17th October – What a carbon tax can and can’t achieve against climate change?

Profound uncertainty about the impact of climate change means that estimates of the social cost of carbon have been all over the place. Consider two of the most influential estimates that were released in recent years. Nicholas Stern of the London School of Economics estimated it at $85 per tonne of carbon. William Nordhaus of Yale University came up with a much lower estimate of $8 per tonne. It gives us some idea about the fragile nature of such estimates.

What is ‘carbon tax’?

  • A carbon tax increases the price that consumers pay for energy. What will be the price impact of a carbon tax of $75 per tonne of carbon consumed in India? The IMF estimates that a tax of this magnitude will increase the price of coal by 230%, natural gas by 25%, electricity by 83% and petrol by 13%.
  • Such steep price hikes will necessarily make such a tax a political hot potato, especially in a developing country like India, where on the one hand politically influential groups such as the urban middle class or rich farmers are the biggest consumers of energy, and on the other, people emerging out of poverty need access to cheap electricity and fuels.
  • The proceeds of the carbon tax could be used to protect the household budgets of poor families, but that is easier said than done, despite the availability of the JAM trinity of Jan Dhan accounts, Aadhaar numbers and mobile phones.

Need of carbon tax –

  • Economists at the International Monetary Fund (IMF) have argued in a recent report that the world needs a global carbon tax in the next 10 years. Their recommendation is $75 per tonne of carbon.
  • The IMF team argues that such a Pigouvian tax will help limit global warming to 2 degrees Celsius above pre-industrial levels, as embedded in the 2015 global climate change agreement in Paris.

A prudent response –

  • Economists have often debated whether the best way to reduce carbon use is via higher prices or through quantity restrictions. The consensus now is that a carbon tax is the better policy response.
  • The decision of the Narendra Modi government to increase fuel taxes as well as quadruple the coal cess is sometimes interpreted as a variant of a carbon tax. Only a third of the sharp decline in global oil prices after 2014 was passed on to consumers.

Issues –

The idea of a global carbon tax will run into two problems –

  • First, it will penalise incremental carbon emissions rather those that have already been spewed into the atmosphere since the Industrial Revolution. A homogenous global carbon tax will, in effect, impose costs on developing countries rather than those that have been responsible for most of the existing stock of pollution.
  • Second, taxes are part of national social contracts that emerge out of very specific conditions that cannot necessarily be replicated on a global scale.

Way forward –

The underlying principle should be of Common but Differentiated Responsibilities and Respective Capabilities that has been recognised by the United Nations Framework Convention on Climate Change.

Conclusion –

Climate change is undoubtedly one of the most serious challenges for the entire world, and the poor in countries such as India are especially at risk. A carbon tax can eventually be an important part of any mitigation strategy—from new technologies to rethinking cities to lifestyle changes.


QUESTIONWhat is ‘carbon tax’? Examine its impact and shortcomings in global fight against climate change.

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