The Hindu Editorial Analysis, Time to Put a Price on Carbon Emissions

The Hindu Editorial Analysis: The editorial analysis of The Hindu Newspaper Editorial Articles aimed at simplifying various concepts relevant to the UPSC and other State PSC Exams. The Editorial Analysis helps in expanding the knowledge base as well as framing better quality mains answers. Today’s Hindu Editorial Analysis of Time to Put a Price on Carbon Emissions discusses need, importance, and impact of carbon pricing in India.

Time to Put a Price on Carbon Emissions background

Without a price on natural resources like air and forests, countries have historically resorted to environmental destruction to drive their GDP growth. However, this approach has resulted in a continuous release of carbon emissions, leading to the escalation of climate change.

• It is now crucial that the G-20, starting with its largest economies, come to an agreement on the valuation of nature, which can be achieved by implementing carbon pricing policies.
• India, as the current president of the G-20, can play a key role in spearheading this initiative, opening up new avenues for reducing carbon emissions.

Methods of Carbon Pricing

Carbon pricing can be achieved in several ways, including-

• Implementation of a domestic carbon tax (as seen in Korea and Singapore),
• Use of an emissions trading system (such as in the EU and China),
• Application of an import tariff on carbon content (as proposed by the EU).

Carbon Pricing Around the World

While 46 countries have implemented some form of carbon pricing, this only covers 30% of global greenhouse gas emissions and the average price of carbon is currently low, at only $6 per ton.

• However, the International Monetary Fund has recommended establishing price floors of $75, $50, and $25 per ton of carbon for the United States, China, and India respectively.
• By doing so, the IMF believes that global emissions could be reduced by 23% by the year 2030.

Impact of Carbon Pricing on Various Countries

In the EU, British Columbia in Canada, and Sweden, the benefits of implementing carbon pricing at the economy-wide level – in terms of damage prevention and revenue generation – have been found to outweigh the costs that individual industries may face.

• A significant factor in this is that carbon pricing provides a clear market signal of the value of clean air, making investment in renewable energy sources, such as wind and solar power, more appealing.
• This is particularly relevant for India, as it has vast potential for renewable energy growth.

Appropriate Carbon Pricing Mechanisms for India

Below we have discussed certain carbon pricing mechanisms that can be opted in India.

Introducing Carbon Tax in India

Of the three ways of pricing carbon, India may prefer to implement a carbon tax as it can directly discourage the use of fossil fuels, while simultaneously generating revenue that can be invested in cleaner sources of energy or used to protect vulnerable consumers.

• A carbon tax could replace the less efficient petroleum taxes, which do not directly target emissions.
• Notably, gasoline prices (including taxes and subsidies) are lowest in Saudi Arabia and Russia, mid-range in China and India, and highest in Germany and France.
• In most countries, including India, the basic structures needed to implement a carbon tax have already been established through existing fiscal policies.
• For example, road-fuel taxes, which are already in place in most countries, can be expanded to include industry and agriculture.

Determining Carbon Tax Rate

The tax rate, which varies widely from $2.65 per ton of CO2 in Japan to $165 per ton set for 2030 in Denmark, must be determined by policymakers.

• India could begin by adopting the International Monetary Fund’s recommended carbon pricing rate of $25 per ton.
• However, one major challenge is the concern expressed by industrial companies that they may lose their competitive edge to exporters from countries that have lower carbon prices.
• To address this issue, it would be logical for all countries, regardless of income level, to establish the same carbon pricing rate within their respective brackets (i.e. high, middle or low-income).

Utilizing International Carbon Credits to Offset Taxable Emissions

Another approach that could be considered is allowing companies to utilize high-quality international carbon credits to offset a specified percentage of their taxable emissions.

• In order to mitigate the potential impact of higher costs being passed onto consumers directly,
  • The EU has excluded the transportation sector,
  • Singapore has provided vouchers for consumers affected by utility price increases, and
  • California has used revenue generated from the sale of carbon permits to subsidize the purchase of electric vehicles.
• While some argue in favor of exempting “emission intensive trade exposed” companies from carbon taxes, a more effective approach would be to offer output-based rebates.

Associated Concerns with Carbon Tax

Despite the potential benefits, any form of carbon pricing is likely to encounter significant political opposition.

• For instance, the carbon tax implemented by Australia in 2012 was repealed just two years later after a new conservative government came to power.
• Additionally, the EU has recently been forced to sell millions of emission permits due to soaring energy prices, leading to a 10% decrease in carbon prices.
• Sweden has perhaps best navigated these political challenges by presenting the carbon tax as part of a broader fiscal package that includes other tax reductions and the implementation of new social safety nets.

Way Forward

It is crucial to effectively communicate the societal gains that can be achieved through carbon pricing, even in the face of potential losses for individual producers.

• The adoption of a sufficiently high carbon tax in the five major emitters – China, the U.S., India, Russia, and Japan – could significantly reduce global emissions and contribute to a successful decarbonization strategy.
• This, in turn, could establish decarbonization as a successful model for economic growth.

Conclusion

Early adopters of carbon pricing will have a competitive advantage, making it imperative for India, as the G-20 summit president this year, to take the lead by proposing global carbon pricing as a crucial measure in the fight against climate change.

Carbon Pricing Leadership Report 2022