December 10, 2023

Environmental Financing needs reforms to address both the issue of pollution as well as generating resources for health sector.

  • The Indian government announced a pandemic-related stimulus package in FY 2020-21 even when there was large decline in tax revenue due to lockdown. The fiscal deficit for FY 2020-21 (revised estimates) is projected to be 9.5% of the GDP; for 2021-22, it is pegged at 6.8%.
  • The focus is on maintaining fiscal discipline. In such a situation, regular fiscal support for health-care sector remains a challenge in India.

As per World Health Organization (WHO) data on the percentage of the total population where the household expenditure on health was greater than 10% and 25% (Rural and Urban) of the total household expenditure or income in India in 2011 –

  • 33% of the population in India made out-of-pocket payments(expense without reimbursement) on health, especially in rural areas.
  • Globally, the average was 12.67%,which means that 12.67% of the population spent more than 10% of their income (out of their pocket) on health.
  • In India, 9% of the population made more than 25% of out-of-pocket payments on health, with 4.34% in the rural areas.

According to the Economic Survey of India:

  • An increase in public spending from 1% to 2.5-3% of GDP, as envisaged in the National Health Policy of 2017 can help to decrease out-of-pocket expenditurefrom 65% to 30% of overall healthcare expenses.

The COVID-19 pandemic has also forced countries all over the world to rethink climate change and the need for the preservation of the environment. Fiscal reforms for managing the environment are important, and India has great potential for revenue generation in this aspect.

  • Environment regulation, can be of various types:
    • Command and control;
    • Economic planning/urban planning;
    • Environmental tax (eco-tax)/subsidies); and
    • Cap and trade.
  • India currently emphasizes the command-and-control approach in tackling pollution.
  • The success of an eco-tax in India would depend on its architecture i.e. how well it is planned and designed.
  • Ideally, the eco-tax rate ought to be equal to the marginal social cost arising from the negative externalities associated with the production, consumption or disposal of goods and services. 

This requires scientific assessment of the damage to the environment including: Adverse impacts on the health of people, climate change, etc.

  • The eco-tax rate may, thus, be fixed in a proportion to the marginal social cost so evaluated. 
  • In India, eco-taxes can target three main areas:
    • Differential taxation on vehicles in the transport sector purely oriented towards fuel efficiency and GPS-based congestion charges.
    • The energy sector by taxing fuels which feed into energy generation.
    • Waste generation and use of natural resources.
  • There is also a need to integrate environmental taxes in the Goods and Service Tax framework.

Environmental Tax Reforms:

  • It generally involves three complementary activities:
    • Eliminating existing subsidies and taxes that have a harmful impact on the environment.
    • Restructuring existing taxes in an environmentally supportive manner.
    • Initiating new environmental taxes.
  • Taxes can be designed either as revenue neutral or revenue augmenting. 
  • In the case of revenue augmenting, the additional revenue can either be targeted towards the provision of environmental public goods or directed towards the overall revenue pool.
  • In India, the revenue can be used to a greater extent for the provision of environmental public goods and addressing environmental health issues.

Benefits of Environmental tax

  • The implementation of an environmental tax in India will have three broad benefits:
    • Fiscal,
    • Environmental and
    • Poverty reduction.
  • It can mobilize revenues to finance basic public services when raising revenue through other sources proves to be difficult.
  • It can be used to reduce other distorting taxes such as a fiscal dividend.
  • It can finance research and the development of new technologies.


  • It may have significant costs on the private sectorin the form of slow productivity growth and high cost of compliance.
  • Increase in the prices of goods and services.

The European experience shows that most of such taxes also generate substantial revenue and there is no evidence on green taxes with sustainable development goals leading to a ‘no growth’ economy. Most countries’ experiences suggest a negligible impact on the GDP and that too as a temporary phenomenon.

This is the right time for India to adopt environmental fiscal reforms as it will reduce environmental pollution and also generate resources for financing the health sector.

Question-Green taxes or Environmental Taxation in addition to curbing pollution can also help in generating essential resources for healthcare. Comment.

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