India’s carbon strategy to counter climate change

Low oil prices make it the right time to introduce a variable stabilizing carbon tax 

The environment ministry’s special secretary, Susheel Kumar, said earlier this week that the Indian government is now looking to retrofit existing national action plans on climate change while building new ones. With the date of signing of the historic Paris climate change agreement in April approaching fast, and its ratification to follow soon, that’s good to hear. But the entire process will require care and finesse—particularly the groundwork for integration with the world’s networked carbon market.

This is a necessary condition for getting adequate circulation of the new carbon currency founded in Paris—internationally transferred mitigation outcomes. To de-jargonize: in a world carbon balance sheet with a fixed net carbon credit, countries will be allowed to trade their credits to other nations if they do not use up their Assigned Amount Units due to lower emissions. This might be due to adjustment of anthropogenic emissions at source or removal by sinks.

A third of the nations which announced their intended nationally determined contributions (INDC) before the Paris talks have already concurred on setting up of carbon markets. But these are not the only possible model. While they consist of governments determining the quantitative cap and markets determining price—allowing domestic trade in carbon credits—the alternative of carbon taxation has the government fixing the upstream price of fossil fuels, allowing markets to determine the optimal quantity of use.

The latter Pigouvian tax (named after English economist Arthur Pigou) to mould optimal social outcomes and choices is the most suited option for the Indian scenario. The average Indian’s carbon footprint is below the average per capita emission of many other countries. And Indian techniques are still struggling to keep pace with the decarbonizing rates of the developed world. Capping carbon without alternatives can thus compromise development. The right carbon tax levels, meanwhile, can internalize the social externality of emissions and make it part of an individual’s choice set in a more optimal manner.

But this also points to the core problem. India—and developing countries in general—got the raw end of the deal at Paris with an entirely disproportionate burden in the context of historical emission trends and development needs. Not acting is not an option either; various studies have shown that the long-term costs of climate change in developing economies significantly outweigh the short-term costs of climate change mitigation efforts. The trick, then, is to find the correct balance that does not impose disproportionately heavy costs in the near future.

The commodities crash has presented the government with that opportunity. The current tax levels—India has a de facto carbon tax on its petroleum and oil products and a green tax on coal—do not adequately consider the intensity of emissions in the country. The prevailing low oil prices make it the right time to remedy this by introducing a variable stabilizing carbon tax—one which rises when fuel prices fall and falls when fuel prices rise. This can ensure that the polluter will pay, keep emissions in check and incentivize the right innovation and the right kind of energy—all without hitting the pace of development too hard.

That said, this alone will not suffice. Fuel is less price elastic and more income elastic in India. This implies increasing carbon taxes alone will be insufficient to reduce emissions as income levels rise. The price inelasticity is mainly due to the absence of alternative energy sources and, in the past, fuel subsidies. The International Solar Alliance and Make in India for low-cost renewable technologies are good policy initiatives in the right direction; they must be given greater impetus.

There are a host of complementary measures to consider as well—from decarbonizing production of electricity to research and development aimed at improving energy and resource efficiency; from reducing waste to preserving and increasing carbon sinks.

If New Delhi has to achieve its INDC target—reduction by 33-35% of the 2005 levels by 2030—and hook itself into the international carbon market, a long-term strategy with the variable carbon tax at its core is a must.

Do you think India’s carbon taxation regime is sufficient to meet its INDC target?