[Answered] In an era of rising trade barriers, fragmented carbon pricing risks massive compliance costs. Examine how a coherent carbon tax framework can be designed to be both environmentally effective and economically fair.”

Introduction

The IMF (2021) warns that fragmented carbon pricing could raise global trade costs by 12–15%. With EU and UK CBAMs emerging, India must design a coherent carbon tax ensuring both equity and efficiency.

Why Fragmented Carbon Pricing is Problematic

1. Trade Competitiveness: India’s steel and aluminium exports face a 20–40% cost increase under the UK-CBAM (2027), despite tariff-free access under the FTA.
2. Asymmetric Carbon Prices: India’s projected carbon price (CCTS: $8–10/tCO₂) is far below the UK ($66/tCO₂), leading to compliance burdens.
3. Global Supply Chains Disruption: Fragmented carbon markets risk “carbon leakage,” shifting industries to low-cost jurisdictions without reducing emissions.
4. Violation of Multilateral Principles: CBAMs undermine the Paris Agreement’s principle of Common but Differentiated Responsibilities (CBDR-RC) by imposing unilateral standards.

Designing a Coherent Carbon Tax Framework

Environmental Effectiveness

1. Unified Carbon Pricing System: Merge coal cess, renewable purchase obligations, and sectoral levies into the Carbon Credit Trading Scheme (CCTS). This ensures better price discovery and streamlined monitoring.
2. Progressive Taxation: Implement a gradually increasing carbon tax trajectory (e.g., ₹500/tonne in 2025, rising to ₹2,500/tonne by 2035) aligned with India’s Net Zero 2070 target.
3. Sectoral Differentiation: Hard-to-abate sectors (steel, cement, fertilisers) should face higher rates, with rebates for clean tech adoption.

Economic Fairness

1. Revenue Recycling: Plough back carbon tax revenues into: Industrial decarbonisation (green hydrogen, CCS, electrification). Just transition for workers in coal-dependent states (Jharkhand, Chhattisgarh).
2. Equity Across Nations: Support IMF’s International Carbon Price Floor (ICPF) – $25/t for low-income, $50 for middle-income, $75 for high-income economies – addressing developmental disparities.
3. Avoiding Trade Disruption: Negotiate CBAM flexibilities, as seen in the U.S.-EU Green Steel Agreement (2023), to protect domestic exporters.

Global Coordination

1. Regional Carbon Market Linkages: Connect CCTS with China’s ETS (world’s largest) and ASEAN carbon schemes to create an Asian carbon market, reducing fragmentation.
2. Standardised MRV (Monitoring, Reporting, Verification): Adopt WEF’s (2022) recommendation for harmonised reporting standards to build trust in India’s carbon credits internationally.
3. Technology Transfer: Use carbon pricing revenues to fund R&D in green hydrogen and carbon capture, ensuring cost parity with developed economies.

Way Forward

1. Institutional Strengthening: Empower the Bureau of Energy Efficiency as India’s central carbon market regulator.
2. Climate Finance Taxonomy: Finalise MoF’s taxonomy to channel domestic and foreign investments into low-carbon infrastructure.
3. Public Acceptance: Communicate co-benefits—clean air, energy efficiency, job creation—so that carbon pricing is not viewed as merely a trade compliance burden.

Conclusion

As William Nordhaus in The Climate Casino argues, coherent carbon pricing is humanity’s best bet—balancing climate justice with growth. For India, coherence ensures competitiveness, equity, and environmental sustainability.