By Prattay Lodh*

Introduction

Climate Change is real. India being the party for United Nations Framework Convention (UNFCCC) and the Paris Agreement on Climate Change has pledged to reduce its greenhouse gas concentration despite being at emission of 14.43 EUR in 2021. Many policy makers and environmentalists alike believe that a possible solution to this could be an effective carbon tax policy. A carbon tax is a fee levied on GreenHouse Gas  (GHG ) polluters with the goal of reducing the use of all forms of fossil fuels, not only coal. Furthermore, it is typically connected to GHG emissions, as opposed to the existing model of cess in India, which is linked to coal usage.

Carbon emission reduction is ostensibly one of the key priorities of most governments in the ongoing debate about climate change and its predicted impact on the environment and development. It is the principal contributor to climate change, and the majority of GHG emissions are caused by the combustion of fossil fuels such as coal. In India, the energy sector accounts for 68.7 percent of GHG emissions, followed by agriculture, industrial processes, transportation, livestock management, and trash. While the government has taken several steps to reduce carbon emissions, a carbon tax is a policy on which India is mostly opposed.

The National Action Plan on Climate Change (NAPCC) enshrines eight national missions, such as the National Mission for Enhanced Energy Efficiency and the Green India Mission, which offer the foundation for implementing multifaceted and integrated climate change mitigation policies. Despite these efforts, India is consistently recognised as one of the top carbon dioxide (CO2) emitters, trailing only China and the United States.

Previous and Current Energy Taxes

The government imposed a Clean Energy Cess on coal in 2010 with the twin goal of:

• Earmarking a portion of the proceeds to finance clean energy research and innovation; and
• Indirectly driving up the usage of cleaner fuel by increasing the cost of coal consumption.

However, with the implementation of the Central Goods and Services Tax Act of 2017, the Clean Energy Cess, along with twelve other cesses, were repealed and replaced with a new cess known as the Compensation Cess. Coal was taxed at the same rate of INR 400 per tonne under the new system. Notably, unlike the Clean Energy Cess, which is only paid at the time of coal generation or importation, the Compensation Cess is imposed at all points of supply.

Regardless of the method used to collect a cess, the government was unable to accomplish the anticipated goals since only a small part of the same was spent into research. Furthermore, cleaner energy sources such as large-scale solar networks had cost parity with coal, therefore demand for such clean energy sources did not rise. Furthermore, while a cess penalises the use of coal, it is unrelated to the amount of carbon emissions released by a taxpayer. As a result, whether a taxpayer chooses a cheap polluting kind of coal or a more expensive low carbon emitting coal, he will pay the same rate of tax.

Although the initiative is a central policy, various forms of the policy have been attempted at state level as well. For instance, the Goa government had levied a ‘Green Cess’ on polluting items and chemicals since 2013. Similarly, the Uttarakhand government levied a ‘Eco Tax’ on automobiles entering Mussoorie. However, none of these strategies have proven effective in lowering carbon emissions and mitigating climate change. As a result, it may be prudent to consider additional budgetary measures to limit GHG emissions, such as a “carbon tax” at the national level.

It is mooted that although India does not have a carbon tax regime presently, the existing tax regime is identical to a carbon tax one. The following are the primary taxes on energy consumption and greenhouse gas emissions in India as of 1 April 2022, all categorised as fuel excise taxes according to the Taxing Energy Use (TEU) system:

• The Basic Excise Duty (BED) is a central excise duty that applies to crude petroleum, aviation turbine fuel, petrol, diesel, natural gas, and compressed natural gas.
• Gasoline and diesel fuel are also subject to a Special Additional Excise Duty (SAED) and Additional Excise Duties (Road and Infrastructure Cess and Agriculture Infrastructure and Development Cess).
• The Goods and Services Tax (GST) does not apply to any fuel subject to the BED, SAED, Road and Infrastructure Cess, or Agriculture Infrastructure and Development Cess.

However, such carbon pricing will disrupt the current status quo of low carbon emissions and create a schism between those who gain from such a programme and others who suffer economic loss. Carbon-intensive businesses are more likely to be opposed to carbon pricing.

Challenges of Future Carbon Tax Regime

The primary difficulty with carbon pricing is while the advantages of such a programme are distributed, the costs are concentrated. Carbon price recipients are dispersed and less inclined to support the plan.

For instance, Prakash Javadekar, Union Environment Minister along with the BASIC countries (Brazil, South Africa, India and China) has opposed EU’s proposal of levying additional Carbon Border Tax on imports and stating the following contentions despite their commitment to UNFCCC and Paris Agreement:

1. Carbon tax regimes that are not tailored to the economy may have a negative impact.
2. Countries would incur greater tax evasion.
3. A carbon tax on emissions would widen the rich and poor gap even further.

Thus, a loosely mitigated carbon tax policy not tailored to the demands of the economy, may impose onerous obligations on economically disadvantaged individuals. Further, carbon emission is a  product of manufacture of numerous vital goods. If a carbon tax is put on emissions, such necessary items may become more expensive, ultimately burdening consumers.

Additionally, in order to avoid paying such taxes, businesses might conceal their genuine amounts of carbon emissions, masking the scope of the problem.  As with any policy involving large quantities of money changing hands, there are several motivations to influence how the mechanism is built, evade payment requirements, and the risk of syphoning off profits.

Conclusion

As mentioned in the previous arguments, India has implemented a variety of fiscal measures to decrease its carbon footprint. Given that none of these solutions have been successful, India should consider instituting a comprehensive carbon tax. Probable alternative for this could be to disincentivize the usage of carbon-emitting inputs and outputs,  initiating fund research into cleaner alternatives and renewable energy initiatives and developing sustainable alternatives will assist Indian products in meeting international standards and, as a result, being free from cross-border tariffs; it will provide uniformity between federal and state regulations to guarantee seamless implementation.

*Prattay Lodh is a final year student pursuing B.B.A., LL.B(Hons) at CMR School of Legal Studies, Bengaluru. The author may be contacted via mail at Prattay.17bl@cmr.edu.in and/ or prattay.lodh@yahoo.com