Tradable Permits for Environmental Protection:
Case Study of an Integrated Steel Plant in India
1. Introduction
There is a growing consensus amongst economists and policymakers that for the
environmental policy to be effective there is a need to supplement the traditional
command and control type of regulation with economic instruments. The main reasons
for this move lie in the existing evidence on the growing levels of environmental
degradation suggesting that the command and control type of regulation has not proved
to be very effective in inducing the polluters to adopt pollution prevention and control
and that the economic instruments are generally more cost-effective.1 Intuitively, cost
effectiveness results from lower total abatement costs through a shift of the burden of
abatement from high to low cost abaters.
Tradable permits for pollution control is one such economic instrument.
Tradable permit systems can be classified into two groups. The first type is inter-plant
trading which allows emission trading among existing plants in a specified
geographical area; the second is that of intra-plant trading, which allows different
discharge points of a large firm to trade emissions among themselves. The latter offers
the firm the option of reducing pollution loads beyond discharge limits at one or more
discharge points and crediting it to other discharge points so that the pre-determined
level of environmental standards or pollution reduction is met at a lower cost. This
study attempts to design an intra-firm emission trading scheme for an integrated steel
plant in India. Trading scheme is designed for suspended particulate matter (SPM), a
toxic air pollutant emitted by the steel plants which can alter the immune system and