Air pollution has become as much a part of North Indian winters as weddings and festivals. The average levels of particulate air pollution over November 2024 in India’s capital city of Delhi crossed 250 µg/m³, a number so high as to be almost uninformative. The WHO standard for safe air is set at 5 µg/m³, and India’s own air quality standard sits at 40 µg/m³. Regulators like using adjectives to communicate air quality, but with pollution growing so bad, the government has found itself having to augment the Air Quality Index, whose highest level was “Severe,” with a new “Severe Plus” designation. We are running out of words to describe the problem.
India’s so-called “pollution season” attracts a lot of attention, but the problem is not restricted to a few cities and the winter months. The country has grown steadily more polluted over the last two decades. Satellite-derived measures of pollution in 2021 were around 51 µg/m³, about ten times the WHO safe standard. Researchers at the University of Chicago estimate that air pollution is now the single greatest threat to life expectancy in the country, lowering lifespans by about 3.6 years relative to aspirational WHO goals. These observations lead to some obvious questions: Why are things so bad? Why is political action not occurring? What concrete policy steps can India take today?
Before getting to solutions, however, it is worth taking on a bogeyman that can paralyze environmental action in developing countries. The idea is that as nations get richer, they automatically get cleaner. This notion—sometimes called an environmental Kuznets curve—has very limited evidence to support it. Unfortunately, there is only one pollution source where poverty alleviation seems directly linked to cleaner air: the portion of India’s pollution, estimated at about 30 percent, that comes from burning biomass at home. Other sources such as transport, construction, and industrial emissions will likely increase with economic activity. Thus, it is worth asking whether any correlation between clean air and national incomes implies exactly the opposite conclusion to the Kuznets curve hypothesis, namely that removing pollution will lead to faster growth and not the other way around.
Rules on Paper
The fact that air quality is getting worse suggests a structural failure to effectively regulate pollution sources. The legislative underpinning of pollution regulation in India is the Air (Prevention and Control of Pollution) Act of 1981. Empowered by this law, environmental regulators in India have created a host of rules and standards over the years. Virtually all these rules follow a command-and-control framework. The regulator sets a pollution limit or mandates a technology or process, while strict criminal penalties, including shutting down a factory or even imprisonment, provide the teeth for enforcement.
On the surface, this approach looks fine. Unfortunately, reality is more disappointing. Anecdotal reports of non-compliance with regulation are widespread, and so is hard data. Research in Gujarat documented that over 60 percent of small industries were in violation of pollution limits, and regulators were selective in penalizing plants even when they had access to failed test reports. This type of gap between regulation on paper and in practice is not restricted to industrial emissions. A Central Pollution Control Board committee that conducted an audit of pollution testing centers for vehicles in Delhi concluded “there are serious quality concerns in the way PUC [pollution under control] tests are conducted, and equipment are maintained in numerous PUC centers across the NCR [National Capital Region]. Malpractice is evident and noticeable.”
The fact that these rules do not seem to work might point to a mismatch between what the government wishes to do and what it is able to implement. When an environmental regulator observes widespread violations by industry, they may find it politically and logistically impossible to issue hundreds of closure notices and fight the resulting court cases. This invariably ends up with selective punishment, a red flag for any regulatory regime and a backdoor to corruption. Human resources may also play a role. A report by Ghosh et al identified severe shortfalls in sanctioned staff in pollution control boards in India, made worse by unfilled vacancies and a minority of technical staff among those positions that are filled.
Market-based Regulation
Whatever the cause, there seems to be an urgent need for new ideas and innovation in regulation. One alternative is to explore the use of market-based environmental regulation such as pollution taxes or cap and trade markets. The basic idea in the latter is to replace a top-down system where the government sets targets for each factory and uses criminal penalties to enforce them, with a more flexible approach. In a cap-and-trade regime the regulator decides how much total pollution is acceptable and sets this as a cap. Once this is in place, however, firms are allowed to buy and sell permits to flexibly apportion pollution reduction amongst themselves.
This strategy can dramatically reduce costs. For example, a small firm that finds it hard to raise capital to buy expensive abatement equipment can pay a larger firm to cut a little more. From an environmental point of view, it makes no difference who does the heavy lifting, but this small firm now has an affordable route to compliance where previously they may have attempted to violate. Costs aside, markets can make enforcement easier because they use financial penalties rather than factory closures and jail sentences. Additionally, markets typically use technology to monitor emissions rather than manual staff audits.
Markets are not a new idea in developed countries or even in China. The 1990 Clean Air Act amendments in the US ushered in the widespread use of such instruments, with the well-known SO₂ trading markets being an early example. China launched a permit trading regime to control SO₂ in 2007 and by 2019 total emissions had fallen from over 38 million tonnes per year to 12 million. Research by Fowlie, Holland, and Mansur suggested the US RECLAIM markets targeting NOx cut emissions by a fifth. Despite these promising examples, even in 2024, markets are practically non-existent in India, with one notable exception.
In 2019 the Gujarat Pollution Control Board partnered with researchers, including myself, to launch India’s first emissions market in Surat. Uniquely, this pilot was implemented with a randomized control trial design, the first emissions market to be evaluated with this level of rigor. In a recent paper, we showed that the market reduced particulate emissions by regulated factories by 20-30 percent. This did not come at a high price. Instead, permit trading data indicated that the trading market reduces abatement costs by 11 percent relative to the status quo. We estimated a benefit-to-cost ratio ranging from roughly 25:1 to more than 200:1, depending on the extent to which pollution reductions translate to increased life expectancy, based on an estimated monetary value for the latter.
Flexible Tools
Since this pilot, Gujarat has announced a scale-up of the market to other parts of the state, and more recently Maharashtra announced the intention to launch a new cap-and-trade scheme to regulate SO₂. It remains to be seen how these tools work at scale and in other parts of India but at least the first step looks hugely promising.
Although cap-and-trade schemes are largely used to regulate industry, market-based approaches can be used elsewhere. Last year, the Government of Delhi announced plans to launch a new congestion pricing scheme to control vehicular air pollution. If this becomes a reality, there would finally be a flexible tool available to dial up or dial down the number of cars on the road, especially during highly polluted months. Further afield, Jayachandran et al show how well-designed contracts with conditional payments can be used to incentivize farmers to burn less agricultural residue, a key pollution source in the capital city.
India’s air pollution crisis is a profound and growing challenge. Part of the explanation seems to be a crippling mismatch between the rules that are on the books and those that the state can enforce effectively. Innovation in regulation can be just as important as innovation in technology and examples such as Gujarat suggest there may be very large returns to trying new ideas. In 2025, India may be well served by thinking beyond the prevailing “License Raj” style of environmental regulation and trying out a different approach.
Anant Sudarshan is an Associate Professor in the Department of Economics at the University of Warwick.
India in Transition (IiT) is published by the Center for the Advanced Study of India (CASI) of the University of Pennsylvania. All viewpoints, positions, and conclusions expressed in IiT are solely those of the author(s) and not specifically those of CASI.
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