Is it time to impose a carbon tax?

Updated: July 25, 2019 5:19:14 PM

The tax can be an effective policy instrument for realising India’s Paris commitments and can substitute the current Clean Environment Cess

evehicles, carbon tax, INDC, Paris Climate meet, emissions reduction targets, Greenhouse Gases, GHG emissions, CO2 emissionsLocal pollutants, particularly particulate matter, cause many health-related problems such as breathing, wheezing, asthma, and aggravation of existing respiratory and cardiac conditions. (Reuters photo)

Monika Gupta & VN Alok

In the recent Union Budget, a major initiative has been taken by the government to promote e-vehicles. However, the initiative is only a small step to curb pollution effectively and give pace to the emissions reduction targets announced in the Intended Nationally Determined Contributions (INDC) during the Paris Climate meet. Other measures, such as a carbon tax, could have been instrumental in this regard.

Local pollutants, particularly particulate matter, cause many health-related problems such as breathing, wheezing, asthma, and aggravation of existing respiratory and cardiac conditions. It has been found recently that air pollution may lead to hypertension risk, particularly in women in India. Further, life expectancy, due to this, has reduced by 2.6 years. Worldwide, more deaths per year are linked to air contamination, particularly from the industrial and transport sectors. The situation is getting worse, particularly in megacities, including Delhi.

As per statistics, India is the world’s fourth-largest emitter of Greenhouse Gases (GHGs) though per capita emission is low due to a large population. Rapid economic growth with little concern for the environment makes this a serious threat. India’s total GHG emissions are more than 3,200 million metric tonnes, which constitute around 7% of the world’s total GHG emissions, with an average growth of 6.3% in 2018. The energy sector has a major role in this and contributes 68.7% of total emissions. Over a span of 24 years from 1990, this emission has increased by 180%.

The growing energy demand and consumption have led to an emergent need to put a price on emissions, directly reducing the exploitation of natural resources and pollution. Putting a price on carbon and taxing it directly is considered far better than deciding the limit of emissions through the ‘cap and trade’ system, under which maximum emission limits are decided for the firms. Firms are required to buy permits if they pollute more than the prescribed limit. Similarly, firms can sell their permits to others if they pollute less than the limit. Obviously, the carbon tax system has advantages over the ‘cap and trade’ system due to its simplicity, affordability, revenue recycling and predictability of carbon prices. Further, the tax has price certainty, transparency and focuses on direct response as it checks unintended incidence of certain taxes on labour and capital, leading to employment generation, increased output and productivity.

Clearly, the carbon tax has three benefits. It—a) reduces emissions; b) stimulates innovations; and c) raises government revenue. In fact, a carbon tax is the most basic economic instrument which can be used to price carbon and combat CO2 emissions, and correct negative externalities. It works on the principle of ‘the polluter pays’.
The principle has been adapted globally and many countries have successfully introduced a carbon tax. In Europe, a large number of countries, such as Denmark, Finland, Germany, Ireland, Italy, Netherlands, Norway, Slovenia, Sweden, Switzerland, and the UK, had already imposed the tax in the nineties. Among them, Scandinavian countries were the first. Finland initiated this in 1990, followed by Sweden in the subsequent year. Sweden and Norway imposed a comparatively higher rate of a carbon tax at $27 and $15 per ton of CO2, respectively. Data shows that these countries generate revenue up to $1.7 billion annually from the tax. Carbon tax in Finland is based on the energy content of fuels and CO2 emissions. Great Britain, which introduced the tax in 2001, used the revenue on energy efficiency improvements and renewable energy support program. In other countries, it is used to finance public expenditure.

In the case of the United States of America, there is no nationwide tax, but few states-California, Colorado, Maryland and New York-use a carbon tax as an integral part of their strategies to reduce emissions. In Canada, Quebec and British Columbia are two popular provinces which impose the carbon tax. British Columbia’s carbon tax model is considered as a benchmark for many countries. It is estimated that from 2007 to 2015, CO2 emissions reduced by 4.7% and real GDP grew more than 17%. Early this year, Singapore imposed a carbon tax of $5 per ton of GHG emissions and is planning to increase the rate in the range of $10 to $15 per ton of emissions by 2030. Among the developing countries, South Africa has planned to introduce the tax in this year.

It can be argued that a carbon tax can easily be an effective policy instrument in reducing different local pollutants and achieving INDC targets for India. Moreover, the tax can substitute the current Clean Environment Cess, which serves little to no purpose as the it is subsumed under GST. Tax proceeds may be used to a) subsidies clean fuels and fuels used in the agriculture sector, b) promote electric vehicles through subsidy, c) improve public transport, and d) build infrastructure.

The primary aim of the tax is to discourage environment unfriendly production and consumer practices by making the polluting sources costlier without any negative effect on overall employment and output levels. The imposition of a carbon tax with revenue recycling, in terms of earmarking the revenue for related purposes, will help develop synergies and win-win situations. The revenue so generated will also contribute to the dwindling tax revenue, and reduce the fiscal deficit, which is targeted at 3.3% for 2019-20. Time has come when India has to become a pioneer among emerging economies and impose an explicit carbon tax, and let the polluters pay.

Gupta is assistant professor, BITS-Pilani & Alok is associate professor, IIPA

Views are personal

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.