Controlling emissions: Explicit carbon taxation needed, indirect taxation doesn’t help

Yet, it has not found favour with policymakers in India because of its supposed detrimental effects on economic growth and income distribution. (Representative image)

By Vijay P Ojha & Sanjib Pohit

Low-carbon, inclusive growth (LCIG), as a strategy, has been the hallmark of India’s vision on clean environment. This strategy is a multi-pronged one, which broadly includes the following policy instruments: regulations and standards, such as, building codes, bio-fuel standards and vehicle-efficiency standards; public funding for R&D; awareness and capacity building activities; and market-based instruments, which, in turn, include quantity instruments (emission trading schemes, such as Perform, Achieve and Trade, or PAT, and renewable energy certificates) and price instruments (removal of subsidies and imposition of a carbon tax on fossil fuels). Among these, it is the price instrument of carbon tax that remains the most potent market-based policy tool for inducing fuel-switching towards cleaner sources of energy. Yet, it has not found favour with policymakers in India because of its supposed detrimental effects on economic growth and income distribution.

Although India does not have an explicit carbon tax till date, it has an implicit or de facto carbon tax in the form of a coal cess since 2010. The reason for preferring a coal cess over a direct carbon tax is not explicitly stated in the policy documents of Government of India (GoI). It is not likely that the implicit carbon tax through cesses and excise duties on fossil fuels will produce better results in terms of reduction in carbon emissions and changes in GDP than an explicit carbon tax. Indeed, the reverse is likely to be true. The greater efficacy of explicit carbon tax vis-à-vis implicit carbon taxes has been shown to hold by many researchers on the subject. The real reason for the adoption of an indirect carbon tax in the form of cesses and excise duties seems to be the ease in their collection.

If coal cess is a de facto carbon tax, then quantitatively speaking, coal cess should be translatable into an equivalent carbon tax. Economic Survey 2014 converts the specific coal cess into equivalent carbon tax (using standard carbon emission factors and net calorific values of coal). In 2015, GoI revised its coal cess from Rs 50 per ton to `100 per ton. Presently, it is Rs 400 per tonne.

Coal cess penalises the carbon emitted from coal, but spares that from other fossil fuels—e.g. oil and natural gas. Thus, an indirect carbon tax cannot induce efficient fuel-switching away from fossil fuels towards cleaner sources of energy. In our view, the transition to a direct carbon tax linked to declared carbon emission targets is the next step in the evolution of a emission control policy in India.

Turning to options on usage of revenues generated through carbon taxation, it may be noted that, theoretically, the range here is rather wide. Carbon-tax action, in our view, must focus on distributing revenues uniformly to all household groups across-the-board or preferentially to the low income/consumption-expenditure household groups to compensate for the burden borne by them due to the imposition of the carbon tax in the first place, investing additionally in various sectors of the economy for capacity expansion, investing exclusively in clean (renewable) energy sectors, and investing in R&D for enhancing energy efficiency. Needless to say, these options are not mutually exclusive. They may all be exercised simultaneously, with varying degrees of emphasis. Using a computable general equilibrium (CGE) model, we developed multiple plausible policy-scenarios based on combinations of the first three options outlined above, and found that a combination of the first two options is the best as it is capable of yielding the triple dividend of marginal GDP gains (not losses), a small improvement in income distribution and significant carbon emissions abatement. This shows the way, for employing a direct carbon tax in place of the existing coal cess in our low carbon inclusive growth strategy.

Ojha is professor of economics, Christ Deemed University, & Pohit is professor, NCAER Views are personal