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Cap and Trade In Indian Air Pollution

Roboramma

Penultimate Amazing
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Feb 22, 2005
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Very cool experiment from India on a cap and trade market in industrial air pollution. The treatment group (randomly assigned firms which used the market) saw drops in pollution and also a drop in the cost of lowering pollution. Why the latter? Because those who could lower their pollution levels more cheaply can sell the right to pollute to the firms who have higher costs for doing so.

https://bpb-us-w2.wpmucdn.com/campuspress.yale.edu/dist/7/2986/files/2024/07/ets_paper-25.pdf
Market-based environmental regulations are seldom used in low-income countries, where pollution is highest but state capacity is often low. We experimentally evaluate the world’s first particulate matter emissions market, which covers industrial plants in a large Indian city. There are three main findings. First, the market functioned well: permit trade was active, and plants bought and sold permits to meet their compliance obligations almost perfectly. Second, treatment plants, randomly assigned to the emissions market, reduced pollution emissions relative to control plants by 20% to 30%. Third, the market reduces abatement costs by 11% at a constant level of emissions. We use rich data on plant bids for emissions permits to estimate heterogeneous marginal abatement costs and evaluate cost savings. These estimates show that plants can reduce emissions for small increases in abatement costs. The pollution market therefore has mortality benefits that exceed costs by at least twenty-five times.

MR has a good post about it, which is where I first saw this:

https://marginalrevolution.com/marg...ion-in-india-with-a-cap-and-trade-market.html
 
This is actually the sort of way of instituting policy that I was trying to get at in the thread on "how to change the constitution". Here we see a specific regulatory regime that was well intentioned but where the state capacity to institute it was lacking, and so it became subject to corruption and lack of compliance.

Instead of just instituting a new policy, they ran an experiment, randomly assigning some firms to stay under the original regulatory regime (the control group) while others were randomly assigned to a new way of doing things (the treatment group, which used the cap and trade system). While I find the result exciting in that they were both able to lower pollution and lower the costs of that pollution mitigation, the thing I find even more exciting is the idea of using this sort of experimental setup to institute new policies.

Just arguing in the public square isn't going to get us to the right answers, or at least not as efficiently as possible. I'd love to see a system where every time we want to institute a new policy we first run an experiment of this sort with clear metrics for what it's trying to achieve and predetermined ways of assessing if it's been successful at doing that, and only if it reaches those goals does the policy get instituted more broadly.

Yes, any such system would potentially be susceptible to Goodhart's Law, but I don't think it would be more susceptible than we already are.

Less ambitiously maybe I can just note that I'd like to see more things like this.
 
I tend to agree, it would be nice to see public policy actually get tested once in while. Need to have clear standards for what is success and failure before you start though.
 
I'd love to see a system where every time we want to institute a new policy we first run an experiment of this sort with clear metrics for what it's trying to achieve and predetermined ways of assessing if it's been successful at doing that, and only if it reaches those goals does the policy get instituted more broadly.
It won't happen. Politicians believe that the only goal of making new laws is to make new laws. What they are trying to achieve and whether the new law will actually achieve that is irrelevant.
 
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