GHG reduction through carbon taxation: Policy framework for India

Abstract

The industrial and post-industrial era development in the world was made possible by extensive use of fossil fuels and subsequent increase in CO2 concentration is causing large scale adverse climate change effects. The extreme weather conditions and the rising sea-levels come at a huge economic cost, especially to the developing countries which are disproportionally affected by it. The global efforts to curb CO2 resulted in Paris Agreement, wherein it was decided to make all efforts to limit the global temperature to 1.5oC above the pre-industrial levels and to ensure a maximum of 2oC increase in global temperature. CO2 is an important contributor to climate change due to its persistence and consequent stocking effect of emissions and hence the focus of policy makers to curb its emissions. There are many market and non-market based instruments to address these issues. Market based instruments include taxes, emissions trading, environmental charges etc. and non-market-based instruments include regulation, reporting requirements, green technology subsidies etc. A combination of various instruments is required to effectively contain the GHG levels and meet Paris agreement commitments. India’s NDC commitment include reducing the GHG emissions by 33-35% per GDP by 2030 from 2005 levels, increasing the share of renewable energy to 40% by 2030 and create additional carbon sink of 2.5-3 billion tons of CO2. The carbon tax is one of the more efficient instruments to “internalize” the externality of carbon emissions. It is based on Pigouvian taxes and polluter pays principle and the unaccounted social costs are imposed as taxes on the emitter to reduce emissions. The pricing of carbon has been most prominently addressed by William Nordhaus, Economics Noble laureate in 2018 by introducing DICE model. According to the DICE model, the global pricing to meet Paris commitments is $40-80/tCO2 by 2020 and $50-100/ tCO2 by 2030. Globally, many countries have adopted carbon tax like Finland, Denmark, Switzerland, Canada. With only 2 countries in 1990 imposing some form of carbon taxation, it has increased 51 countries in 2020, with tax as high as $139/tCO2 in Sweden. In India, coal is the most significant CO2 contributor responsible for 70% of emissions. The carbon “cess” was introduced in India by formation of National Clean Energy Fund in 2010-11, which was later expanded to include environmental cess and was renamed as National Clean Energy and Environmental Fund (NCEEF) in 2016-17. Post GST implementation in India, the cess is collected in GST Compensation Fund and has practically ceased to exist. About Rs. 30,000 crores were collected in NCEEF, which was used to fund projects in MNRE, MoEF, MoP etc. The pricing in India was Rs. 50/tCO2 in 2013 and increased to Rs. 400/tCO2 in 2016. This policy paper suggests that the carbon cess should be converted to carbon tax to give more flexibility to the government. The carbon tax should be laid with progressively increasing base and rates. The base can start with coal in 2020 and progressively include additional petroleum products in 2-3-year cycles and include all GHG emissions by 2030. The carbon price should increase from Rs 400/ tCO2in 2020 to Rs 3500/ tCO2 in 2030 to meet the Paris commitments. The tax collection can be done as a part of GST collection but funds must be transferred to the NCEEF periodically. To reduce the disproportionate burden on the poor because of carbon taxes, these are proposed to be revenue neutral by ensuring that income tax is abolished for incomes less than Rs. 5 lakh/annum, cash transfer to Jan Dhan account for inflationary compensation and supporting adaption & mitigation efforts of the marginalized. An inter-ministerial committee to oversee utilization of NCEEF funds and monitoring the GHG emissions and India’s progress on NDCs. Therefore, carbon taxes are efficient market-based instruments for curtailing the GHG emissions and can help India achieve its NDC as committed in Paris Agreement as per the proposed policy.