|Monday, 28 March 2011 00:00|
Environment minister Jairam Ramesh’s market-friendly Emissions Trading Scheme (ETS) is aimed at, as he puts it, convincing ‘marketwallahs’ his ministry is not anti-industry. He is trying to replicate, on a smaller scale, the EU’s carbon-trading initiative which helped Europe reduce emissions by around 14% up to 2010, in line with its 20% target for 2020. The two-year pilot project will cover 1,000 industries near metro areas in Gujarat, Tamil Nadu and Maharashtra and will begin with pollutants like SOx and NOx.
As an idea, it is a good one, but industry must understand it does not mean a smaller role for pollution control authorities; indeed, successful working is contingent on the authorities doing a better job. It does, though, mean there will be a lot less harassment of individual units. Let’s say Gujarat’s current level of NOx pollution is 100 units and needs to fall to 75 after three years. Gujarat may choose to now issue 95 emission certificates of one-year validity to industry in the first year (it makes no difference if they’re given free or auctioned), 87 in the second year and 75 in the third year. Each firm has to surrender one emission certificate for each unit of NOx it generates. In year 1, all firms in Gujarat can emit only 95 units (or they pay a penalty if they have emitted more), this is non-negotiable. If, in year 1, Firm X has only 5 certificates but emits 7 units of NOx, the ETS gives it some flexibility in that it can buy 2 certificates from Firm Y that has emitted two units less of NOx as compared to the certificates it has. But at the end of the trading period, if the same firm has neither reduced its emissions nor bought enough permits against its emissions, it will pay a penalty. Pollution authorities will continue to monitor firms’ NOx emissions rigorously but will not harass Firm X once it shows its emission certificates.
The design of the incentive-penalty scheme is critical. If Firm X does not cut emissions from 7 to 5 in the non-ETS phase, let’s say it pays a fine of R100. This also means the cost of reducing emissions from 7 to 5 is more than R100, else Firm X would have cut emissions. In which case, for ETS to work, the fine has to be many multiples of R100; only then will Firm X want to buy credits from Firm Y. If the monitoring isn’t top-class and bribing inspectors is an option, the maximum that X will pay for Y’s permits will be the cost of bribing the inspectors! It is equally vital the targets not be set arbitrarily—if the steel industry, for example, cannot cut emissions by more than 17-18%, there’s little point fixing targets of 30%. For ETS to work, heavy-polluters should find themselves steered towards making technological changes in order to survive and less-polluting ones will have an incentive to grow—but if the industrial laws make it difficult for units to close, ETS won’t work. The two-year trial phase gives us enough time to work on the answers and for industry to understand how to use the new system.