By Siddhartha Bhasker
The economic survey of India devoted merely two pages to climate change this year. However, with the ongoing debates on climate change and a “carbon tax”, it won’t be long before India is forced to answer a few questions about the same.
What is a carbon tax?
A carbon tax is basically a price put on one tonne of carbon. There are two major ways to implement carbon pricing. This can be done by either taxing the fossil fuel burning industries for emitting the greenhouse gas; or by setting up a carbon constraint. The latter can be imposed on the amount of greenhouse gas that the industries can emit; so that the market forces can then determine the price of carbon.
Trump and the rest of the world
The carbon tax is a highly debated topic in the west. The Trump government is mulling over imposing a price on pollution and then using the revenues to reduce the corporate or personal income taxes. A recent plebiscite held in the state of Washington on whether the citizens wanted a proposed carbon tax in the state produced stunning results. The initiative (called Initiative 732 or I-732) received the support of only 42% of those who cast ballots in Washington. The I-732, if implemented, would have instated a tax of $25 per metric tonne on fossil fuels consumed in the state. It would have also reduced the state sales tax by 1%, funded a tax rebate, and eliminated a tax on business income. Despite the positives, the measure failed to find unanimous support among the regions environmentalists, many of whom were concerned about its failure to engage with the minority as well as the low-income groups.
Existing environmental taxes
It is estimated that four-fifths of Canadians will start living in provinces with such taxes by 2017. By 2018, all Canadians are expected to be paying a carbon tax. The British Columbias provincial government launched this tax back in 2008. The British Columbia tax started at $7.40 per metric tonne of carbon dioxide on fossil fuels consumed in the province, and it rose up to $22.7 per metric tonne by 2012. This tax is revenue-neutral, with proceeds used to cut corporate and personal income taxes.
India and the carbon tax
India has put implicit taxes on petrol and diesel through the excise duty tax. The recent economic survey shows that India has put a tax of around $150 per tonne of carbon dioxide on these products. There is a tax levied on coal which applies to both domestic as well as imported coal. This tax by the government acts as a carbon tax to discourage the use of coal and promote renewable sources of energy. India also has the renewable purchase obligation, which produces renewable purchase certificates for those entities who produce a part of their power through renewable energy. But the debate on taxing carbon or starting an Emission Trading Scheme has not yet flared up in India.
In 2013, three-quarters of Indias energy use was met by fossil fuel. If a tax were to be suddenly enforced on carbon, the fossil fuel industry will be hit first. Coal constitutes around 44% of Indias primary energy mix. The use of fossil fuels by India is going to rise exorbitantly because of the rise in economic growth. If a tax is imposed, the three major sectors using fossils transportation, industry, and buildings will be affected. This will lead to an increase in the price of transport fuel. The burden of the increased price will fall on the consumers. The consumers can then be reimbursed by either reducing taxes within the scope of the GST, or by using the revenue generated through the carbon tax to promote renewable energy. The latter can be done by providing a subsidy to electric vehicles which will reduce its price for the consumers. There are proposals going around to give the tax rebates back to the consumers in the form of a quarterly dividend check.
The effects of a tax on carbon
Quick implementation of the carbon tax would also increase the percentage of renewables in Indias energy mix. Presently, renewables like the wind, solar, and geothermal resources contribute close to two percent of Indias energy use. Even though the use of biomass is around twenty-four percent, this is gradually decreasing; and the major shift is towards coal and Liquified Natural Gas, which again, are fossil fuels. The electricity we use is primarily produced through the burning of coal. Any increase in the price of fossil fuel through the carbon tax will shift the electricity generation trend towards renewable forms of energy. Research shows that the imposition of the carbon tax will also shift the transportation sector towards using electricity as fuel.
To fulfil their commitment towards global climate change and to show their seriousness towards this issue, countries will have to tax carbon sooner or later. The early actors will be better prepared to fulfil their commitments. Globally, a total of 40 national and 20 sub-national jurisdictions have implemented (or are scheduled to implement) carbon pricing instruments, including the Emission Trading Schemes and taxes. China plans to start an Emission Trading Scheme in the year 2017. India will need to get its act together and think about putting a robust carbon pricing mechanism in place to fight the menace of climate change.
Featured image source: WWF South Africa