Many low- and middle-income countries today suffer from extraordinarily high air pollution. For example, in India, nearly the entire population of 1.4 billion people breathes air more polluted than what World Health Organization standards allow for particulate matter, often by a factor of 10 or more. To address this crisis, India relies on command-and-control environmental regulations akin to those adopted in the United States prior to 1990. Under this system, the government mandates that plants install pollution-control equipment (the command) and penalizes plants that emit particulates above a limit (the control). These limits are often similar across plants that may differ in age, size, fuel type, or existing pollution-abatement equipment. However, though the penalties are stringent on paper, in practice, they are weakly enforced. Several reasons for this include limited monitoring capacity, high costs, and the difficulty of deploying strict punishments, such as imprisonment at scale. Crucially, in the status quo, civil fines are not an option for the regulator. Lastly, the uniform emissions limit ignores differences in abatement costs between plants and provides no incentive for plants to overperform even when it would be relatively cheap for them to reduce pollution.

A powerful alternative to this system is to regulate pollution using markets of tradable pollution permits. The standard justification for markets is that trade allows greater flexibility, reducing the overall cost of pollution abatement by enabling plants that can cut emissions more cheaply to do more of the work. The United States and the European Union have had great success in using permit markets to reduce air pollution, but low- and middle-income countries have rarely used them. Indeed, the precise effects of markets have been difficult to quantify anywhere in the world because there is rarely a suitable comparison group available. A key question is how markets might perform in places with lower state capacity, considering that they place different burdens than command-and-control regimes on both regulators and plants.