The upcoming carbon tax hikes will add to the cost of doing business globally and albeit with such enhanced tax, emitters will have to pay for the social costs of what they generate. Businesses will have to adopt cleaner energy while eschewing the usage of fossil fuels, which may curtail emissions in a phased manner. However, such a move is ought to increase business costs, as it is a pricing mechanism structured to encourage companies to fundamentally change the way they do business.
There was a lengthy debate in Parliament in Singapore recently on the Carbon Pricing (Amendment) Bill before it was passed and the country has taken a revolutionary step in raising the carbon tax over the years. From $5 tons currently, there will be staggered increments to $25 tons in 2024, $45 in 2026, and finally upwards of $50 in 2030.
With increased thrust in global climate action more countries are assuring a net-zero commitment. ‘Carbon Tax’ initiatives are going to gain momentum when greener, cost-effective technologies are also available. The recent meetings at the COP27 climate change conference in Egypt have once again provided the required impetus for a more focused strategy to deal with the ‘climatic holocaust’. But as with all positives, there are negatives too especially for the economy. With increased prices, the GDP of various countries that largely depend upon exports may have to experience some initial hiccups – their competitiveness will be affected when carbon tax rates are hiked – increased prices will result in slowing global growth.
23 Countries implemented ‘Carbon Tax mechanisms
Several countries around the globe have implemented various types of carbon pricing mechanisms while standardizing the price of carbon emissions. According to the United Nations, 23 countries have implemented carbon taxes, primarily at the national level. Countries began adopting carbon taxes in the early 1990s—Finland introduced a carbon tax in 1990; Norway and Sweden in 1991; and Denmark in 1992. Over the decades, carbon taxes were introduced not just in developed economies, but also in emerging economies like Chile and South Africa. Carbon taxes vary in their mechanism and rates in every country and are increasingly being adopted by countries not only in pursuance of extenuating the effects of climate change but also as a means to avoid being reprimanded and penalized by the international community.
The inadequate carbon tax structure in India
According to the Global Climate Risk Index 2021, India is among the 10 countries badly affected by extreme weather conditions. As a fast-emerging global economy, it becomes of paramount importance to reduce carbon emissions to the lowest levels. India is one of the few countries on the right track to achieve its targets for emission reduction under the Paris Agreement, more critical initiatives should be mandated to strengthen its endeavours against climate change.
At present India does not have a uniform system of carbon taxation across the country; however, state governments have imposed their taxes to negate the causes and its effects —such as the ‘Green Cess’ implemented in Goa and the vehicles entering Mussoorie. While the Government of India (GOI) has not implemented any explicit carbon tax, it has in the past introduced certain measures to compensate for the costs of the damages caused.
One of the action plans introduced by the GOI in 2010 was the ‘Clean Energy Cess’ which was intended to incentivize the use of clean fuels by increasing the cost of consuming coal and using a portion of the revenue collected to fund research and clean energy projects. However, with the introduction of Goods and Services Tax (GST) in 2017, the Clean Energy Cess was abolished; in its place, a ‘Compensation Cess’ on coal production at Rs.400 per ton was introduced.
The ‘Compensation Cess’ introduced is to have force until 2022. However, it taxes only the usage of coal and not the quantum of carbon emission. Ironically, this results in a two-fold problem:
- It does not precipitate in reducing the amount of coal used and the consequent carbon emission, and
- It penalizes taxpayers instead of emission producers.
The system of carbon taxation in India is currently at its elementary stage. Further, it is not an encouraging system of taxation. Not only does this have an impact on the economy of the country in terms of the external costs of carbon it also carries the potential to affect India’s international trade if not addressed adequately shortly.
The European Union (EU) has announced its ambitious plan – “Carbon Border Adjusted Mechanism” (CBAM) which would tax carbon-emitting goods which enter the EU at the borders. At present, it is cheaper to import certain goods from outside the EU than use domestically manufactured goods; the CBAM hence aims to resolve this issue by bridging the gap between the prices of imported and domestic goods. As a part of the rollout strategy for the CBAM, a reporting system is to apply from 2023 and importers would need to start paying financial adjustments by 2026. The CBAM is ought to be detrimental to India’s interests, although India has expressed its displeasure, but it does not enjoy enough bargaining power without its domestic carbon pricing mechanism in place.
India must adopt an efficient ‘Carbon Tax’ structure at the earliest and that would not only portray India’s genuine endeavours in reducing carbon emissions but also gradually help in arresting the resulting catastrophic effects besides evading CBAM’s punitive measures on India’s exports in future.
Also Read: Majority of Oppo 5G smartphones now support 5G, see if your phone is on the list
Immediate efficacy of carbon taxes
- ‘Carbon Taxes discourage the consumption of highly emissive materials/sources of energy and incentivize the use of renewable sources of energy. By making highly emissive inputs more expensive, such taxes would provide the required impetus for firms for adopting greener inputs.
- Carbon Taxes entail the external costs of carbon emission on the overhead of the polluter and not on the public. This forces polluters to use means of production which are less emissive and more environmental friendly. Further, they also enable the government to collect revenue which can be used to mitigate any potential disaster caused by climate change.
- If a maximum limit of emissions is set, beyond which such emissions would be taxable, carbon taxes could be a progressive system of taxation. Further, by taxing emissions and not the use of fossil fuels which are essential to economically disadvantaged persons, a prudent carbon tax system would benefit the country without harming the citizens it seeks to protect.
- From an international trade perspective, India would protect itself from being ostracized or penalized for not imposing a carbon tax. Further, India would be able to defend itself from any legislation imposed by International agencies thus evading adverse impacts on its exports.
Also read: Discount on cars: Renault is offering huge discounts on these models, details here
Keep watching our YouTube Channel ‘DNP INDIA’. Also, please subscribe and follow us on FACEBOOK, INSTAGRAM, and TWITTER.