Is India ready to have carbon tax?

Reduction of carbon emission is supposedly one of the primary goals of most of the countries in the ongoing debate on climate change and its expected impact on the environment and development. The Paris Agreement which seeks to achieve carbon neutrality by the end of 2050 has been ratified by the Indian government.

Accordingly, the focus of the government should be to ensure that effective measures are taken to reduce carbon emissions and switch to a more effective alternative source of energy. Carbon dioxide is the primary contributor to climate change and most of the GHG emissions take place through the burning of fossil fuels such as coal.

While various initiatives have been taken by the government to curb carbon emission, a carbon tax is a policy on which India's stand is mainly negative.

Carbon tax is the need of the hour in India, but not for the purposes of revenue but to curb greenhouse gases (GHG). Before introducing a carbon tax, India needs to have a clear policy framework on how to make effective use of such tax collected.

The core of the climate change problem is considered as one of market failure as the emissions from industries are the primary driver of uncontrolled carbon emissions. In the context of the market, these emissions impose negative externalities for the economy and the environment as the social cost of carbon-intensive goods is not reflected in their market.

This raises the issue of carbon pricing wherein the price imposed on such goods must reflect the true cost of the carbon emissions. Thus, by internalising the externalities that are associated with GHG emissions, carbon pricing allows for a cost-effective and innovative incentive solution to address the issue of climate change.

In India there is no explicit carbon tax, the main challenge with carbon pricing is that the benefits of such a scheme are diffused, and there exist concentrated costs. The beneficiaries of carbon pricing are scattered and less likely to support the scheme. Carbon pricing will change the existing status quo on low emission of carbon and will create a divide between those who benefit from such a scheme and those who suffer economic loss. Carbon-intensive companies are more likely to oppose carbon prices.

The policy of carbon taxation is considered to be regressive in nature as it mainly impacts the lower-income groups as compared to middle or higher-income households since they are able to afford energy-incentive goods because of their higher income. In addition to this, the common argument that the revenue generated through carbon tax could be used in distributive and welfare schemes is also flawed. Because, most of the time, there has been poor use and implementation of the revenue generated through such a scheme. Most of it remains unused or used for other purposes by the government. There is no clear record or accounting of how the revenue is used by the government.

Another reason often used to oppose carbon pricing is that it will lead to an increase in production/manufacturing costs for local industries which will be reflected in the price of the final products. This will reduce the demand for such products in the national and global market and will make Indian products less competitive.

However, to resolve these concerns, it is argued that revenue recycling provides a great option in making suitable use of revenue and provides a mechanism for the government to provide good returns to society. The option of creating a fund for the revenue generated seems good. However, in reality, such a method for the revenue distribution has largely failed before. Even when coal cess was levied, a significant part of the Clean Energy Fund that was formed remained largely unutilised from 2010 to 2016. Therefore, the government should first plan out viable projects that it actually seeks to execute and then accordingly allocate funds.

Lastly, climate policy with a focus on carbon tax can work efficiently in countries that have political trust and the perceived notion of corruption is less. However, unfortunately, the performance of India in both areas is considerably low. If the revenue generated through carbon tax is effectively used in the distribution of dividends to households or in energy-efficient projects, it will help the government in winning the trust of the public and creating awareness with respect to controlling carbon emission.

(The writer is a student of NLSU, Bengaluru)

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