Time to put a price on carbon emissions

General Studies Paper 3

Context: India can take the lead, as president of the G-20 this year, in carbon pricing, which will open unexpected avenues of decarbonisation.

About Carbon pricing

Meaning:

• Carbon pricing is an instrument that captures the external costs of greenhouse gas (GHG) emissions, the costs of emissions that the public pays for, such as damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise—and ties them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted.
• A price on carbon helps shift the burden for the damage from GHG emissions back to those who are responsible for it and who can avoid it.

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; and
• The application of an import tariff on the carbon content, as the EU is proposing.

IMF’s suggestion:

• Some 46 countries price carbon, although covering only 30% of global greenhouse gas (GHG) emissions, and at an average price of only $6 a ton of carbon, a fraction of the estimated harm from the pollution.
• The International Monetary Fund has proposed price floors of $75, $50, and $25 a ton of carbon for the United States, China, and India, respectively.
  • It believes this could help achieve a 23% reduction in global emissions by 2030.

Benefits:

• The economy-wide benefits of carbon pricing in terms of damages avoided (plus revenue generation) generally outweighed the cost it imposed on individual industries in the EU, British Columbia, Canada, and Sweden.
• A key dynamic is that carbon pricing, by signalling a price for cleaner air, makes investment in renewable energy such as solar and wind, which has huge prospects in India, more attractive.

Carbon pricing for India

• Carbon tax:
  • Among the three ways of pricing, India could find a carbon tax appealing as it can directly discourage fossil fuels, while raising revenues which can be invested in cleaner sources of energy or used to protect vulnerable consumers.
  • It could replace the more inefficient scheme of petroleum taxes which are not directly aimed at emissions.
    • Saudi Arabia and Russia are at the low end of gasoline prices (including taxes and subsidies), China and India in the mid-range, and Germany and France at the high end.
  • How?
    • In most countries, including India, fiscal policy has set in place the basic structures needed to implement a carbon tax.
      • For example, they can be woven into road-fuel taxes, which are established in most places, and extended to industry and agriculture.
    • Policymakers have to choose the tax rate, which varies widely from Japan’s $2.65 a ton of CO2 to Denmark’s $165 a ton set for 2030.
    • India could start with the IMF figure of $25 a ton.
  • Challenges:
    • The main obstacle is the argument by industrial firms about losing their competitive advantage to exporters from countries with a lower carbon price.
    • It would stand to reason, therefore, for all high, middle and low income countries to set the same rate within each bracket.

Significance

• Notable climate effects: 
  • A high enough 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.
• Decarbonisation as a formula:
  • It could also pave the way to seeing decarbonisation as a winning development formula.
• For India:
  • 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.

Suggestions

• Allowing companies ‘high-quality international carbon credits’:
  • It might also make sense to allow companies to use high-quality international carbon credits to offset up to a certain percentage of their taxable emissions.
  • Global examples:
    • The EU excludes transport, where higher costs would have been passed on to consumers directly, Singapore provides vouchers for consumers hit by utility price rises, and California uses proceeds from the sales of carbon permits partly to subsidise purchases of electric cars.
    • Some make a case for exempting “emission intensive trade exposed” enterprises from the carbon tax, but output-based rebates would be superior ways of doing the same.
  • Awareness:
    • Communicating the idea of wins at the societal level, even in the presence of some individual producers’ losses, is vital.

Way ahead

• India is currently marching towards its target of reducing its carbon intensity by 45 per cent by 2030. This goal is a part of India’s updated Nationally Determined Contributions (NDC).
• India must set an example by balancing energy use and climate goals.