Determining a Carbon Tax Rate for India in the Context of Global Climate Change

Abstract

Global warming has been described as “the biggest externality the world has ever seen”. With international policymaking gradually taking into account initiatives to tackle climate change, the idea of putting a price on carbon has also received much acclaim. Pricing carbon, in the form of a carbon tax, was put forward as a policy initiative with the commencement of the Paris Climate Summit of 2015, as such a policy, could address emissions at the sources while being the least intrusive with the lowest burden on taxpayers. India is the third largest emitter of greenhouse gases globally but has also been a pioneer in acknowledging carbon taxes. The government has claimed its high excise duties on petrol and diesel, along with the Clean Environment Cess on coal consumption, to be implicit carbon taxes. Interestingly, while a carbon tax should be linked to carbon emissions, current indirect taxes by the government are not at all linked to them while are mostly used as revenue generating measures or compensating the States as part of GST revenue losses. This paper envisages to examine the case for introducing a carbon tax regime in India vis-à-vis fossil fuel consumption in the economy, with a subsequent determination of a unique carbon tax rate for India. To achieve India’s Nationally Determined Contribution (NDC) targets of Paris Summit, it is imperative that India introduces an explicit carbon tax that links fuel prices to emissions, which can have a cascading effect of reducing their consumption while switching to cleaner fuels as substitutes. Findings from the study indicate that coal faces a minimal tax burden while being the most polluting whereas natural gas faces a high tax burden even though it is cleanest among all. As part of the study, a tax rate has been derived that is expected to act as a policy benchmark and can nudge tax policies in the right way, as switching to a low-carbon economy forms a primary agenda of India, in this era of a hothouse Earth.