PRICE ON CARBON EMISSIONS – ENVIRONMENT
News: Time to put a price on carbon emissions
What's in the news?
● A high enough carbon tax can pave the way for decarbonization as a winning development formula; India, as the G-20 chair, can play a lead role in this.
Ways of pricing:
Three ways of pricing carbon are:
● The establishment of a carbon tax domestically, as in Korea and Singapore;
● The use of an emissions trading system (ETS), as in the European Union (EU) and China;
● The application of an import tariff on the carbon content, as the EU is proposing.
Carbon tax:
● A carbon Tax is a form of pollution tax that imposes a fee on the production, distribution, and use of fossil fuels based on the amount of carbon released during combustion.
● This tax is based on the amount of carbon in a fuel such as coal, for example.
● The goal of this tax is to reduce the use of fossil fuels while also providing an incentive to use alternative energy sources.
● Significance:
○ Predictability - The tax could help predict energy prices, potentially boosting investments in energy efficiency and alternative fuels.
○ Implementation - A carbon tax could be implemented much faster than the legalities associated with the 'cap and trade' method.
○ Understandable - Because the carbon tax is simpler to understand, it may be more widely accepted by the general public.
○ Lack of Manipulation - Because a carbon tax is simple, special interest groups have fewer opportunities to manipulate it.
○ Rebates - The carbon tax, like other types of taxes, may be subject to public rebates.
Carbon Tax Regime in India
● According to the Global Climate Risk Index 2021, India is one of the ten countries most affected by climate change-related extreme weather.
● As a developing country, it is critical to reducing carbon emissions to as low a level as possible.
● While India is one of the few countries on track to meet its Paris Agreement emission reduction targets, more efforts are needed to strengthen it against climate change.
● Currently, India lacks a unified system of carbon taxation across the country; however, state governments have imposed their own taxes to offset the costs of negative externalities, such as the Green Cess in Goa and the Eco Tax on vehicles entering Mussoorie.
● Furthermore, while the Government of India (GOI) has not implemented an explicit carbon tax, it has introduced measures in the past to capture the costs of negative externalities.
● The Clean Energy Cess was one measure introduced by the GOI in 2010 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 implementation of the Goods and Services Tax (GST) in 2017, the Clean Energy Cess was repealed, and a Compensation Cess on coal production of Rs.400 per tonne was introduced in its place.
● The Compensation Cess will be in effect until 2022. However, it only taxes the use of coal, not the amount of carbon emitted as a result of that use.
● India's carbon taxation system is currently rudimentary at best. Furthermore, it is not a progressive taxation system.
● This has an impact not only on the country's economy in terms of the external costs of carbon not being adequately captured, but it also has the potential to affect India's international trade.
1. Emissions trading or Cap and Trade:
● In this, the central authority sets a limit of cap on the amount of a pollutant that can be emitted.
● This limit is sold to the firms in the form of emission permits. An emission permit represents the right to emit the specific volume of a particular pollutant.
● The Firm would need to hold the number of permits equivalent to their emissions. The number of these permits cannot exceed a cap.
● If a firm wants to increase the emission permits, it would buy from those who need fewer permits. This transfer of permits is called Emission Trade.
● Thus, the centreline is that: The buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions.
Carbon market in India:
1. Perform achieve trade:
● It has been doing this, partly, via the Perform, Achieve and Trade (PAT) scheme, where around 1,000 industries have been involved in procuring and trading energy saving certificates (ESCerts).
● Since 2015, various cycles of the PAT have shown emission reductions of around 3%-5%.
● The PAT scheme was introduced to improve energy efficiency in Indian industries and consequently reduce greenhouse gas.
● It is a part of National Mission for Enhanced Energy Efficiency of National Action Plan on Climate Change (NAPCC).
● PAT Mechanism is a market-based mechanism to further accelerate as well as incentivize energy efficiency in the large energy-intensive industries.
● The scheme provides the option to trade any additional certified energy savings with other designated consumers to comply with the Specific Energy Consumption reduction targets.
● The Energy Savings Certificates (ESCerts) issued will be tradable on special trading platforms to be created in the two power exchanges — Indian Energy Exchange and Power Exchange India.
2. Emission trading system in Gujarat:
○ A regulatory tool called the ETS was introduced in Surat.
○ It is a market where particulate matter (PM) emissions are traded commodities.
○ It aims to minimize the cost of compliance for the company while also reducing the pollution load in an area.
○ The overall emission load from all industries is capped by the Gujarat Pollution Control Board (GPCB).
○ By exchanging licenses (measured in kilograms) under this cap, various industries can buy and sell the capacity to release PM.
○ ETS is also referred to as a cap-and-trade market for this reason.
Import tariff on Carbon content:
● Example Carbon border adjustment mechanism:
○ The European Union has proposed a policy — called the Carbon Border Adjustment Mechanism — to tax products such as cement and steel that are extremely carbon intensive, with effect from 2026.
○ It is a duty on imports based on the amount of carbon emissions resulting from the production of the product in question.
○ As a price on carbon, it discourages emissions. As a trade-related measure, it affects production and exports.
● To eliminate the difference in carbon price paid by companies subject to the EU’s Emissions Trading System (ETS) and the price paid by companies elsewhere.
● Leveling the playing field for EU firms.
● To implement stronger emission reduction efforts.
● Incentives non-EU countries to increase their climate ambition.
● It will ensure that EU and global climate efforts are not undermined due to the relocation of production which is defined as ‘carbon leakage’.
● India opposes this carbon border adjustment and India doesn’t have this type of mechanism in the domestic market.
Benefits of pricing carbon emission:
1. Reduced consumption: Because the tax increases the cost of using dirty fuels, it encourages businesses and individuals to reduce consumption and increase energy efficiency. It restricts the use of fossil fuels.
2. Increased use of alternative energy sources: Alternative energy sources such as solar, hydro, and wind energy are more expensive than fossil fuel energy. The carbon tax on fossil fuels makes alternative energy more competitive with fossil fuels, resulting in greater use of alternative clean energy.
3. Revenue generation: Carbon taxation provides both social and economic benefits. It increases revenue while also promoting climate change policy objectives. The revenue can be used for socio-economic purposes such as health and education, as well as pollution reduction efforts. It can make effective use of available funds for programs such as afforestation.
4. Better air quality: A carbon tax reduces consumption, resulting in fewer emissions. The carbon tax levies a fee based on the amount of carbon emitted. As a result, in order to reduce the fee, users use less fossil fuel. This will help to protect the environment and ensure the good air quality in cities, particularly in Delhi and Kanpur.
5. Meet emission targets: A carbon tax is a step toward assisting India in meeting its voluntary target of reducing carbon dioxide emissions per unit of GDP by 25% from 2005 levels by 2020. It will also assist India in meeting its committed INDC of 33% by 2030.
6. Clean energy investment: The clean energy tax will contribute to the creation of a National Clean Energy Fund (NCEF). The entire amount raised by the tax can be used to subsidize environmental programs and clean energy.
7. Reducing the use of non-renewable fossil fuels, it will also help India promote flagship programs such as the International Solar Alliance, Start-up India, and Make in India.
Concerns on carbon pricing:
1. High cost of fuel: Already stressed price on fuel due to supply side shocks and distributed supply chain, the new carbon pricing will increase the cost burden since lack of alternative available in the market.
2. Lack of transparency in disclosure: The ‘cap and trade’ system needs a transparent emission disclosure and high level monitoring. This is the caste of concern.
3. Problem of greenwashing: Many firms can easily manipulate the emission level and illegally benefit from the emission trading system.
4. Disadvantages to developing countries: The proposed Carbon border adjustment will negatively impact the export revenues of developing countries. High import tariffs due to high carbon content will reduce the trade competitiveness of developing countries like India.
5. Against the Common but differentiated responsibilities: The developed countries which utilized major junks of carbon budget will transfer the burden to innocent developing, small island countries. It is unfair climate justice.
6. Inflation: Burden of inflation in essential products due to increased price of fuel. It will increase inequality and poverty.
WAY FORWARD:
● India can take the lead, as president of the G-20 this year, in carbon pricing, which will open unexpected avenues of decarbonization.
● Allow companies to use high-quality international carbon credits to offset up to a certain percentage of their taxable emissions.
● To minimize political pressure: Sweden handled political constraints by presenting the carbon tax as part of a bigger fiscal package that lowers other taxes and includes new social safety nets.
● Communicating the idea of wins at the societal level, even in the presence of some individual producers’ losses, is vital.
● A high carbon tax across China, the U.S., India, Russia, and Japan alone (more than 60% of global effluents), with complementary actions, could have a notable effect on global effluents and warming
○ It could also pave the way to seeing decarbonization as a winning development formula.
● As carbon pricing gains acceptance, the first movers will be the most competitive.
● India, as president at the G-20 summit can play a lead role by tabling global carbon pricing in the existential fight against climate change.