After Gujarat win, an emissions trading experiment heads to Rio

In 2019, textile factory Swastik Poly Prints joined the emissions trading scheme (ETS) of Surat, a city in the Indian state of Gujarat. Since then, the company has reduced its particulate matter emissions by at least 30%, claims its owner Binay Agrawal.

The ETS is a cap-and-trade system which seeks to curb air pollution by allowing companies to buy and sell permits for particulate matter emissions. Participating companies have access to an online dashboard which helps them track emissions. In Surat, factories like Swastik Poly Prints emitted 20-30% less particulate pollution than those operating under conventional regulations, notes Emissions Market Accelerator (EMA), which brought the cap-and-trade system to Gujarat.

Agrawal says continuous emissions data via the ETS helped inform the company’s decisions on how to improve combustion efficiency, such as fine-tuning and upgrading its auto-firing systems, pollution-control equipment and filtration devices. Now, the company is “well within the limit” of its ETS cap, he notes.

Gujarat’s emissions trading scheme was a finalist for the 2025 Earthshot Prize hosted in Rio de Janeiro, where it piqued the interest of local officials. Now, the Brazilian city is exploring whether a similar market-based approach could help it tackle industrial pollution.

If implemented, this market would be the first of its kind in South America. A memorandum of understanding between EMA and the city of Rio, which would lay the foundations for the partnership, is now in legal review, says Kaushik Deb, executive director of EPIC India.

In June 2026, Rio de Janeiro announced a partnership with EMA. The accelerator is a partnership between the Energy Policy Institute at the University of Chicago (EPIC) and the Abdul Latif Jameel Poverty Action Lab, a global research centre.

According to Osmar Lima, Rio’s secretary for economic development, “some variables” are currently under assessment until June. These include “the pollutants that may be regulated, the facilities potentially covered, the emissions cap, the initial number of permits, the governance model, the trading platform and the monitoring, reporting and verification mechanisms”, Lima says.

Dialogue Earth spoke to researchers involved in the Gujarat experiment, the technical team working with Rio de Janeiro, and independent experts to examine what the model can deliver.

Gujarat’s results offer a promising proof of concept, with some high polluters showing lowered emissions. But questions remain over the transparency of emissions data, the capacity of regulators to run such markets and whether reductions in factory-level emissions translate into cleaner air for nearby communities, experts say.

Answers to those questions are important for Rio, which is still assessing whether a pollution-control model developed in an industrial hub in western India can work in its unique regulatory, industrial and environmental context.

“The idea at the outset is not just to set up an emissions trading scheme. We want to try and understand what the situation in Rio is,” Deb tells Dialogue Earth. Some lessons from Gujarat, including how to set an emissions cap and measure the total industrial emissions, may be transferable. But regulation, local laws and institutional capacity could prove harder to replicate, he notes.

The Surat model

Emissions trading is not a new concept. Over the years, markets for pollution control have cropped up in the United States and across Europe to reduce pollutants such as sulphur dioxide and greenhouse gases.

But Surat’s was the world’s first emissions trading scheme specifically targeting particulate matter, and in a polluted textile manufacturing hub.

The pilot in Surat covered 342 industrial units over seven months. A randomised selection of 168 participated in the scheme while 174 remained under conventional regulation. Participating plants reduced their particulate matter emissions by about 24% compared with the control group. The latter failed to comply with pollution rules roughly a third of the time, while non-compliance fell to about 1% among participants.

The market does not, however, replace regulation. It is a compliance market: regulators determine which industries participate, which pollutants are covered and how the cap is set. “Let’s say, in Gujarat, the initial cap was 280 [tonnes of particulate emission] and was reduced to 170 [tonnes] over two years,” says Dheeraj Alshetty, deputy director of EPIC India. The idea was to tighten the ceiling gradually rather than impose an immediate reduction that could result in major costs and resistance from industry, he adds.

At Swastik Poly Prints, the financial gain from selling surplus permits was one factor behind investment in cleaner technology, says Agrawal. But the bigger benefit was improved fuel efficiency. Better combustion reduced fuel consumption and costs, while also keeping the company comfortably within its emissions limit, he notes.

The hope is that these financial and reputational incentives encourage companies to invest in cleaner technology and more efficient production, Alshetty says.

Before the ETS was set up in parts of Gujarat, like other Indian states it relied on traditional “command-and-control” regulation. Under that system, regulators set emissions standards for industrial plants. “Compliance was expected and only non-compliance was penalised,” says Tejas Patel, deputy environmental engineer at the Gujarat Pollution Control Board. Plants that performed better had little financial incentive to reduce emissions further.

Under the ETS, the Gujarat Pollution Control Board set a ceiling for the combined emissions of participating industries, with companies receiving permits for a certain amount of pollution. Those that emit less than their allocation can sell surplus permits to companies that need additional allowances.

There are limits, however, on how much a company can rely on the market. In Gujarat, a firm can buy no more than 50% above its initial allocation. Beyond that, the economics are designed to push firms towards cleaner technology or fuel, Alshetty notes.

Rio’s needs

After a year of preliminary talks, the EMA is currently working with Rio’s Department of Economic Development to hash out the details of this partnership, including establishing a roadmap and determining pollutants to focus on.

Traffic on Avenida Brasil, a major thoroughfare in the northern area of Rio de Janeiro (Image: Fernando Frazão / Agência Brasil)

Among Brazilian state capitals, Rio has one of the highest levels of air pollution and pollution-related deaths (Image: Fernando Frazão / Agência Brasil)

The City Council already has a voluntary tax exemption programme for companies that buy carbon credits. The city now wants to establish a new market for permits relating to particulate matter. This is where the EMA comes in.

“The aim is to reduce the total volume of emissions and enable this reduction to take place more efficiently – at a lower cost and in a manner better suited to each business’s specific profile,” says Lima.

But Rio’s pollution sources are different from Surat’s. Petrochemical and metalworking industries, as well as transport, are among the main drivers of pollution in Rio and nearby cities, says Carolina Mendes Rocha, a carbon specialist at the E+ Institute, a Brazilian think-tank focused on the energy transition.

The city also has one of the highest levels of air pollution among Brazilian state capitals and is second only to São Paulo in pollution-related deaths, recording around 17,000 between 2023 and 2025, according to estimates from the Ministry of Health.

“It is necessary to consider where emissions are concentrated, who is exposed to them, and whether the regulatory framework prevents the formation or persistence of pollution hotspots,” notes Rocha. “A system may fully meet its aggregate reduction target and yet still allow excessive concentrations of pollutants in certain neighbourhoods or communities,” she says.

Cleaner air?

The results of the Gujarat experiment are promising, but they come with important limitations. The pilot measured emissions from industrial stacks, not ambient PM10 or PM2.5, which is the pollution people inhale and includes sources like heavy vehicles and construction activity.

The Surat experiment also focused on textiles, an industry where pollution controls are relatively limited, notes Bhargav Krishna, coordinator for environmental governance and policy at the Sustainable Futures Collaborative. “It’s debatable whether it would be equally effective for steel, cement, power industries, which have a more complex political economy around them.”

“An effective ETS should not focus only on particles but also gases such as SO2 [sulphur dioxide] and NO2 [nitrous dioxide],” says Krishna, noting that secondary particles can make up a substantial share of particulate pollution. SO2 emissions are mainly generated by burning fossil fuels.

Smoke billows from a sugar factory in Maharashtra, India. Many such factories have industrial boilers powered by fossil fuels, emitting pollutants including SO2 (Image: Dinodia Photos / Alamy)

An SO2 ETS is being designed in other Indian states drawing on Gujarat’s experience, according to Patel. This demonstrates that the model is not tied to a specific sector, he adds.

One example is Maharashtra, which is developing an SO2 market for several industries. It could offer lessons on technology adoption, costs and emissions reductions, notes Abinaya Sekar, an air quality scientist working with the Health Effects Institute.

Patel says a direct measurement of the ETS’s impact on ambient air quality has not yet been conducted. But he opines that stack-level emission reduction across hundreds of industrial units could translate into meaningful improvements in air quality in and around Surat.

The city’s experiment shows ETS is a viable mechanism for the Global South, he says. Alshetty estimates 80-85% of the model can be transferred across states, with the rest customised based on local conditions such as fuel availability and industry composition.

Not so easy

It took the Gujarat government around nine years to launch the market. Continuous emissions monitoring systems (CEMS) were installed starting from 2014, with guidelines coming in 2018 and the market following in 2019, Alshetty says.

But the data generated by CEMS is still not publicly available, says Krishna, making it difficult for independent researchers and the public to assess emission levels and the market’s performance.

Krishna believes the model worked partly because three conditions came together: a highly capable technical institution in the form of the EMA and ETS, strong attention from the state government, and rapid deployment of technologies to monitor and control emissions. India’s state pollution-control boards “certainly do not possess the capabilities to do so” as they continue to face staffing and institutional capacity constraints, he says.

Krishna also cautions against replacing traditional models with market-based regulation. “The existing regulatory system is broken, no doubt, but the answer to me isn’t to chuck it out in favour of a market-based mechanism,” he says. Rather, the system should be strengthened and equipped to handle current and future challenges.

“The Surat experiment gives us a strong counterfactual between the emissions trading market and the status-quo regulatory system,” says Sekar. But to draw a fair comparison between the two, researchers would need to compare the market with an equally resourced conventional approach, she says.