An insight into carbon tax in India

The public’s recognition of global warming has driven lawmakers around the world to negotiate greenhouse-gas reductions. Among the suggestions, carbon tax is more popular.

Why climate change is a cause of concern?

• There is compelling evidence that climate change is the greatest and widest-ranging market failure ever seen, and there is a large chance of a global average temperature rise exceeding 2ºC by the end of this century.

• It has also been established in various scientific studies that any such warming of the planet will lead to increased natural calamities such as floods and cyclones, declined crop yields and ecological degradation.

• A large increase in global temperatures correlates with an average 5% loss in global GDP, with poor countries suffering costs in excess of 10% of GDP.

India stands on climate change

• The National Action Plan on Climate Change was launched in 2008.

• It has eight vertical missions on water, energy efficiency, solar, sustainable habitat, agriculture, forestry, Himalayan ecology and strategic knowledge on climate change. India’s ambition for renewable energy production is well known.

• Under Prime Minister Narendra Modi, the timelines to achieve renewable capacity has been aggressively advanced, and the scale vastly enlarged.

• So India’s commitment for action on greening, to mitigate climate change and to act against global warming is not in doubt.

• Indeed by some reckoning, India’s initiatives and leadership for environmental activism dates back to the 1972 UN conference in Stockholm.

Is India overdoing the greening of energy?

• In the aggregate terms, India is now in the third highest emitter of carbon dioxide. (not in per capita terms)

• Firstly, the coal cess that was introduced a few years ago is now at Rs400 per tonne, almost one-fifth the cost of mining coal.

• This is something like a 20% carbon tax.

• India has the world’s third largest endowment of coal, which can help double our per capita electricity usage at a relatively low cost.

• Due to the coal bidding scams and the coal cess, India now might have become the most expensive place to produce coal-fired electricity.

• It is greatly hurting our competitiveness, and will directly undermine industry as it faces an onslaught of imports from China and other trade partners.

• Also, we already have a system of renewable purchase obligations (RPOs) on all electricity distribution companies and also captive producers.

• There is often not enough solar or wind energy available for purchase, within state boundaries.

• Across states, wheeling of solar is not yet possible and the RPOs burden goes up steadily every year. This increases the cost of energy.

What is the solution?

• It is not as if India should stay away from global joint efforts at curbing greenhouse gases.

• Green energy, apart from mitigating climate change has great potential for job creation.

• India is uniquely blessed with sunshine almost all the time, and hence solar can contribute hugely to our energy needs.

• Electric vehicles are a nascent industry, which eventually can change the economics of oil and geopolitics.

• But it is not necessary for India, whose per capita consumption of electricity is barely half the world average, to embrace the highest rate of carbon taxes in the world.

• Success in mitigating climate change requires global and absolute cooperation.

• India needs to cautiously calibrate its “greening pace” and de facto carbon taxation.

Carbon credit

• Any tradable certificate representing the right to emit one tonne of carbon dioxide or the mass of another greenhouse gas equivalent to one tonne of carbon dioxide

• Carbon credits and carbon markets are a component of national and international attempts to mitigate the growth in concentrations of greenhouse gases (GHGs)

• One carbon credit is equal to one tonne of carbon dioxide, or in some markets, carbon dioxide equivalent gases.

• Carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects

• Buyers and sellers can also use an exchange platform to trade, such as the Carbon Trade Exchange, which is like a stock exchange for carbon credits

• China is currently the largest seller of carbon credits controlling about 70% of the market share with India at second place with 20% market share

• MCX has become the first exchange in Asia to trade carbon credits

Carbon offset

• A carbon offset is a reduction in emissions of carbon dioxide or greenhouse gases made in order to compensate for or to offset an emission made elsewhere
• Carbon offsets are measured in metric tons of carbon dioxide-equivalent (CO2e) and may represent six primary categories of greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), perfluorocarbons (PFCs), hydrofluorocarbons (HFCs), and sulfur hexafluoride (SF6)
• One carbon offset represents reduction of one metric ton of carbon dioxide or its equivalent in other greenhouse gases

Carbon sink & source

• A carbon sink is anything that absorbs more carbon that it releases, while a carbon source is anything that releases more carbon than is absorb

• Forests, soils, oceans and the atmosphere all store carbon and this carbon moves between them in a continuous cycle. This constant movement of carbon means that forests act as sources or sinks at different times.

• Natural sinks

Oceans (Largest on earth) + Photosynthesis by plants

• Artificial sinks
Landfills + Carbon capture and storage proposals
• Oceans are the largest active carbon sink on Earth, absorbing more than a quarter of the carbon dioxide that humans put into the air.

Carbon Sequestration

• long-term storage of carbon dioxide to mitigate global warming & avoid dangerous climate change

• proposed as a way to slow the atmospheric and marine accumulation of greenhouse gases

• Includes carbon capture and storage, which refers to large-scale, permanent artificial capture & sequestration of industrially produced CO2 using

• Subsurface saline aquifers

• Reservoirs

• Ocean water

• Aging oil fields or other carbon sinks

Geological sequestration / storage (Carbon Sink)

The method of geo-sequestration or geological storage involves injecting carbon dioxide directly into underground geological formations for ex:

• Declining oil fields

• Saline aquifers

• Unminable coal seams

• CO2 has been injected into declining oil fields for more than 40 years, to increase oil recovery

• CO2 is soluble in oil hence lowers viscosity of the oil & reduces its interfacial tension which increases the oils mobility.

• Salty water contained in deep saline aquifers is not suitable for drinking or agriculture, making saline aquifers an ideal large-scale storage solution for large stationary industrial CO2 emitters.

• Unminable coal seams can be used to store CO2, because CO2 absorbs to the coal surface, ensuring safe long-term storage.

• In this process it releases methane that was previously adsorbed to the coal surface and that may be recovered, & Again the sale of the methane can be used to offset the cost of the CO2 storage

Carbon Credit

• A carbon credit (often called a carbon offset) is a tradable certificate or permit.

• One carbon credit is equal to one tonne of carbon dioxide.

• Carbon credits are a part of attempts to mitigate the growth in concentrations of GHGs.

• Carbon credits or carbon offsets can be acquired through afforestation, renewable energy, CO2 sequestration, methane capture, buying from an exchange (carbon credits trading) etc.

• Carbon trading is the name given to the exchange of emission permits.

• This exchange may take place within the economy or may take the form of international transaction.

• Under Carbon Credits Trading mechanism countries that emit more carbon than the quota allotted to them buy carbon credits from those that emit less.

• In Carbon trading, one credit gives the country or a company right to emit one tonne of CO2.

• A country having more emissions of carbon (less carbon credits) is able to purchase the right to emit more from a country having less emissions (more carbon credits).

• More carbon emitting countries, by this way try to keep the limit of carbon emission specified to them.

• A developing nation such as India, turns out to be a seller of such credits, which eventually provides them with monetary gains.

• Carbon credits are traded at various exchanges across the world.

• Multi-Commodity Exchange of India (MCX) launched futures trading in carbon credits in 2009.

Types of Carbon trading

1. Emission trading and

2. Offset trading.

Emission trading/‘cap-and-trade’

• Emissions trading allows countries that have emission units to spare – emissions permitted them but not “used” – to sell this excess capacity to countries that are over their targets.

• Carbon is now tracked and traded like any other commodity. This is known as the “carbon market.”

Other trading units in the carbon market

1. A removal unit (RMU) by reforestation.

2. An emission reduction unit (ERU) generated by a joint implementation project (explained be low).

3. A certified emission reduction (CER) generated from a clean development mechanism project activity.

Offset Trading/Carbon Project/ ‘baseline-and credit’ trading

• Another variant of carbon credit is to be earned by a country by investing some amount of money in such projects, known as carbon projects, which will emit lesser amount of greenhouse gas in the atmosphere.

• For example, suppose a thermal plant of 800 megawatt capacity emit 400 carbon-equivalent in the atmosphere. Now a country builds up a 800 megawatt wind energy plant which does not generate any amount of emission as an alternative of the thermal plant. Then by investing in this project the country will earn 400 carbon-equivalent.

• Offset Trading is a variant of Emission Trading or Carbon Trading.

Carbon tax

• It is a tax on all fossil fuels in proportion to carbon dioxide emissions.

• Proposed in may developed and developing countries.

• The proposal faced political resistance (politician – corporate nexus, people feared more burden).

• India has a carbon tax of sorts. Budget of 2010-11 introduced a cess of Rs. 50 per tonne of both domestically produced and imported coal.

Later it was increased to Rs. 100.

• This cess is used to raise revenues for the National Clean Energy Fund.

What is carbon tax?

Carbon tax is a form of pollution tax. It levies a fee on the production, distribution or use of fossil fuels based on how much carbon their combustion emits. The government sets a price per ton on carbon, then translates it into a tax on electricity, natural gas or oil.

Because the tax makes using dirty fuels more¬ expensive, it encourages utilities, businesses and individuals to reduce consumption and increase energy efficiency. Carbon tax also makes alternative energy more cost-competitive with cheaper, polluting fuels like coal, natural gas and oil.

Carbon tax is based on the economic principle of negative externalities. Externalities are costs or benefits generated by the production of goods and services. Negative externalities are costs that are not paid for. When utilities, businesses or homeowners consume fossil fuels, they create pollution that has a societal cost; everyone suffers from the effects of pollution.

Proponents of a carbon tax believe that the price of fossil fuels should account for these societal costs. More simply put — if you’re polluting to everyone else’s detriment, you should have to pay for it.

Why a Carbon Tax?

Carbon is currently not accounted for as a cost in production. This means that industry actors do not need to actively monitor and limit their CO2 output. Governments, businesses and consumers all emit carbon dioxide and other greenhouse gases by burning fossil fuels. When greenhouse gases are burned they release CO2 that remains resident in the Earth’s atmosphere, trapping heat and warming the globe. The build up of these emissions can have devastating environmental consequences for the climate and ecosystems.

Carbon Tax in India

• India does not have a de jure Carbon tax, there has been de facto carbon tax. There are several examples: NCEF In 2010, the government had launched the National Clean Energy Fund (NCEF) whereby it imposed a clean energy cess on coal produced in India as well as imported coal @ Rs.50 per tonne.

• This is one example of de facto Carbon Tax. In the Union budget 2014-15, this cess was raised to Rs. 200 per tonne. In July 2015, this fund was worth Rs 17,000 crore.

• The objective of such taxes is to limit the consumption of polluting fuels and promote use of clean energy.

• However, this fund is not doing what it was supposed to do i.e. finance the clean energy. Only levying a cess does not reduce pollution by itself.

• The government needed to use this fund to provide support to clean energy infrastructure in the country.

• Excise Duty Currently the government sets aside Rs. 4 per litre of the petrol / diesel excise duty for a dedicated road cess.

• This is also one kind of Carbon Tax whereby tax on fossil fuel is to be used to develop infrastructure.

Rationale behind the imposition of carbon tax?

By placing a price on carbon, consumers and producers are encouraged to reduce their carbon dioxide emissions through ‘substitution and innovation’. According to the World Bank, a carbon tax “sends a price signal that gradually causes a market response across an entire economy, creating incentives for emitters to shift to less greenhouse-gas intensive ways of production and ultimately resulting in reduced emissions.”

When actors encounter carbon-based taxation they are inclined to “reduce carbon use or energy efficiency, switch to lower-energy strategies, innovate, or offset.” This has an effect on both production and consumption, effecting variables from the location of a business and the materials it uses to an individual’s choice of vehicles or appliances. Industries and consumers respond to price changes. By pricing carbon, governments encourage businesses and households to seek out low-carbon options and adopt more energy efficient sources in the long-term.

What is to be ensured?

Carbon tax regimes will only be effective if harmonised internationally. Different country-wise policies could lead to ‘carbon leakages’ where energy-intensive businesses will most likely move to less strict national regimes. Harmonised carbon taxes hold advantages over quantitative limits imposed through government control and regulation.

Advantages of harmonised carbon taxes:

• A carbon tax regime avoids the problems related to choosing a baseline. In a price approach, the natural baseline is a zero carbon tax.

• A carbon tax policy will be better able to adapt to the element of uncertainty which pervades the science of climate change.

• A carbon tax policy is likely to cause less volatility in the prices of carbon emissions.

• Quantity limiting policies are often accompanied by administrative arbitrariness and corruption through rent-seeking. This sends off negative signals to investors. In a price-based carbon tax, the investor has an assured long-term regulation to adapt to and can weigh in the costs involved.

• The price-based approach in the form of carbon taxes makes it easier to implement equity-based international adjustments than the quantity-based approach.

• The carbon tax will essentially be a Pigovian Tax which balances the marginal social costs and benefits of additional emissions, thereby internalising the costs of environmental damage. It can act as an incentive for consumers and producers to shift to more energy-efficient sources and products.

India’s stand on Carbon Tax

• A carbon tax is less likely to face political opposition while creating avenues for businesses and growth

• We stand today on the brink of a long-term anthropogenic and ecological change, caused not by the forces of nature but our own exploitation of the planet’s resources.

• There is compelling evidence that climate change is the greatest and widest-ranging market failure ever seen, and there is a large chance of a global average temperature rise exceeding 2ºC by the end of this century

• It has also been established in various scientific studies that any such warming of the planet will lead to increased natural calamities such as floods and cyclones, declined crop yields and ecological degradation. A large increase in global temperatures correlates with an average 5% loss in global GDP, with poor countries suffering costs in excess of 10% of GDP.

• As a mitigation policy

• A global and immediate policy response is urgently required to reduce greenhouse gas emissions and mitigate the effects of climate change.

• A carbon tax aims to internalise the externality of climate change by setting a price on the carbon content of energy consumed or greenhouse gas emitted in the production or consumption of goods.

• Carbon tax regimes will only be effective if harmonised internationally. Different country-wise policies could lead to ‘carbon leakages’ where energy-intensive businesses will most likely move to less strict national regimes.

• Harmonised carbon taxes hold advantages over quantitative limits imposed through government control and regulation.

• First, a carbon tax regime avoids the problems related to choosing a baseline. In a price approach, the natural baseline is a zero carbon tax.

• Second, a carbon tax policy will be better able to adapt to the element of uncertainty which pervades the science of climate change.

• Quantity limits on emissions are related to the stocks of greenhouse gas emissions, while the price limits are related to the flow of emissions.

• Fourth, quantity limiting policies are often accompanied by administrative arbitrariness and corruption through rent-seeking. This sends off negative signals to investors. In a price-based carbon tax, the investor has an assured long-term regulation to adapt to and can weigh in the costs involved.

Addresses issue of equity

• Fifth, the most contentious issue in any international negotiation on climate change mitigation either at the level of the World Trade Organisation (WTO) or at the United Nations Framework Convention on Climate Change has been the issue of equity between high-income and low-income countries.

• The price-based approach in the form of carbon taxes makes it easier to implement such equity-based international adjustments than the quantity-based approach.

• Finally, the carbon tax will essentially be a Pigovian Tax which balances the marginal social costs and benefits of additional emissions, thereby internalising the costs of environmental damage. It can act as an incentive for consumers and producers to shift to more energy-efficient sources and products.

• Some countries and regions such as the U.S. and the European Union already have fairly successful carbon pricing regimes in place in the form of carbon taxes and emissions trading schemes

• The political consensus in favour of a direct carbon tax will be difficult to achieve in low- and middle-income countries that have developmental priorities and lack the capacity to administer such regimes. A general tax on energy consumption combined with a technology-centric policy that promotes entrepreneurs and investors who develop low-energy intensive products can be a good starting point from where they can gradually move towards a direct carbon tax.

Another near-term approach can be a ‘cap-and-tax’ which combines the strengths of both quantity and price approaches. Cap-and-tax might also address the concerns of environmentalists that a price-based approach does not impose hard constraints on emissions.

• Africa as a priority region

• countries must negotiate and share policy experiences and researches in this area. They also must decide upon the appropriate forum to discuss and implement any such mitigation policy. The WTO could be the preferred forum, given the important nexus between international trade and climate change. Finally, any prospective policy regime must give the highest importance to the African continent. A rapidly growing African economy must then be able to learn from past lessons without having to choose between economic growth and climate change mitigation.

• A carbon tax policy might not seem a magic wand, but it is also less likely to face political opposition and compromise while creating new sectors for businesses and growth.

Way ahead for India:

Actually, India has a carbon tax of sorts. It is not called as such but the United Progressive Alliance government’s budget of 2010-11 introduced a cess of Rs. 50 per tonne of both domestically produced and imported coal. Last year, this was doubled. However, the idea of this cess, it must be admitted, was less to curb carbon emissions but more to raise revenues for the National Clean Energy Fund.

But the important point is that India already has an important half-step, even though its version of a carbon tax is not economy-wide and it is far below the levels that are generally accepted as being desirable (around $20-25 per tonne of carbon).

By Gudipati Rajendra Kumar