How carbon taxation can lead to a profitable climate change mitigation strategy in India
Climate change is no longer a “scary thing of the distant future”. The recently released Intergovernmental Panel on Climate Change (IPCC) report indicates that the world will likely reach or even exceed 1.5 ° C warming over the next two decades. Limiting this level of warming will require ambitious emission reductions and strategies dedicated to creating a sustainable future.
One of these strategies could be a reform of the tax structure in India, with regard to its carbon taxation. Carbon taxation policy in India continues to evolve, albeit haphazardly through a carbon taxation regime that lacks overall consistency and does not appear to be linked to specific carbon emissions targets.
We don’t have an explicit carbon price or a market-based mechanism, but we do have a number of schemes and mechanisms that put in place an implicit carbon price. These include the Perform, Achieve and Trade (PAT) program, the (now abandoned) Clean Energy System, Renewable Energy Purchase Bonds (RPO) and Renewable Energy Certificates (REC). . However, although these mechanisms have had some success, India has yet to realize benefits comparable to those of an explicit carbon pricing structure.
Carbon pricing outweighs the economic efficiency costs of pricing with national environmental benefits. According to a 2021 IMF-OECD report, the economic efficiency costs of carbon pricing are typically around 1% of GDP for a carbon price of $ 50 / tonne of CO.2 in 2030 for countries with high emissions, and much less than in other cases.
For most countries, the national environmental co-benefits of carbon pricing, which mainly include reductions in deaths from local air pollution and reductions in traffic congestion / accident externalities, are about as large, or in a few cases are much more important, than cost efficiency costs.
In addition, carbon pricing offers significant potential revenue gains. According to the report, $ 50 / tonne of CO2 Carbon prices in 2030 would generate revenue increases of around 1% of GDP for many G20 countries and significantly more than that in a few cases.
The design and the mechanism for the effective implementation of a carbon tax system will be delicate and experimental. The government could introduce a carbon tax in the form of a revised clean energy tax. This iteration of this previously hijacked cess could include not only coal, but also other forms of fuels such as gasoline, natural gas, etc.
As suggested by the Center for Legal Policy, the new tax should be tied to the amount of carbon emissions, and not to the fuel supply itself. This would cause the cessation rate to vary depending on the ability of a product to emit greenhouse gases. This will help encourage the use of comparatively cleaner alternatives. It is vital that any form of carbon tax is introduced realistically and gradually to ensure less or no chaos.
However, a carbon tax mechanism is not complete success, the key issue is the distribution of these collected revenues. The fundamental motive of a carbon tax is not only to assign an economic penalty to pollution or emissions, but also to channel the revenue generated for investment in a sustainable and cleaner future.
Unlike the fate of environmental cessation, which has been diverted from use for energy and environmental purposes and used to compensate states for lost revenues following the switch to the new indirect tax regime, it is essential to ensure a judicious use of revenues from carbon pricing which will make climate policy more inclusive and efficient while controlling the costs of clean energy transitions for the economy.
It is necessary to define the purposes for which the collected revenues could be used. A defined approach will help create a universal definition of “green” and close the doors to any disparity as well as any dispute. This redistributive aspect could be the responsibility of the Finance Commission itself, through the creation of a nodal agency.
Proceed with caution
Despite their advantages, carbon taxes remain subject to speculation as to the efficiency gains provided. There have been several studies to understand this and the conclusion remains skeptical. Carbon taxes have proven to be simpler and faster to apply and, therefore, they are a more practical choice over short to medium term Emissions Trading System (ETS) for developing countries. .
Research shows that the impacts of implementing a carbon tax are more evident in developing countries than in developed countries. The analysis shows that developing countries experience higher real GDP contraction rates than developed countries because emission costs relative to the size of the economy are relatively higher in developing countries. Major polluting countries like China, USA, India and Russia have also been found to have low marginal abatement costs compared to other countries due to high emission levels and substitution possibilities inputs.
In addition, concerns have been expressed about carbon leakage. The European Union advocates the introduction of a carbon border adjustment mechanism (CBAM) to reduce the risk of carbon leakage. The European Parliament also advocates connecting CBAM to a region’s emissions trading system, allowing companies to buy and trade greenhouse gas emission permits.
Imports would then be taxed equivalent to the price of carbon paid in this trading system, unless that country has adequate environmental rules. In such a scenario, the development of a carbon pricing mechanism in India would help to be competitive on the international front and protect domestic markets. It remains to be seen, however, whether the benefits obtained by a few exporters outweigh the potential losses for many due to a higher tax burden.
In summary, carbon taxes can prove to be an indispensable tool in any profitable climate change mitigation strategy, provided it is inclusive and supports economic development. The short-term burden of an additional tax levy is likely to be relatively small, as low-cost carbon reduction options are still within reach of many key economies.
However, the long-term benefits of this development in terms of changing fuel or improving overall competitiveness through energy technology innovations remain to be seen. The introduction of these taxes into the Indian economy has the potential to support effective climate policy and to show India’s stance towards the apparent dangers to a sustainable future.
Amrita Goldar is a senior fellow and Sajal Jain is an associate researcher at ICRIER. Opinions are personal.