This article has been written by Hemant Sharma pursuing a Diploma in US Corporate Law for Company Secretaries and Chartered Accountants course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Carbon emissions create and escalate climate change and have adverse effects on the planet. Governments worldwide are actively seeking innovative solutions to mitigate the environmental impact of human activities. Natural disasters are increasing, and their frequency and severity are also increasing. The reasons for the same are well understood by various studies. Studies have agreed that climate change is driven by human activities and carbon emissions, which are going to cause extreme weather events that affect the most vulnerable people in our societies. This article explores the concept of taxing carbon emissions, its implications, and its role in promoting environmental sustainability.

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Understanding carbon emission and its taxation

What is carbon emissions? All fossil fuels, such as coal, petroleum, and natural gas, contain carbon, which is released as carbon dioxide when these fuels are burned. The release of carbon dioxide acts as a greenhouse gas. Greenhouse gases are the gases that absorb the infrared radiation (heat energy) emitted from the earth’s surface and redirect it back to the earth’s surface. Over time, the accumulation of greenhouse gases in the atmosphere contributes to climate change and causes harm to the environment.

We depend on fossil fuels, such as oil, natural gas, coal, etc., which help us produce electricity that powers homes, businesses, and industries. They provide us with energy, and they are essential in modern society; that is why stopping the use of fossil fuels is not an option as it may also cause economic unrest. To drive our economy, we need an immediate way to encourage fewer carbon emissions and to maintain environmental sustainability. This is where carbon taxes come in. One such solution is the taxation of carbon emissions, taxes that are levied directly on the sources of carbon emissions, but this economic policy comes with its controversies and problems.

Historical context of taxes on carbon emission and environmental sustainability

According to a poll conducted by GlobeScan and  several other studies, carbon taxes effectively reduce emissions. Many economists argue that carbon taxes are the most efficient (lowest cost) way to tackle climate change. Seventy-seven countries and over 100 cities have committed to achieving net zero emissions by 2050

Carbon taxes have been implemented in several countries around the world. They take several different forms. The first country to implement a carbon tax was Finland in 1990. As of April 2021, that levy stood at $73.02 per tonne of carbon. Finland was quickly followed by other countries like Sweden and Norway, which both implemented their carbon taxes in 1991 at a rate of $69.00 per tonne of CO2 used in gasoline. There are some unsuccessful implementations, such as in the United States, which has not enacted a carbon tax till now. On the other hand, Australia has failed to implement it since 2012-2014.

In 2015, many countries, including India, came together to form an agreement to control climate change. According to the agreement, if we want to achieve a healthy environment by 2050, the emission rate must be less than 2 tonnes per person. India has 2.5 tonnes per person of carbon emissions, which is less than the global average of 4.47 tonnes per person. In total, India emits 7% of global carbon emissions. The United Kingdom has an average emission of 6.8 tonnes per person, while the United States has a dangerous emission  of 18.44 tonnes per person. But with the population we have, we contribute a lot  globally.

How does tax on carbon emission work in India

India initially had subsidies on carbon emissions, from which you would benefit if you emitted fewer carbons. After that, however, India changed its policy from subsidisation to taxation. A carbon tax is imposed in the form of an indirect tax, a tax on a transaction, and not on incomes like a direct tax. But why don’t we have direct taxes on carbon emissions? Below are a few reasons for not imposing the carbon tax as a direct tax:

  • Carbon taxes are regressive, meaning they will affect lower-income families more than the higher-income families.
  • Large emitting companies will oppose the direct tax scheme
  • It will increase production costs and affect local manufacturers and small businesses.

In 2010, the Clean Energy Cess was introduced in India through the Union Budget 2010-11, It is a kind of carbon tax in India that is imposed as a duty of excise on coal, lignite, peats, and coal produced in India and imported in India. The rate of Clean Energy Cess in the last few years is as follows:

  • In 2010, the rate prescribed was Rs. 100 per tonne for coal and its variants; afterwards, it was reduced to Rs. 50 per tonne through a notification.
  • In 2014, the rate was increased to Rs. 100 per tonne.
  • In 2015, the rate was further raised to Rs. 200 per tonne.
  • From 2016 until now, the rate has increased to Rs. 400 per tonne.

The funds raised through the cess are being used to fund research and innovative projects in clean energy technologies or renewable energy sources to reduce dependence on fossil fuels.

One more example of indirect taxation to protect the environment was in 2016, when the Supreme Court ordered an Environment Compensation Charge (ECC) of 1% for the registration of diesel cars above 2000 cc in Delhi. Due to this tax, the number of large cars will decrease compared to normal and they can get registered by paying the ECC

Like this, India has several indirect taxes to discourage and penalise carbon consumption. The target is to have 0 tonnes per person of carbon emissions by 2070. India is focusing a lot on recycling and reusing products, and the Ministry of New and Renewable Energy has also begun  waste-to-energy programmes such as biogas, bio-CNG, power from agriculture waste and solid waste. The Department of Science and Technology supports the development of projects that support plastic recycling, solar power, and electric vehicles.

Importance of environmental sustainability

Environmental sustainability refers to the practice of meeting the needs of the present without compromising the ability of future generations to meet their own needs. It involves the responsible use of natural resources and the creation of a balance between human activities and the environment. This includes reducing greenhouse gas emissions, conserving energy and water, and minimising waste and pollution. 

Environmental sustainability is the ability to make human life better. This has to be done within the carrying capacity of the Earth’s supporting ecosystems. Breathable air, oceans, and rivers are beyond national, local, and continental borders. They have to be looked after together.

Currently or in the past few decades, we have been consuming resources at a much faster rate than we are growing, and due to this, we are also facing climate change, air pollution, plastic pollution, and declining ecosystem health. Below are some solutions or ways to promote environmental sustainability:

  • Preserving resources and health in the long run to manage social and economic needs later on.
  • While making decisions, one should pay attention to how they will influence later generations and not only current times.
  • It is important to expand into sources that do not depend on non-renewable resources (e:g oil, coal, etc.).
  • Make policies to prevent the deterioration of Earth’s environment.
  • We should preserve rainforests, as they need to preserve many resources and grow as many trees and crops using fewer chemicals.
  • Policies to boost environmental sustainability, e:g imposing a carbon tax on consumptions.
  • Promoting recycled materials and products.

Challenges and solutions

Challenges

A carbon tax on greenhouse gas emissions where a fixed price is set by the government for carbon emissions in certain sectors. The price is passed through from businesses to consumers. By increasing the cost of greenhouse emissions, governments hope to curb consumption, reduce the demand for fossil fuels, and push more companies towards creating environmentally friendly substitutes. However, implementing carbon taxation creates resistance from industries heavily reliant on fossil fuels and it concerns economic competitiveness. Also,  the cost of production increases, and due to that, the prices of many essential products will increase, which will affect the economy. While the concept of carbon taxation is rooted in environmental concerns, its economic implications are equally significant. The carbon taxes may increase the cost of energy and goods, potentially burdening low-income households.

Solutions

To address these issues, policymakers must design carbon tax systems that are fair and transparent and provide incentives for innovation. Additionally, revenue recycling mechanisms, such as investing in sustainable infrastructure or subsidising renewable energy projects, can enhance the public’s acceptance of carbon taxation. Revenue generated from carbon taxes can be used to implement progressive policies, such as income tax cuts or direct rebates, to offset the financial impact on vulnerable populations, create economic incentives for businesses to innovate and invest in cleaner technologies, and be reinvested in renewable energy projects and other environmentally friendly programmes.

Conclusion

Climate change is a global challenge that requires international collaboration. Carbon taxation is more effective when implemented on a global scale, ensuring that businesses or industries cannot simply relocate to regions with liberal environmental regulations. The success of carbon taxation in promoting environmental sustainability can be measured through various indicators. Reductions in carbon emissions, increased adoption of renewable energy sources, and advancements in clean technologies are tangible signs of progress. Additionally, tracking the allocation of tax revenues to environmental initiatives and monitoring socio-economic impacts is crucial for evaluating the overall effectiveness of carbon taxation policies. Taxation of carbon emissions is a powerful tool in the fight against climate change. While challenges exist, the potential benefits for the planet and the economy are considerable. Implementation of carbon taxation can pave the way for a greener, more sustainable world.

References

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