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Does India Need to Work Towards an Environment Taxation System?

By Archisha Tiwari

India’s Union Government recently approved its Nationally Determined Contributions but India’s green sector is barely getting the annual financing it needs. To bridge the lacuna the paper attempts to demonstrate the need for India to increase its accountability and work towards a revenue-neutral environmental taxation system that is both punitive and incentivised. This leads to incorporation of the externalities into the economic model of demand and supply.

Having ratified the Paris Climate Accords, India is bound to submit its Nationally Determined Contributions (hereafter NDCs) to showcase its short-term and long-term goals and efforts towards mitigating climate change. Recently in August 2022, the Union Cabinet of India approved India’s updated NDC for the period 2021-30 that reaffirms many of the targets set out by Narendra Modi at the 26th session of the Conference of Parties of the United Nations Framework Convention on Climate Change. 

One of the targets is transitioning to cleaner energy and achieving about 50% cumulative electric power from non-fossil fuel-based energy resources by 2030 which follows the main commitment towards reducing Emissions Intensity of its Gross Domestic Product by 45% by 2030. While these targets are updated, they’re not entirely new and it is to be noted that India’s green sector is getting only 25% of the annual financing it needs to meet its energy transition goals. There is a disconnect between the targets being reaffirmed and the reality India is faced with. This article attempts to propose imposition of a structural environment tax or a green tax to bridge the gap and make the system of environment financing more regulated and efficient.

Why Do We Need a Green Tax?

In an economic structure, externalities refer to consequences that affect persons and entities like the environment. In terms of negative externalities, it is usually an additional cost of production that the rest of the society has to bear, not the producers. Economists and policymakers wish to incorporate these costs and make the producers liable by adding it to the supply curve. This is done through the application of a Pigovian tax that aims to eliminate the externality associated with production. Internalizing the harm caused to the environment is supposed to reduce the said pollution but in practicality, it comes with many caveats. Firstly, if the cost of eliminating one more unit of production equals the cost of incurring the tax of it, then the producers would be inclined to invest in greener practices but if the cost of elimination increases then they would not invest and would rather prefer paying taxes as a more profitable option. This is especially true if the cost of production and profits incurred is very high. Moreover, if the tax framework allows the tax paid on pollution to be a deductible expenditure on other tax schemes, then this incentive would be an offset. One needs to ensure that the taxes on pollution come with a punitive undertone, and they should also be revenue neutral.

George P Shultz and Gary Becker argue for a revenue-neutral carbon tax which entails the government not deriving any revenue from the taxes or using the revenue for any public sector expansion. The tax revenue should instead be used to support renewable energy by methods like providing direct tax cuts to renewable energy investors or research. This ensures that there is some benefit to the environment through its inclusion in the supply and through taxation and not just waiving off the deep harm caused to the environment because the producer paid the taxes.

Does India Have an Existing Green Tax?

India does not have a single policy governing green taxes or a uniform system of even carbon taxation across the country to curb carbon emissions. There has been an attempt by the Government to alleviate the harm caused by this externality through the Indian Clean Environment Cess (formerly, the Clean Energy Cess) that has been levied on coal and its derivatives through Section 83 of the Finance Act, 2010. The Cess’ purpose is to finance and promote clean energy initiatives, funding research in the area of clean energy or for any related purpose. Back in 2010 when it was introduced, a research associate at The Energy and Resources Institute of India had mentioned that this was the peaking of the negotiation formula of ‘polluter pays.’ But this was in 2010.

In the present year, though India has made certain progress when it comes to clean energy, it is nowhere close to its goals, and this is cemented by the fact that India ranks at the bottom in the outcome-oriented 2022 Environment Performance Index. India has also increased the use and dependence on black carbon and there is no transparency in the process, i.e., if the taxes are being levied and if they are, then where the revenue is going?

As Ipshita Chaturvedi puts it, India’s green tax package currently consists of ad-hoc legislation at the national and state level. There is no clear policy brief underlining the policy rationale of such initiatives. She also suggests that rather than just focusing on making the polluter pay, tax incentives may encourage people positively to adopt greener practices. It has been recommended by the Ministry of New and Renewable Energy in the past that having direct cash benefits for environmental compliance would be more efficient. The need of the hour is to make a proper structure of an environmental taxation system in India that involves both punitive and beneficial provisions to incite people to invest and adapt to cleaner forms of energy. The policy and tax collection and revenue allocation structure should be transparent to ensure that the funds are allocated to the desired places. It is only then that India might climb the indexes and move towards achieving the Nationally Determined Contributions that it has set out to do.

Archisha Tiwari is a second-year student at Jindal Global Law School pursuing the course BA LLB Hons. and is deeply interested in the intersection of law and the environment.

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