— everything that came in there.
But having done all of that, we are hoping that the second market that we are going to set up now in the state of Maharashtra in India is something that we are able to do in a period of a year and a half or so. So from 15 years to 18 months is quite a steep improvement. And that’s the kind of learning curve that’s central to my ambition at EPIC. We talked about this briefly earlier. This is the kind of improvement in solar energy generation costs or wind energy generation costs that we’ve seen over the last 15 years.
We are in the process of launching this as a formal initiative— a joint initiative of J-PAL and EPIC— during the New York Climate Week, and we’ve christened this as the Emissions Market Accelerator.
Arvid Viaene: The Emissions Market Accelator has now been launched. And you can more information in the show notes. But the story continues. Let’s end on the following exciting developments that are happening in the broader cap-and-trade markets:
Kaushik Deb: So there’s— I mean, so this growth and this expansion that’s happening is both intensive and extensive. And let me draw that distinction. Once this experiment in Surat took off and delivered these results, now the default of the Gujarat Pollution Control Board for every pollution problem is markets.
So we are in the process of designing ETS schemes for— markets— industrial effluents for them for two central effluent treatment plants. So water pollution is being dealt with using these markets. They want to explore the use of markets for SO₂ as well. And we have a memorandum of understanding with them to think and start developing a carbon market for that state as well. So there is a lot of diffusion of the idea that markets can solve environmental problems across the board within that one state. But having seen that success, Maharashtra— the neighboring state— the SO₂ market that I talked about is well underway to use this as a tool and a solution to deal with their industrial-emissions problems as well.
We’ve just signed a memorandum of understanding with another neighboring state of Gujarat, Rajasthan, to set up an SO₂ market for them. This was signed at the last World Environment Day earlier this year.
And initial conversations with some other states in India are also happening. But if I were to put all of these three states together— if this was one big SO₂ trading program— this would be probably the world’s largest cap-and-trade scheme, much bigger than the EU ETS just in terms of population.
This would really be a hugely important and successful result. And seeing this now, there are conversations that we are having with numerous other countries and numerous other geographies and jurisdictions around the world on trying to use cap-and-trade schemes as solutions to deal with all sorts of environmental problems, including carbon markets.
There has been a trend recently— I would say a slightly aggressive trend— in the sense of a move away from climate regulation and climate management, especially using economic instruments.
But I think once some of these experiments and some of these markets become a lot more viable and grow, it will become a much more widespread tool. At this point, everyone in our community, in the environmental community, kind of thinks that cap-and-trade schemes are sophisticated and useful only in very developed jurisdictions like Europe and, in a pre-current-administration world, the U.S.. But what we are doing is showing that this is a tool that’s much more widely applicable in the developing world.
Arvid Viaene: Today’s best-of documented one problem across two countries and two policy designs. China used a command-and-control framework with explicit incentives for local officials and delivered large, rapid reductions. India used a decentralized approach where states could implement cap-and-trade for particulates, achieving near-universal compliance and substantial emissions cuts at lower cost—then expanding to other pollutants and jurisdictions. The common denominator is measurement: transparent data supported enforcement in China and enabled market design in India. In the show notes, I’ve linked to the underlying studies and programs discussed. Next time, we’ll run a best-of on CO₂ and climate.