Carbon pricing challenges- India’s piecemeal approach to carbon pricing

Source: The post is based on the article “Carbon pricing challenges- India’s piecemeal approach to carbon pricing, driven by emerging trade barriers, is not a long-term strategy” published in “Business standard” on 17th October 2023.

Syllabus: GS3- Environment- carbon emission

News: The article discusses market-based solutions for reducing carbon emissions, like carbon pricing and cap-and-trade systems. It highlights examples from Europe, China, and the US. It argues against solely using the “social cost of carbon” for decisions. It then examines India’s implicit carbon taxes from coal and petroleum and suggests India adopt a national carbon pricing system due to international trade pressures and to promote cleaner technology.

What are market-based solutions to carbon mitigation?

Definition: Strategies using market forces to incentivize the reduction of carbon emissions.

Global Spread: Implemented or planned in 73 jurisdictions, they cover 23% of global greenhouse gas emissions.

Forms:

Carbon Pricing:

Charges levied on carbon emissions without a set target.

Sweden’s model: Launched a carbon price in 1991 for designated emitters (40% of emissions). The carbon price is now about $100 per tonne, which led to a 25% emission reduction since its inception.

Cap-and-Trade (CaT):

An approach where a target emission level is specified.

China’s approach: Introduced CaT in eight regions in 2021. The emerging carbon price from emissions trade in China is $8 per tonne of CO2e.

Social Cost of Carbon (SCC):

The US Environmental Protection Agency’s method to estimate the societal impact of carbon.

US’s evolution: $43/tonne (Obama era), dropped to $3-5/tonne (Trump era considering only US impacts), and a recent suggestion of $190/tonne.

Implicit Carbon Pricing:

India’s indirect method by taxing fuels.

Coal taxation in 2019-20 translates to an implicit carbon tax of $5 per tonne of CO2e. Taxes on petroleum products and natural gas result in a higher rate of $87 per tonne of CO2e, driven primarily for revenue rather than emission reduction.

What is India’s approach to carbon emissions?

India’s Approach to Carbon Emissions:

Coal Cess and GST:

India has a cess and Goods and Services Tax (GST) on coal.

In 2019-20, it collected around 2600 billion from this. Considering the CO2 emissions from coal consumption in that year (1,678 million tonnes), this translates to an implicit carbon tax of $5 per tonne of CO2e.

Taxation of Petroleum Products and Natural Gas:

In 2019, these products resulted in about 800 million tonnes of CO2 emissions and yielded tax revenue of €4.9 trillion. This implies an implicit carbon price of $87 per tonne of CO2e.

This high taxation on petroleum products is mainly for revenue purposes and not explicitly for reducing emissions.

Facing Global Pressure:

India may soon have to consider carbon pricing options due to increasing global pressure, especially as Europe implements a Carbon Adjustment Border Mechanism (CABM) which would levy duties on imports from countries not accounting for carbon emissions.

Potential Carbon Pricing Approaches:

India is contemplating introducing carbon pricing either directly or through a CaT system, focusing on sectors like electricity generation, steel, and cement production. The primary challenge is the political complexity due to taxation by both Union and state governments.

What should India do next?

Consider Carbon Pricing: Due to global pressure and potential carbon emission-linked trade barriers from Europe, India needs to think about carbon pricing solutions.

Address Trade Barriers: With Europe implementing a Carbon Adjustment Border Mechanism (CABM), India is contemplating a directed export tax to counterbalance the CABM.

Sectoral Carbon-Oriented CaT Mechanism: India should think about starting a sectoral carbon-oriented CaT mechanism, focusing on sectors like electricity generation, steel, and cement production, instead of geographical areas.

Develop a National System: It’s essential to create a national system that not only reduces carbon emissions but also boosts R&D in relevant technology areas.

Reconsider Taxation Sources: Introducing carbon pricing might need a partial shift in sources of budgetary finance from coal cess and GST to carbon pricing.