CARBON TAX AND INDIA

During the course of the past few decades, climate change has grown as a global concern that requires an integrated worldwide response. The United Nations Framework Convention on Climate Change (UNFCCC) is an international agreement with the primary objective of lowering the concentration of greenhouse gases (GHG) in the atmosphere. India is a signatory to this convention. Additionally, India has demonstrated its commitment to combating climate change by ratifying the Paris Agreement, a multilateral international treaty. The Paris Agreement aims, among other things, to reach a state of carbon neutrality beginning in the year 2050 and continuing thereafter. India made a commitment to reduce its carbon footprint when it ratified the Paris Agreement. This commitment is based on the assumption that the country will have unrestricted access to more environmentally friendly sources of energy, technological advancements, and financial resources from all over the world. In this context, Prime Minister Narendra Modi recently stated that the nation is on course to achieve its climate targets well before the target date since it is continuing to transition over to energy-efficient mediums and utilising trash to generate electricity.

Taking into account the international commitments it has made, India has, throughout the course of the last few decades, implemented a variety of regulatory and fiscal measures to address the issue of climate change. Its National Action Plan on Climate Change (NAPCC) enshrines eight national missions, such as the National Mission for Enhanced Energy Efficiency and the Green India mission, among others, that provide the framework for adopting multipronged and integrated strategies to mitigate the effects of climate change. Nonetheless, in spite of all of these efforts, India is consistently classified as one of the major emitters of carbon dioxide (CO2) in the world, after only China and the United States.

Burning fossil fuels, particularly coal, is the principal source of carbon dioxide (CO2) emissions, making it one of the primary contributors to climate change. CO2 is a primary greenhouse gas (GHG), and one of the primary contributors to climate change. The energy sector is the single largest contributor to greenhouse gas emissions in India, accounting for 68.7% of the country’s total, followed by agriculture, industrial activities, transportation, the management of livestock, and garbage.

In 2010, the government implemented a Clean Energy Cess on coal with the dual objectives of:

• designating a portion of the revenue to fund research and innovative projects in the field of clean energy; and
• indirectly increasing the consumption of cleaner fuel by increasing the consumption cost of coal. The Clean Energy Cess was implemented in 2010.

However, with the implementation of the Central Goods and Service Tax Act, 2017, (GST), the Clean Energy Cess, along with twelve other cesses, was repealed and replaced by a new cess called the Compensation Cess. This new cess was introduced in place of the former cesses. Under the new system, the tax on coal remained at the same amount of INR 400 per tonne as the previous one. It is important to note that whilst the Clean Energy Cess was only collected when coal was being produced or imported, the Compensation Cess is collected at each and every point of supply.

Yet, the government was not successful in achieving the desired goals regardless of the method by which a cess was levied because only a negligible amount of the revenue was allocated towards research. In addition, the cost of more environmentally friendly forms of electricity, such as large-scale solar grids, was competitive with the cost of coal, and as a result, the demand for such environmentally friendly forms of energy did not increase. A further consideration is that the imposition of a cess, despite the fact that it constitutes a tax on the utilisation of coal, is not connected to the total amount of carbon emissions produced by a taxpayer. Therefore, a taxpayer would be subject to the same rate of tax regardless of whether he chooses an inexpensive variety of coal that is known to produce pollution or a relatively expensive variety of coal that produces low levels of carbon emissions and is referred to in common parlance as “clean coal.”

In addition to the actions made at the federal level, a number of Indian states have also taken initiatives to cut carbon dioxide and other greenhouse gas emissions. For instance, the state government of Goa began collecting a “Green Cess” on products and chemicals that contributed to pollution in 2013. This tax was first implemented in 2013. In a similar manner, the state government of Uttarakhand came to the conclusion that the hill station of Mussoorie should impose a “Environmental Charge” on any vehicles that passed through its gates.

Nevertheless, none of these strategies have shown to be effective in bringing down carbon emissions and, as a result, slowing or reversing the effects of climate change. In light of this, it may be worthwhile to explore adopting new fiscal measures such as a ‘carbon tax’ in order to bring about a reduction in GHG emissions. A carbon tax is a broader term that refers to the imposition of a fee on GHG emitters with the objective of discouraging the utilisation of all forms of fossil fuel, not simply coal. In addition, unlike the model of cess that is currently in use in India, which is tied to the consumption of coal, this one is generally connected to greenhouse gas emissions.

Implementing a Carbon Price Puts These Countries at the Front of the Pack in the Global Struggle to Combat Climate Change

In 1990, Finland was the first country to implement a carbon tax, and in the years that followed, Norway, Sweden, and Denmark all did the same. Since that time, a number of governments, both industrialised and developing, including the United Kingdom, France, Canada, and others, have instituted a price on carbon emissions. The Indonesian Ministry of Finance has also revealed their intentions to implement a carbon price only within the past month. In addition, the European Union (EU) is in the process of implementing a “Carbon Border Adjusted Mechanism” (CBAM), which proposes that carbon emitting goods (such as cement, steel, aluminium, glass, etc.) entering the EU would be taxed at the borders. This would be done to reduce the amount of carbon dioxide emissions. Because businesses in the EU are required by law to obtain permits in order to engage in manufacturing activities that result in the emission of GHG, the CBAM was conceived as a response to this requirement. This additional cost pushes up the price of completed items created within the EU, which in turn makes it more cost effective to import goods from countries that do not impose similar economic measures. In light of this, the imposition of tariffs on imported goods would result in an increase in the price of those goods as a consequence of the additional tax expense; thus, this would make imported goods less appealing to purchasers, which might result in a decrease in demand. As a result, CBAM is working to reduce the price gap that exists between products made in the EU and those made in other jurisdictions. Importantly, the United States of America is also taking into consideration a plan that is very much like the one being discussed here.

In the year 2020, India’s commerce with the EU, which was the country’s third largest trading partner, resulted in the exchange of goods valued at 74.5 billion USD. Up until recently, Indian goods had a competitive advantage in the EU due to the fact that they were significantly more affordable than the items that were produced by enterprises located in the EU. Yet, as a result of the implementation of CBAM, the cost of importing goods from India for a customer based in the EU is likely going to be comparable to the cost of acquiring items that are created within the EU. As a result, there is a significant chance that demand for goods manufactured in India would fall, which will have an impact on the export sector in India. These allegations have been rejected by the EU, despite the fact that India and a number of other nations have vigorously opposed the CBAM on the grounds that it is discriminatory. According to Frans Timmermans, deputy president of the European Commission, “the need for a carbon charge on imports disappears” if other countries move to price carbon on exports instead of importing it. If they don’t, we won’t have any problems pushing forward with the plan because we won’t have any reservations about it.

Therefore, in addition to the compelling environmental case for introducing a carbon tax, India must also take into consideration the possibility that if multiple countries adopt cross-border carbon tariffs in the future, then the global demand for Indian goods may decrease, which would result in a significant setback for businesses that are focused on exporting their products. However, this problem can be solved if, going forward, the Indian manufacturing industry is compelled to manufacture goods in a sustainable manner. This is because such goods would not be responsible for carbon emissions and, as a result, could possibly be exempt from the penalty of cross-border tariffs.

Introducing a Fee on Carbon Emissions in India

As was said earlier, India has implemented a number of different taxation policies in an effort to lessen its contribution to global warming caused by carbon emissions. These policies include imposing a cess on coal and an excise duty on petroleum products, amongst other things. However, given that none of these measures have been successful, India should consider introducing a comprehensive carbon tax because it will help to serve a three-fold purpose: • it will disincentivize the use of carbon emission intensive inputs and outputs; • the revenue collected can be utilised to promote research of cleaner alternatives and to support projects related to renewable energy. • create uniformity between federal and state measures in order to ensure that the implementation process is streamlined; developing environmentally friendly alternatives will assist Indian products in meeting international standards, which will result in these products being exempt from cross-border tariffs;

Implementation

When the details of the Goods and Services Tax (GST) reform were being worked out, one of the major changes that was proposed to the mode of taxation was to move the state in which taxes were accrued from the state in which the goods and services were manufactured to the state in which they were consumed. This was one of the major changes that was proposed to the mode of taxation. As a result, states that rely heavily on their manufacturing industries dreaded seeing a decline in their tax income. In order to reach a consensus and win over the support of the states, the Central Government has promised to investigate the possibility of recouping any money that may have been lost as a result of the introduction of the Goods and Services Tax (GST). As a result of this agreement, the Compensation Cess was implemented in 2017 and will remain in effect for the next five years.

As a result, despite the fact that Compensation Cess effectively replaced Clean Energy Cess, the revenue collected in the form of Compensation Cess is intended to be distributed to state governments rather than being earmarked for an environmental cause. This is in contrast to Clean Energy Cess, for which the revenue collected was intended to go towards an environmental cause. In addition, because the Compensation Cess has not yet been extended beyond the year 2022, it is not in the best interest to modify the Compensation Cess.

Therefore, going forward, whenever the Indian government decides to implement a carbon tax, it may think about getting rid of the existing Compensation Cess, which is only applied to its levy on coal, and instead introducing a carbon tax in the form of a revised Clean Energy Cess. This is because the existing Compensation Cess is limited to the tax that is placed on coal.

Nevertheless, in contrast to the earlier version of the Clean Energy Cess, which was solely levied against coal, the new cess ought to be levied against all varieties of fuels, including gasoline, crude oil, natural gas, and so on. As a result, the application should cover a wider range of topics. In addition, the suggested Clean Energy Cess needs to be connected to the total amount of carbon emissions rather than the acquisition of fuel in and of itself. As a result, the rate of cess may differ from one product to another depending on the amount of greenhouse gas emissions it is capable of producing. This would be beneficial in that it would help to encourage the use of alternatives that are relatively cleaner. To prevent a situation in which a tax is paid on both sides of a transaction, the government must assure that the proposed cess would be collected on just one of those sides. In addition to this, the revenues that have been collected need to be accounted for on a consistent basis.

It goes without saying that the proposed Clean Energy Cess should only be implemented in a manner that is both realistic and gradual in order to guarantee that the parties involved have sufficient time to prepare for it. This is especially important in light of the current state of the economy as a direct result of the pandemic. In addition, particular thresholds could be established in order to guarantee that the operations of small businesses are not hindered.

Conclusion

Tax legislation has on multiple occasions been utilised to influence the actions of taxpayers. By imposing a tax on carbon emissions, India will not only be able to make good on its promise to cut carbon emissions, but it will also be able to keep its businesses competitive in a global market that is increasingly placing a premium on the use of environmentally friendly products.