The Energy Policy Institute at the University of Chicago Trust in India (EPIC India) and the Abdul Latif Jameel Poverty Action Lab (J-PAL) signed a Strategic Partnership agreement with the Gujarat government to set up India’s First Carbon Trading Market on Monday. The market will allow industries and power plants in Gujarat to trade CO2 permits and an overall cap will provide the government a flexible tool to meet climate goals. The market will be the first of its kind among today’s emerging economies, outside of China, said Michael Greenstone, Director of the Energy Policy Institute at Chicago (EPIC) and Milton Friedman Distinguished Service Professor. Greenstone believes a cap and trade carbon market can significantly reduce CO2 emissions and facilitate faster economic growth, than is possible from other approaches. Excerpts from an interview:
Q. How will the cap and trade scheme work in Gujarat? Can companies from outside interested in trading also participate?
A. The Government today announced that it will launch a CO2 cap-and-trade market. It builds on Gujarat’s success in launching India’s first emissions market, which was for particulate air pollution, that the CM recently announced will be scaled up throughout Gujarat. The success of the Gujarat experience at providing a win-win in that it reduces pollution while minimizing the costs on industry mirrors the experiences of the US, EU, and recently China with pollution markets. For now, the proposal is to identify large emitters (i.e large energy users) in the power and manufacturing sector in Gujarat and setting a maximum level of CO2 emissions (i.e., a cap). Gujarat would then be issuing permits equal to this target and allow firms to trade. This allows industries that can reduce their emissions inexpensively to receive payments from those that find it more costly to do so. The initial proposal is that this market be restricted to existing participants and new entrants in these sectors, although there is flexibility to allow others to participate over time. Importantly, the cap is likely to both facilitate increases in electricity consumption and, at the same time, be consistent with India’s Paris commitment to reduce the economy’s carbon intensity.