Will India turn to carbon tax to meet emissions reduction targets?


In the 1920s, British economist Arthur Pigou introduced a concept of imposing a tax on any business transaction that could create a negative externality. One came to be called a Pigouvienne Tax.

It is widely seen as a corrective tax implemented to improve social welfare when the consumption of the product concerned has a cost on the lives and livelihoods of others by creating negative side effects for society.

The purpose of these taxes is to oppose and cover market inefficiencies with negative pressures, such as environmental pollution, threatening the surrounding population.

While they are intended for the producers of these sinful goods and services, economists argue that these taxes are rather borne by users or consumers.

Some examples are tobacco taxes, sugar taxes or just the very recent and famous carbon taxes.

This has happened as a result of constant greenhouse emissions across the world and the gradual impacts of climate change. As COP26 approaches, there is a broader public debate on the need for and ways to reduce carbon.

Advocacy for a carbon tax in India:

The IPCC, UNFCCC, IEA, G20, OECD, BIMSTEC, GCC, etc. have all given urgent priority to adapting or mitigating the impacts of climate change.

Ambitious, India has set emissions reduction targets to be achieved by 2030 and recently set 2070 as the target year for net zero emissions.

India has even changed its energy rules to make it mandatory to include the share of renewables in the purchase and consumption of electricity.

When India is required to control these toxic fumes responsible for global warming while ensuring the development and growth aspect throughout the country, it becomes very difficult for the country to balance the two.

Although there are various methods to decarbonize the industrial sector: increasing energy efficiency, developing new and improved manufacturing techniques, adopting low-emission alternative fuels, carbon capture and storage, less absorption of resources, etc.

But experts have often pointed out that carbon pricing is the most cost-effective and efficient tool in providing incentives to reduce greenhouse gas emissions.

However, it is a two-pronged tool: a cap and trade system.

This requires capping total GHG emissions (including carbon). This helps stimulate supply and demand in the carbon market while imposing carbon taxes on GHG emissions. Indirectly, it sets a price for Carbon, in particular that present in fossil fuels.

Carbon trading involves capping the authorized levels of carbon to be emitted, creating the possibility of offsetting in the event of excess production. Depending on the needs of supply and demand, carbon becomes a commodity to be bought and sold.

Globally, nearly 13% of global annual greenhouse gas emissions are covered by carbon pricing systems.

India has largely controlled its emissions on the basis of the first mechanism, setting carbon prices in its commercial markets, but has failed on the second front: the carbon tax.

In the country, coal attracts a cess of Rs 400 per ton. Likewise, gasoline and diesel are heavily taxed.

According to one of the studies published in ScienceDaily: “It has long been theorized that increasing carbon prices would provide an incentive to reduce emissions through improvements in energy efficiency. So we looked at history to find out how cost increases affected energy efficiency in the past.

It is often said that if the world is to meet its ambitious 1.5 ° C targets under the Paris Agreement, it should look beyond the simple base pricing mechanism.

While carbon taxes can help further reduce emissions, world political leaders have pointed to economic constraints as their doubts about continuing and implementing the same.

Therefore, although some taxes may appear to be a form of carbon tax, India’s tax structure does not provide incentives to reduce emissions.

Based on the productivity model developed by Nobel Prize-winning economist Robert Solow: “Other studies have examined how the taxation of carbon emissions would stimulate innovation in renewable energy. “

It has been claimed that energy efficiency increases by 30% in case of improvement in the use of resources.

“But we show that it would also lead to more efficient energy use, not only by making people use better existing technology, but also by motivating people to innovate better ways to use energy. This means that solving the climate problem, while still difficult, is a little easier than previously believed. “

How does carbon pricing or the carbon tax work?

This is achieved by increasing the price of inputs involved in high emission processes.

And without a doubt, companies seeking to maximize sufficient profits are doomed to react to this imbalance and will find alternatives or ways to limit the use of these overpriced inputs, thus decreasing the manufacture of products responsible for the least pollution.

While tax regulations barely cover a minimal portion of emissions, i.e. the sector treated, carbon taxes across the country will, on the other hand, cover 100% of the emissions achieved.

According to the IMF, an assumed carbon price of US $ 25 per tonne of CO2 in 2030 will reduce carbon emissions by around 25% in India alone.

Win-win situation for the Government on the levy of the carbon tax:

Each carbon emitted can be an important source of taxation for the regime.

Considering the annual emissions of 2.0 billion metric tonnes of CO2 per year and Rs 1000 / tonne of carbon tax, the government may possibly levy a tax of Rs 200,000 crore per year.

However, it becomes difficult to balance effective carbon pricing and associated growth.

Can the respective taxation work for everyone?

No country can fight climate change alone or stop it unilaterally. Because no country suffers its impacts on its own, what is observed in one region surely finds a mechanism to influence conditions in the other region.

With this in mind, the European Union has formulated a new carbon border tax, i.e. a tax levied on imports of steel, cement, electricity, aluminum and fertilizers, if the carbon prices are not paid at the place of origin.

If a single country imposes a carbon tax, it can end up hurting its economy while collective action can help achieve seemingly impossible goals.


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