Exploring a Design of Carbon Tax for Coal- and Lignite-Based Thermal Power Sector in India

Abstract

According to India’s ‘Third Biennial Update Report to the United Nations Framework Convention on Climate Change’, electricity production contributes half of India’s total carbon dioxide (CO2) emission (without land use, land-use change and forestry [LULUCF]) and 40% of CO2e (CO2 equivalent) emission in 2016. Coal- and lignite-based thermal power sector is the predominant source of electricity generation in India, and it contributes 74% in 2019–2020. In the 26th Conference of the Parties (COP26), India has committed to achieve net zero (in CO2e emission) target by 2070. Therefore, any strategy to reduce the total CO2e emission in India cannot spare emission reductions from coal- and lignite-based thermal power plants (TPPs). To accelerate achieving India’s emission intensity reduction target to 45%, we explore a design of carbon tax for coal- and lignite-based TPPs. Given the constraints involved in designing carbon tax based on cost-benefit analysis as well as integrated assessment models, we estimate a revenue neutral rate of tax on CO2e emission by converting taxes on coal and lignite. Our carbon tax proposal sets the floor (minimum) rate, and it requires regular upward revisions to induce TPPs to take action. To reduce disruptions in tax administrations, we propose adjustments of input tax credits with carbon tax liability. JEL Classification: H23, Q54, Q4, P43