As the dust settles following an historic Indian election, it is an opportune time to think about innovative policy tools that could help India achieve its development goals. In the last term, several schemes have had their roots in Prime Minister Narendra Modi’s home state of Gujarat. To take just two examples, a redesign of the electricity distribution to move towards 24-hour power for rural households, and an innovative scheme to generate female employment through the collection of Neem seeds.

Today, as we commemorate World Environment Day, Gujarat is proving itself to be a trailblazer once again as the state launches the world’s first emissions trading scheme (ETS) for particulate air pollution. This ground-breaking idea was initiated when Modi was chief minister of the state and the pilot will apply to 350 industries in Surat, a densely populated industrial center.

Emissions trading schemes are the rare policy that offer the potential for a win-win-win. Specifically, it is expected that air pollution emissions will decline significantly, and that industry compliance and government enforcement costs will both decrease.

The first win is that under the ETS, the Gujarat Pollution Control Board (GPCB), which Gupta chairs, will set a fixed emissions cap covering all factories with plans to systematically reduce the cap over time. An appealing feature of the scheme is that it enforces compliance with the environmental goal, namely regulating the total mass of particulate matter put into the air. Reducing this form of air pollution offers high potential benefits because it causes the average person in India to lose about 4 years of life expectancy, according to the Air Quality Life Index (AQLI) produced by the Energy Policy Institute at the University of Chicago (EPIC).

The second win is that the ETS promises to reduce industries’ compliance costs by unleashing markets to identify the least cost way for heavy polluters to comply and rewarding the most efficient plants. The flexibility of being able to trade reduces the costs imposed on industry, because plants for whom it is cheap to emit less will take on more of the burden. In contrast, in the status quo, regulations mandate the use of specific abatement technologies, regardless of whether it is the least expensive way for a plant to reduce emissions. In many respects, this status quo resembles a hangover from the pre-liberalization years when licenses, permits and permissions governed most aspects of India’s economy…