Carbon taxes are the best option to make up for the loss in revenue caused by transition away from fossil fuels as India targets net zero, a study by policy think-tank Centre for Social and Economic Progress (CSEP) has said.
The government is staring at a revenue loss of 3.2 percent of the GDP, as it shifts away from fossil fuels to meet its climate and emission goals.
The CSEP study “Taxation Alternatives for India’s Energy Transition: ESAM Analysis” by Rajat Verma and Laveesh Bhandhari says none of alternative options offer a viable solution, which can reduce the tax burden of households, have no impact on growth and curb carbon emissions at the same time.
None of the seven alternatives in terms of carbon taxes, user taxes and increase in goods and services tax (GST) explored by the study balance growth with reduced emissions and lower household tax burden.
What can carbon taxes offer?
Carbon taxes seem to be the best bet, especially for coal, as they increase GDP and reduce emissions. However, even they lack equity, as they add to the burden of households and impact lower-income families more than upper income ones.
Calculations by authors show that a carbon tax on coal will add more to GDP than any of the other six alternatives (0.46 percent) and reduce emission intensity by 1.6 percent — highest across all seven options.
The change in tax burden is likely to be regressive with houses in the lower 20 percent income bracket paying comparably higher taxes than the top fifth.
India aims to achieve net zero by 2070.
Are user taxes, GST increase an option?
On the other hand, the study highlights that user taxes on distance travelled or electricity charges may be difficult to levy and leave a negative impact on GDP.
“In the long run, replacing fossil fuel taxes with user taxes will negatively impact real GDP, whereas if a proportionate increase in the GST replaces fossil fuel taxes, then this will impact equity,” it says.
GST increases may benefit users and lower emissions but leave the economy worse off. Real GDP is likely to reduce by 0.18 percent.
“The regressivity concerns can be addressed by providing revenue transfers from the State to the lowest quintiles,” Verma and Bhandari say.
Is revenue reduction a solution?
The study says while the government may be tempted to reduce its spending to cover for revenue loss, it can hurt the economy with a 6.3 percent drop in nominal GDP. It would also not be environmentally friendly.
Challenges
The government will also need to address institutional and political-economic challenges while considering the best alternatives, as states will not like to part with autonomy further, the study says.
A carbon tax may not be easy to implement as it requires monitoring and mapping of emissions, the authors say.
CSEP is a policy think-tank with former Shell India CEO Vikram S Mehta as chairman. Bhandari is the president, former IMF executive director Rakesh Mohan president emeritus and Rajat Verma is the associate fellow.
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