The Role of Carbon Taxation in Combating Climate Change: An Indian Perspective

Author: Joyita Ghosh, Jindal Global Law School, JGU


Introduction

The global climate crisis is no longer a distant threat; it is a reality that impacts billions of lives. Rising global temperatures, extreme weather events, and the rapid melting of glaciers pose unprecedented challenges to human survival. In India, the consequences of climate change are especially stark. Erratic monsoons threaten agricultural livelihoods, rising sea levels endanger coastal populations, and increasing pollution exacerbates public health crises.
As the world rallies to mitigate climate change, the emphasis has shifted toward mechanisms that can curb greenhouse gas emissions effectively. Carbon taxation is increasingly recognized as one such mechanism. While India has made significant strides in renewable energy and climate policy, it lags in adopting a formal carbon tax. A comprehensive approach to carbon taxation could balance India’s economic growth with its environmental responsibilities, ensuring the country contributes meaningfully to global climate efforts.


This article delves into the concept of carbon taxation, its potential in the Indian context, the legal framework surrounding it, global practices, recent developments, and recommendations to strengthen India’s approach.

What is Carbon Taxation?
Carbon taxation refers to a financial charge imposed on the carbon content of fossil fuels, effectively pricing the carbon emissions they produce. Carbon taxation is a mechanism to price carbon emissions to reduce greenhouse gas outputs and A tax levied on the carbon content of fuels is a key tool to internalize environmental costs.

The core idea is to make carbon-intensive activities more expensive, thereby incentivizing individuals, businesses, and industries to transition to cleaner alternatives.


Key Features of Carbon Taxation


Explicit Pricing: Carbon taxes directly set a price per ton of CO₂ emitted.


Scope: These taxes can be levied on various fossil fuels, including coal, oil, and natural gas.


Revenue Allocation: Governments often use revenues generated from carbon taxes to fund renewable energy projects, energy efficiency programs, or rebates to mitigate the impact on vulnerable populations.


Why Carbon Taxation?
Internalizing Externalities: Carbon taxes incorporate the environmental costs of emissions into the market price of fossil fuels.


Market Efficiency: By putting a monetary value on emissions, carbon taxation encourages innovation and competitiveness in cleaner technologies.


Alignment with Global Goals: Carbon taxes help countries meet their climate targets under international agreements like the Paris Accord.
India’s Approach to Carbon Taxation
While India has not implemented a formal carbon tax, it has utilized indirect measures to price carbon emissions. These measures reflect a foundational understanding of carbon pricing principles, albeit without a comprehensive policy framework.


1. The Coal Cess
In 2010, India introduced the Clean Energy Cess on coal, initially set at ₹50 per ton and progressively increased to ₹400 per ton by 2016. Although labeled as a cess, this effectively functioned as a carbon tax, targeting one of the most carbon-intensive sectors. The revenue was allocated to the National Clean Energy and Environment Fund (NCEEF).


However, the coal cess lost its environmental focus when it was subsumed under the GST Compensation Fund in 2017, highlighting the need for a dedicated mechanism for climate action.


2. Fuel Taxes
India’s excise duties on petrol and diesel have acted as an indirect carbon tax by making fossil fuels more expensive. While these taxes are primarily aimed at revenue generation, their environmental benefits cannot be overlooked.


3. State-Level Initiatives
Certain Indian states have introduced green taxes on older vehicles, aiming to reduce vehicular emissions. For instance, Delhi imposes additional fees on vehicles older than 15 years.
4. Pilot Emissions Trading Scheme (ETS)
In 2023, India launched a pilot ETS in the power sector, allowing industries to trade emissions allowances. This system complements carbon taxes by providing a market-based mechanism to control emissions.


The Legal Framework in India

India’s approach to carbon taxation, while commendable in certain aspects, reflects an evolving yet fragmented framework. Over time, India has employed indirect measures like the coal cess, excise duties on fossil fuels, and most recently, a pilot Emissions Trading Scheme (ETS) in the power sector to address carbon emissions. These measures represent steps toward internalizing environmental costs within India’s economic system. However, the absence of a dedicated carbon tax law creates several gaps, limiting the efficiency and effectiveness of these initiatives.


A dedicated carbon tax law could provide a structured and cohesive approach to climate financing. Such a framework would allow policymakers to explicitly define the following:
Tax Rates: Establish clear rates based on the carbon content of fuels or emissions generated. These rates could be designed to increase progressively, incentivizing the gradual transition to cleaner technologies.


Revenue Utilization: A well-defined allocation mechanism for carbon tax revenue could ensure that funds are channeled into climate-focused initiatives. This might include investments in renewable energy, subsidies for green technology adoption, and programs to assist vulnerable populations affected by the transition.


Socio-Economic Equity: Carbon taxes are often criticized for their regressive nature, disproportionately affecting low-income groups. A formalized law could incorporate provisions for rebates, subsidies, or direct transfers to mitigate these effects, making the policy more equitable and politically acceptable.


The Coal Cess: A Missed Opportunity
The introduction of the Clean Energy Cess on coal in 2010 was a pioneering move, effectively functioning as a form of carbon taxation. The cess was incrementally raised from ₹50 per ton to ₹400 per ton by 2016, with revenues allocated to the National Clean Energy and Environment Fund (NCEEF). This demonstrated the potential for targeted levies to both reduce emissions and generate resources for green initiatives.
However, the subsumption of the coal cess into the GST Compensation Fund in 2017 marked a turning point. The shift redirected funds from environmental programs to compensating states for GST revenue losses. Critics argue that this undermined the original purpose of the cess, diluting its environmental focus and limiting its ability to contribute meaningfully to India’s climate goals. The redirection also highlighted a broader issue: the absence of a legal mandate ensuring that revenues from carbon-related levies are used exclusively for climate action.
Challenges Without a Dedicated Framework
Fragmented Policy Implementation: Without a unified law, existing measures like excise duties on fuel and green taxes on older vehicles remain disconnected, reducing their cumulative impact.
Lack of Clarity and Consistency: Businesses and industries face uncertainty in the absence of clearly defined rules and tax rates. A structured law could provide predictability, encouraging investments in cleaner technologies.
Missed Global Alignment: Countries like Sweden, Canada, and the EU have implemented explicit carbon pricing mechanisms that align with international climate commitments. India risks falling behind without a comparable framework.


The Need for Alignment with Climate Commitments
India has made ambitious commitments under the Paris Agreement, including a pledge to achieve net-zero emissions by 2070 and reduce the carbon intensity of its economy by 45% by 2030. Meeting these targets requires a significant mobilization of resources and a shift in economic practices. A dedicated carbon tax law could:
Facilitate climate financing by generating predictable revenue streams for green investments.


Align with global best practices, such as the EU’s Carbon Border Adjustment Mechanism (CBAM), ensuring Indian exports remain competitive in carbon-conscious markets.


International Practices and Lessons for India
Globally, carbon taxation has been adopted by various countries, each tailoring the approach to their socio-economic contexts.


1. European Union
The EU has implemented a robust Emissions Trading System (ETS) and introduced the Carbon Border Adjustment Mechanism (CBAM) in 2023, which taxes imports based on their carbon footprint. This prevents carbon leakage and ensures compliance with EU emission standards.


2. Sweden
Sweden’s carbon tax, introduced in 1991 and currently among the highest globally at $137 per ton of CO₂, has significantly reduced emissions without hampering economic growth.


3. Canada
Canada’s carbon pricing policy ensures revenue neutrality by redistributing collected taxes as rebates to citizens. This approach enhances public acceptance while mitigating regressive impacts.


4. China
China has initiated regional pilot carbon trading schemes, which serve as a precursor to a national carbon market. These pilots offer valuable insights into pricing strategies and compliance mechanisms.


Recent Developments in India and Globally
India
National ETS Launch (2023): India’s pilot ETS in the power sector marks a significant step toward market-based emissions control.
Budget 2024-25 Allocations: The government allocated ₹35,000 crores to renewable energy, signaling a commitment to the green transition.


Global
COP28 Outcomes: Agreements to increase climate financing and transfer clean technologies to developing nations.
US Inflation Reduction Act: Policies to incentivize clean energy investments, indirectly influencing global carbon reduction goals.


Recommendations for India
Introduce a Dedicated Carbon Tax Framework
Define rates, scope, and revenue allocation mechanisms.
Target carbon-intensive industries and fossil fuel consumption.


Harmonize with Global Standards
Align with global pricing mechanisms to enhance competitiveness.
Collaborate with international organizations like the World Bank.


Strengthen Legal Provisions
Amend existing environmental laws to incorporate explicit carbon pricing.
Public Awareness and Equity
Launch campaigns to educate stakeholders.
Address socio-economic concerns through rebates and subsidies.


Conclusion


Carbon taxation presents India with an opportunity to address climate change while fostering economic resilience and energy security. As a developing nation with ambitious climate goals, India must design policies that balance environmental and economic priorities. Learning from global best practices and tailoring them to local contexts can help India lead by example in the fight against climate change. By implementing a robust carbon taxation framework, India can align itself with global sustainability efforts and pave the way for a greener, cleaner future.


FAQS

1. What is a carbon tax, and why is it important?
A carbon tax is a charge imposed on the carbon content of fossil fuels or greenhouse gas emissions. Think of it as a way to hold polluters accountable by making carbon-intensive activities more expensive. The goal? To encourage people and industries to shift to cleaner energy sources, reduce emissions, and help fight climate change.


2. Does India have a carbon tax?
Not exactly. India doesn’t have a dedicated carbon tax, but we’ve taken steps in that direction. For example, the coal cess (a tax on coal), excise duties on fuel, and green taxes on older vehicles are forms of indirect carbon pricing. These measures are helpful, but they lack the structure and focus of a proper carbon tax.


3. What is the coal cess, and what happened to it?
The Clean Energy Cess was introduced in 2010 as a tax on coal, starting at ₹50 per ton and later increased to ₹400 per ton. It was meant to fund renewable energy projects through the National Clean Energy and Environment Fund (NCEEF). However, in 2017, the cess was merged into the GST Compensation Fund, which diverted its focus from environmental initiatives to compensating states for GST revenue losses. This move diluted its environmental purpose and highlighted the need for a clear legal framework.


4. Why does India need a dedicated carbon tax law?
India’s current measures are fragmented. A dedicated carbon tax law would bring everything together. It could:
Clearly define tax rates and who should pay.
Ensure that the money collected is used for renewable energy, climate adaptation projects, and support for affected communities.
Provide certainty to industries, encouraging them to invest in greener technologies.


5. How does the Indian Constitution support environmental action?
The Indian Constitution lays a strong foundation for environmental protection:
Article 48A: Encourages the State to protect and improve the environment.
Article 51A(g): Makes it a duty of every citizen to safeguard the environment.
Article 253: Allows Parliament to make laws for implementing international treaties, such as climate agreements.


6. How does India regulate carbon emissions currently?
India uses a mix of laws and policies:
The Environment (Protection) Act, 1986: Gives the central government power to act against pollution and environmental damage.
The Air (Prevention and Control of Pollution) Act, 1981: Aims to control air pollution and indirectly reduces carbon emissions.
Judicial precedents like MC Mehta v. Union of India (1987) have reinforced the polluter-pays principle, which aligns with the idea of carbon taxation.


7. How does India’s approach to carbon pricing compare to other countries?
India’s approach is still evolving.
European Union: Runs a well-established Emissions Trading System (ETS) and taxes imports based on their carbon footprint through the Carbon Border Adjustment Mechanism (CBAM).
Sweden: Charges one of the world’s highest carbon taxes ($137 per ton of CO₂), achieving emission reductions without hurting economic growth.
Canada: Implements a revenue-neutral carbon tax, meaning the money collected is returned to citizens as rebates.
India: Relies on indirect measures like coal cess and excise duties but lacks a centralized and comprehensive framework.


8. What are some recent developments in India’s carbon policy?
Emissions Trading Scheme (ETS): India launched a pilot ETS for the power sector, allowing industries to trade emissions allowances. This could evolve into a robust carbon pricing mechanism.
Union Budget 2024-25: Allocated ₹35,000 crores to renewable energy projects, demonstrating the government’s commitment to climate action.


9. What challenges does India face without a proper carbon tax?
Policy Fragmentation: Current measures like fuel excise duties and green taxes don’t work together effectively.
Revenue Misallocation: Funds from the coal cess, meant for environmental projects, were diverted to other purposes under the GST Compensation Fund.
Global Competitiveness: With international markets adopting carbon-conscious policies like the EU’s CBAM, Indian exports could face barriers without a formal carbon pricing system.


10. What can India do to improve its carbon tax framework?
Draft a Dedicated Carbon Tax Law: Clearly define tax rates, revenues, and socio-economic safeguards.
Set Up a Climate Action Fund: Ensure that carbon tax revenues are spent on green projects and climate resilience.
Make It Equitable: Include rebates or subsidies for vulnerable groups to offset the financial burden of the tax.
Align with Global Standards: Harmonize India’s policies with mechanisms like the EU ETS or Canada’s carbon tax.


11. Are there any case laws in India related to carbon taxation?
Although there’s no case directly addressing carbon taxation, Indian courts have been active in environmental protection:
MC Mehta v. Union of India (1987): Reinforced the polluter-pays principle, a foundation for carbon taxation.
Indian Council for Enviro-Legal Action v. Union of India (1996): Held industries accountable for environmental damage, emphasizing the need for strict measures like carbon pricing.


12. How can carbon taxation help India achieve its climate goals?
A structured carbon tax can:
Reduce Emissions: By making polluting activities expensive and promoting greener alternatives.
Fund Green Projects: Create predictable revenue streams for renewable energy and sustainable infrastructure.
Meet Global Commitments: Help India fulfill its Paris Agreement pledges, including achieving net-zero emissions by 2070.

Bibliography

https://pib.gov.in/PressNoteDetails.aspx?NoteId=153385&ModuleId=3&reg=3&lang=1


https://iforest.global/wp-content/uploads/2024/07/Coal-Cess_Paper.pdf


https://www.imf.org/en/Publications/fandd/issues/2019/06/what-is-carbon-taxation-basics


https://earth.org/india-carbon-tax/


https://earth.org/explainer-what-is-a-carbon-tax-pros-and-cons-and-implementation-around-the-world/


https://www.pwc.com/gx/en/issues/reinventing-the-future/take-on-tomorrow/carbon-taxation-podcast-episode.html


https://pmc.ncbi.nlm.nih.gov/articles/PMC7050298/

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