Carbon tax vs cheap talk

Written by Jeffrey S Hammer | Updated: Nov 26 2009, 02:40am hrs
Rich countries seem to have abandoned the idea that the upcoming Copenhagen conference will make much progress on global warming. The UN General Secretarys office is trying to dampen expectations. However, this should not dampen Indias stance at the conference. Copenhagen offers India a chance to make an important statement on the international scene. With only self-interest in mind and with enough resolve, the country can also set itself up for forward-looking, efficient industrial growth and make it easier to maintain fiscal balance.

India should tax carbon at rates that will embarrass the rich world. We can bargain for deals compensating for rich countries previous profligacy later. Unilateral action on taxes will not only help India claim the moral high grounda good place to bargainbut also help fix some of our own problems.

Carbon taxes are easily assessed on fixed location industrial activities and on fuel sources for automobiles, heating and cooking fuels. This is a good place to start. Actually, implementing taxes that are the true instruments for pollution reduction rather than declaring targets for emission control would be another way of leading the rich countries to good behaviour. Lets face it: targets are empty promises. Concrete policy moves show true commitment. They can also be adapted as their effects are monitored and judged. Easily administered taxes should be announced and acted on as quickly as possible so that there is no accusation of cheap talk on Indias part as it deals with the rest of the world.

The countrys self-interest in executing such a policy goes beyond public relations. Deficits are rising. The introduction of sweeping new tax reforms, while long overdue, will be longer in coming. Indias tax resiliencythe rate at which revenues keep up with economic growthis distressingly low and lags far behind expenditure needs for infrastructure growth, which will increase with a low industrial base. A tax that reduces pollution in our cities, cuts carbon worldwide and raises potentially large sums of tax revenue in the short-run should be appealing indeed. It only makes sense to tax bad things like pollution emissions before taxing good things like wages, income or wealth.

Wont extra taxes on an industrial sector that is already too small for a country of Indias income slow its growth even further By themselves, of course. However, its not expensive energy thats held back the sector. Manufacturing firms are hamstrung by a myriad of constraints that are entirely policy-induced. There are dozens of impediments to joining the organised sector. For example, its an ordeal to maintain the many government-mandated records. India ranks 133rd (behind Malawi and Tanzania!) in the World Banks index for the ease of doing business.

Many of the obstacles are completely unnecessary. Relaxing them would offer the quid pro quo that industry needs to accept taxes on carbon emissions.

Some constraints to industries, particularly those with 100 employees and more, are supposed to protect labour but are incredibly burdensome on firms that are growing. The number of firms that have just over 100 employees is out of line with those just under. Growth among the former has been very small for decades; India is stuck with firms and plants that are much too small and that could absorb many more employees.

Unfortunately, this sector has already seen organised interest groups becoming active. And while their claims to protect working people (that is, almost everyone) are tragic-comic, countering them will be a tough sell. Letting people know that many labour protection laws protect only those who currently have good jobs but seriously reduce the number of good jobs there should and could be is a crucial adjunct to such a policy.

Current industries developed under a too-cheap energy policy, which has made many of them dependent on coal. These are going to have to change soon anyway. The more recent entrants use newer technologies that are already more efficient. Higher taxes will encourage more efficiencies, and more rapid adoption of international industrial techniques. Better, they will lead our creative business and engineering sectors to search for cheaper forms of energy. Appropriate technology can become free to develop in a labour-intensive environment. Gee, I wonder where such energy could come from and how many modern, organised sector jobs that would create

Compensating current industry for higher energy prices should be technically and financially easy, with business registration procedures and labour laws that are more like East Asian and developed countries. Also helpful would be clearer land acquisition policies. This is much harder and prone to abuse of people who really deserve protection. Policies that would compensate business for energy taxes along these lines are possible, but not in the next few months.

One problem in this proposal may not be a problem at all, depending on how you look at it. If industry finds a way to reduce emissions and grows with modern and appropriate technology that is clean and likely labour-intensive, the fiscal gain I mentioned will not materialise. But in that case, we have a cleaner environment, a strong bargaining position in the world on compensation payments for prior, rich country pollution and modern, adaptable industry. If industry does not adapt and remains a heavy polluter, the fiscal gains will be large. Either way (or some combination) doesnt sound so bad.

The author is Charles & Marie Robertson visiting professor of economic development, Woodrow Wilson School of Public & International Affairs, Princeton University