Why The Carbon Tax Is A Great Idea

A free society values accountability as much as liberty. Those among us who truly understand the concept of liberty know that “my right to swing my fist ends where your nose begins.” And so, it is as much a duty of the State to protect my friend’s nose from my fist, as it is to protect my right to swing my fist.

Let’s take the case of pollution. Whether individuals or corporations, consumers or producers, those that are responsible for emitting poisonous greenhouse gases in the course of their activity must be held accountable for the social costs imposed on the rest of the society. In economic parlance, these social costs are known as ‘externalities’ (more precisely, ‘negative’ externalities). Carbon taxes – taxes on the carbon content of the fossil fuels such as petrol, diesel, and coal – are one way of holding the polluters accountable. 

In his Budget speech on 29 February, Finance Minister Arun Jaitley proposed to increase clean energy cess on coal by double from Rs. 200 per tonne to Rs. 400 per tonne. Last year too, it was raised from Rs. 100 to Rs. 200. This hike is a much welcome step towards reducing India’s carbon footprint, even as the country continues to be the third-largest emitter of greenhouse gases around the world after China and the United States. This is not to say that India has not been doing enough to promote clean energy.

Besides the gradual, significant, and direct hikes in cess on coal, India has already imposed an implicit carbon tax on petrol and diesel in the guise of excise duty. The Economic Survey of 2014-15 recognized this implicitness, saying that it “puts an effective price on emissions.” Low prices of fuels in the last couple of years provided the most favourable opportunity for the government to leverage the application of excise duty and use part of it in clean environment initiatives.

To be sure, excise duties are a bad alternative to direct carbon taxes on fossil fuels. Their use by the state lacks transparency, and their implementation necessitates a big government, accompanied by administrative costs. It’s much better to impose a carbon tax that is explicitly directed at charging the polluters for social cost.

Also, we should not advocate carbon tax primarily as a medium to garner revenues for investment in public good, but rather as a method to provide justice for the negative externality imposed on the society. Nevertheless, these revenues could be used to compensate low-income groups, whose energy consumption as a percentage of income is higher, for the rise in energy costs that result as a consequence of high taxes on carbon.

In an attempt to discourage the purchase of vehicles that run on conventional fuels, Mr. Jaitley also proposed to levy an infrastructure cess of 1 percent on small petrol, LPG, and CNG cars, 2.5 percent on diesel cars of certain capacity, and 4 percent on SUVs and higher engine capacity vehicles. This move, however, is debatable from a policy perspective.

Taxing a slew of vehicles instead of merely the carbon content on the fuels used by them, and simultaneously also actively planning to promote electric and hybrid vehicles through excise duty rebates (read: central planning), will not only lead to government overreach, but also create bureaucratic nightmares.

Much better to instead just put a price on carbon and allow individuals to choose which cars to use, how much to drive, whether to opt for public transport or carpool to work.

To sum it up, carbon tax seeks to correct inefficiencies resulting due to negative externalities. These inefficiencies, to be sure, are ethical failures rather than market failures. Carbon tax helps internalize these failures and the revenue thus received could be used to reimburse those affected by pollution or rising energy prices. Carbon tax also solves the problem of choice as it puts a price on carbon and leaves upon the users to decide which mode of conveyance to use.