Rigorously piloting and evaluating climate and environmental policies before scaling them up can be a good way to help ensure public sector investments are (cost-)effective.
The Government of Gujarat, India, adopted this design-testscale approach in rolling out its first emissions trading scheme (ETS) to reduce industrial pollution. The Government and researchers from the Abdul Latif Jameel Poverty Action Lab (J-PAL) conducted a randomized controlled trial that showed the ETS was effective, in the sense that firms’ particulate matter emissions decreased by 20–30%, while average abatement costs fell, generating an estimated US$25 in health benefits for every US$1 spent on the reform.
- If there is not yet credible causal evidence that a policy is effective, governments should consider investing in a small number of strategic impact evaluations to measure the impact of major reforms. This can help ensure they are (cost-)effective before they are scaled up widely.
- Command-and-control regulation that sets caps on individual firms’ pollution can suffer from imperfect compliance, poor or corrupt monitoring, and weak enforcement, and tends not to differentiate between firms with different abatement costs.
- ETSs set a cap on total pollution across businesses such that permits can be traded between them, allowing firms with lower (higher) abatement costs to reduce pollution more (less). This can lower overall costs. While successfully implemented in high-income countries, they are rarely used in low- and middle-income countries at this point.
- The Gujarat ETS study shows that emissions markets are possible to implement and can be highly effective, including in emerging economies. This evidence helped the government make the case to scale the emissions markets in cities across the state and inspired other states to explore plans to launch similar systems for particulate matter and other pollutants.
- Building emissions markets in this way can also help lay the groundwork for carbon trading.
Challenges of piloting and setting up an ETS include initial setup costs, continuous emission monitoring technology, regulatory harmonization, and ensuring equitable participation among industries. Addressing these challenges requires sustained institutional support and tailored capacity-building efforts. MoFs can use findings from the study to explore potential benefits and costs of emissions markets in their own contexts.
Keywords
carbon pricingco-benefitsempirical methodsex-post analysispolicy process
