Carbon Tax

Carbon Tax

What do we feel when we hear Tax? ‘Extra money’ is the phrase that immediately pops into our head and it causes you to have a tiny knot in your stomach! When we receive the final check or a bill,  after we are done eating from a restaurant or shopping from our favourite clothing store, the first thing that we look at is of course the final amount. Before you get the time to get some relief, immediately you notice that there is another final amount. What sorcery! Well this is the actual ‘final amount’ after the addition of the tax. The difference in the two final amounts is so much that you kind of wonder, with the tax amount you actually could have gotten another dessert or drink!

Nobody likes to pay extra, of course! Well, if that’s the case, then why don't we add these taxes for something that we would like to control the usage of, which causes distress?

We already have one which isn't very familiar to many people and is only successfully implemented in some countries in the world. This is the Carbon Tax.

What is Carbon Tax? In simple terms, it is the tax that is imposed on any corporation/company that burns fossil fuels, such as coal, oil, gasoline, and natural gas.

A price is directly set on the carbon by defining a tax rate on greenhouse gas emissions or on the carbon content of fossil fuels. 

It reflects the true cost of burning these fuels that produce harmful gases such as carbon dioxide and methane. What this means is that it makes the external costs, those that are borne by the public who suffer from the effects and pay for through damage to crops and health care costs from heat waves and droughts or to property, from flooding and sea level rise, of carbon emissions through transport.

The tax aims to reduce emissions, when businesses are obliged to pay at least part of the cost of the externality they have created. It will then be used as an incentive to bring down emissions from economy-wide usage of high-carbon fuels and to protect the environment from the harmful effects of excessive carbon dioxide emissions. 

Furthermore, such tax has the potential to encourage firms to invest in environmentally friendly renewable energy and reduce the economy-wide reliance on fossil fuels.

I know this definitely sounds very promising and the immediate thought is ‘Why is this not implemented in every country, especially in India, then?’

Well, the implementation isn’t as easy as it sounds and it comes with certain challenges, as in the case with any new taxes or new policies. It involves the complexities of economics, parameters of policy-making and all that. 

A country of 1.3 billion plus people with multiple corporations and organizations that depend on carbon-intensive products will oppose the introduction of this tax, such as oil producers and refiners, large electric utilities with carbon-heavy fleets, large energy-intensive manufacturers, and others.

Some of the notable trade offs of this tax implementation are:

  • An increase in the prices of commodities, which will drastically affect the public, especially the low-income societies.
  • Dwelling on few perceptions such as the low utilization of the commodities will eventually lead to unemployment (manufacturing, packaging etc).
  • A country with a proper carbon tax in place could add additional border adjustments for the goods coming in from countries with a lesser carbon tax or no carbon tax at all, so as to ensure equal preferences for local and imported goods, which in turn is a liability for the latter mentioned category of countries.
  • There are other emissions apart from carbon dioxide such as methane, nitrous oxide etc which are more harmful than carbon and are not accounted for.

Trade offs will always exist and there will always be solutions that can be implemented to tackle these, gradually. From my research and readings, I have found that there are multiple ways, out of which two are easier to implement, by which this system can be made circular, so that all the parties involved is benefitted.

  • Using the funds to invest in clean energy and other green initiatives
  • The basic motive behind a carbon tax is not to just attach an economic penalty to pollution or emissions, but also to channelise the proceeds generated for investment in renewable energy projects and green jobs. It is vital to identify viable areas or projects to efficiently invest and also to ensure judicious use of carbon pricing revenues which will make climate policy more inclusive and effective while containing the costs of clean energy transitions to the economy.

  • Recycling to firms and households
  • The recycling means that the proceeds from the taxes are used to pay dividends to the households, which in turn will maximize welfare. It can be distributed on a per capita basis or in any mixed denominations.

    The key here is that the tax increases can be very gradual, to allow people and businesses to adjust each step of the way. The important point to note here is that the public (which is us), is more likely to accept a carbon price if they understand how the revenues would be deployed, which will need a robust system of communication, public dialogue and social deliberation to be established.

    Existing literature on climate policy shows that carbon pricing is likely to work well in countries with a high level of political trust and low levels of perceived corruption.

    Some countries such as Canada, Ireland, Sweden, Denmark, Finland and Indonesia were able to implement the tax in ways which will benefit their society, with various incentives and systems in place which appeal to unique cultures in each country.

    Carbon pricing in India has frequently met with political and public opposition, like in the case of introduction of various schemes and mechanisms such as PAT (Perform, Achieve and Trade) scheme, Coal Cess, ICP (Internal Carbon Pricing) and others.

    In the short term, India can focus on phasing out fossil-fuel subsidies and improving the efficiency of existing policies that place an implicit price on carbon. Recent advancements in renewable technology and a decline in the cost of renewables provide a conducive policy environment to scale up renewables. This opportunity can be capitalized to accelerate the decline of the fossil-fuel industry and catalyse the economy’s green transition.

    On a positive note, with the rise of electric vehicles, renewable energy such as solar, wind etc., we could be seeing a drastic change in the coming years!


     Written by: Sreelakshmi Kumar