29th September – Carbon Tax

Carbon Tax

One way to cut carbon effluents while earning revenues is to price the carbon content of domestic production and imports, be it energy or transport. With the International Monetary Fund endorsing the European Union’s plan to impose carbon levies on imports, India can be among the first movers in the developing world in taxing and switching from carbon-intensive fuels (like coal), the main sources of climate change.

What is a ‘carbon tax’?

  • A carbon tax is a fee imposed on the burning of carbon-based fuels (coal, oil, gas). A carbon tax is a way — the only way, really — to have users of carbon fuels pay for the climate damage caused by releasing carbon dioxide into the atmosphere.
  • If set high enough, it becomes a powerful monetary disincentive that motivates switches to clean energy across the economy, simply by making it more economically rewarding to move to non-carbon fuels and energy efficiency.


  • India ranks fifth in the Global Climate Risk Index 2020. Between 1998 and 2017, disaster-hit countries reported $2.9 trillion in direct economic losses, with 77% resulting from climate change, according to a United Nations report. The U.S. faced the highest losses, followed by China, Japan, and India.
  • Air pollution has fallen worldwide after the COVID-19 outbreak, including in India. But with resumption of polluting activities, emissions in India are set to rise sharply unless strong action is taken.
  • Carbon dioxide, the chief culprit in global warming, was 414 parts per million in August 2020 because of past accumulation. As one half comes from the three top carbon emitters, they need to drive de-carbonisation.

Need of imposing ‘carbon tax’ –

  • India has committed to 40% of electricity capacity being from non-fossil fuels by 2030, and lowering the ratio of emissions to GDP by one-third from 2005 levels. It is in the country’s interest to take stronger action before 2030, leading to no net carbon increase by 2050.
  • A smart approach is pricing carbon, building on the small steps taken thus far, such as plans by some 40 large companies to price carbon, government incentives for electric vehicles, and an environmental tax in the 2020-21 budget.
  • One way to price carbon is through emission trading, i.e., setting a maximum amount of allowable effluents from industries, and permitting those with low emissions to sell their extra space
  • Another way is to put a carbon tax on economic activities — for example, on the use of fossil fuels like coal, as done in Canada and Sweden. Canada imposed a carbon tax at $20 per tonne of CO2 emissions in 2019, eventually rising to $50 per tonne. A carbon tax at $35 per tonne of CO2 emissions in India is estimated to be capable of generating some 2% of GDP through 2030.

Way forward –

  • Big economies like India should also use their global monopsony, or the power of a large buyer in international trade, to impose a carbon tariff as envisaged by the EU.
  • Focusing on trade is vital because reducing the domestic carbon content of production alone would not avert the harm if imports remain carbon-intensive. Therefore, leading emitters should use their monopsony, diplomacy and financial capabilities to forge a climate coalition with partners.
  • There is growing public support for climate action, but we need solutions that are seen to be in India’s interest. A market-oriented approach to tax and trade carbon domestically and to induce similar action by others through international trade and diplomacy offers a way forward.

SourceThe Hindu

QUESTION – What is a ‘carbon tax’? Discuss the merits in imposition of a carbon tax in terms of environmental as well as fiscal gains.

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