Carbon taxes will lead to heavy GDP losses, warns Economic Survey

Market mechanisms, international funding needed

Updated - December 04, 2021 11:39 pm IST

Published - February 28, 2013 03:19 am IST - NEW DELHI:

Warning that a carbon tax of $10 per tonne of greenhouse gas emissions could cause a GDP loss of more than $600 billion, the Economic Survey says the way forward for domestic environment financing must come from a mix of market mechanisms, fiscal instruments and regulatory interventions.

Citing the results of preliminary modelling studies by the Ministry of Environment and Forests, the Survey argues that “relying solely on carbon taxes and subsidy may not be the most viable policy option.” It also discusses the establishment of a National Green Fund to finance environmental protection, but only mentions international sources to fill the coffers of the Fund.

The models projected four different carbon tax scenarios for a 20-year period between 2010-11 and 2030-31. At the most extreme end of the spectrum, an economy-wide tax on carbon emissions at the rate of $80 per tonne would lead to an undiscounted cumulative GDP loss of more than $4 trillion. But even a modest revenue-neutral $10 per tonne tax would lead to losses of $632 billion at 2005 prices, said the studies.

(However, it is worth noting that when these studies were originally done, at least one economist cautioned that they had not taken into account structural changes and adjustments over the two decade period, thus leading to exaggerated projections of loss.)

While it is difficult to assess the actual costs of fighting climate change – both through mitigation and adaptation – the Survey points to the preliminary estimate of Rs. 2.3 lakh crore needed to achieve the National Action Plan on Climate Change’s objectives.

Where is the money going to come from? Apart from government expenditure and subsidiaries – which were estimated at more than Rs. 5,000 crore for 2008-09 – taxes are an obvious option. And the Survey acknowledges that “theoretically, environment-related taxes have an important role to play in funding green initiatives.” And, of course, the Rs. 50 per tonne cess on coal is a form of carbon tax.

However, the Survey then goes on to cite the scary GDP losses projected by the modelling studies, warning that “at the same time, any government must use these policy tools after serious consideration and analysis as they may have serious repercussions on other sectors of the economy.”

While cap and trade mechanisms are also being used to promote energy efficiency and the use of renewable energy, the Survey makes it clear that domestic resources are simply not enough.

Thus, the proposed National Green Fund, which could be set up to finance both public and private sector activities aimed at protecting the environment, has no specified domestic sources of funding. Instead, the Survey only notes that “the Fund could also be a vehicle for receiving international support.”

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