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Mobilizing climate finance: imperative of carbon pricing – Opinion News
By Janak Raj, Valbha Shakya and Kritima Bhapta
India It needs major funding to meet the climate targets set out in its Nationally Determined Contributions document. Various estimates for India put climate finance needs at $160-288 billion (12.6-22.63 trillion rupees) per year by 2030. India would need to raise a large portion of that amount on its own. India received less than $8 billion in 2023 for climate finance from official external sources (mainly multilateral development banks).
Governments (center and states) will have a key role to play in providing climate finance. However, there is almost no budget space at the general government level, with the debt-to-GDP ratio rising from 70.4% in 2018-19 to 82% in 2023-24 (due to large expenses related to the pandemic). The public taxes/GDP ratio has not shown any significant improvement, oscillating in a narrow range between 16% and 17.5% over the last 12 years. Therefore, there is a need to explore all other options to raise resources.
One possible source of revenue could be carbon pricing (carbon taxes and emissions trading system or ETS), which has been gaining traction in many other countries. It has become even more necessary due to the European Union (EU) Cross-Border Tax Mechanism (CBAM), which will come into force from January 1, 2026.
The EU-CBAM is apparently a tool designed to mitigate the risk of carbon leakage (relocation of production facilities in countries with less stringent carbon emission standards) by imposing a carbon price on six products (cement, iron and steel, aluminum, fertilizers, electricity and hydrogen) entering EU markets based on their embodied emissions. In India, the impact will be felt largely in its exports of iron and steel (28.3% of its total steel exports go to the EU) and aluminum (27.2%) due to its carbon emissions, a as they largely depend on coal-fired power plants for their production. power requirements.
In the absence of an internal carbon pricing mechanism, it will be necessary to pay carbon tariffs to the EU, estimated at more than €1 billion (for direct emissions) per year. What is worrying is that a similar mechanism is being considered by other countries such as the USA, the United Kingdom, Japan, Canada and Australia.
What is the potential revenue that the government could obtain if it decided to introduce carbon pricing? Let’s first focus on selected fossil fuels that are already taxed. Average taxes (based on Delhi, Mumbai, Kolkata and Chennai) constituted 70% of the base price of Motor Petrol (MS) and 54% of High Speed diesel (HSD) in 2023. These taxes are a significant source of revenue (15.1% from the central government in the form of excise taxes in 2022-23 and 7.8% from state governments in the form of VAT).
MS and HSD contribute 16% of carbon emissions in India. Fuel taxes, when converted into effective carbon taxes, are estimated to be around 18,000 rupees/tCO2 (total carbon dioxide) for MS in 2023 and 12,000 rupees/tCO2 for HSD. The effective carbon taxes on Member States in India, in terms of euros, amount to 216 euros/tCO2, close to/higher than the taxes levied on Member States in Spain (223 euros/tCO2), Austria (213 euros/ tCO2), New Zealand (207 tons/tCO2). CO2) and Norway (189€/tCO2). Effective carbon taxes on HSD in India amount to 143 euros/tCO2, higher than in Switzerland (142 euros/tCO2), South Korea (139 euros/tCO2) and France (133 euros/tCO2). These countries have a much higher level of per capita income than India.
Of the other fossil fuels, coal alone is responsible for 70% of India’s carbon emissions. However, India taxes coal very little, at 400 rupees per ton (as a ICMS compensation fee). Other carbon emitting products are: light diesel, fuel oil, naphtha, domestic LPG, kerosene, aviation turbine fuel (ATF) and natural gas (with a 16% share in carbon emissions). All these products are subject to the GST regime, with the exception of ATF and natural gas, which are subject to excise duties and VAT.
A key consideration for introducing carbon pricing would be effective carbon taxes, which will help increase revenues and also achieve carbon neutrality. The EU has estimated that 120 euros per ton of CO2 will decarbonize the economy in mid-century. Such estimates are not available for India. But effective carbon taxes in the EU can still be an important guide, although 120 euros/tCO2 appears to be on the higher side, especially as India has committed to achieving carbon neutrality by 2070. Assuming carbon taxes equivalent to 90 euros/ tCO2 with coal alone, India could generate around 8 billion rupees (4.2% of GDP). An additional revenue of over 1.5 trillion rupees (0.8% of GDP) could be generated from petroleum products, in addition to MS and HSD, which are heavily taxed.
Carbon pricing on LPG and kerosene could harm vulnerable areas. However, they are better protected by direct benefit transfers. Carbon pricing could also affect India’s competitiveness industry. However, with the expected introduction of EU-CBAM and similar taxes by other countries, there will be no escape from carbon pricing in India.
Carbon pricing can be an effective tool not only to raise medium-term resources for mitigation and adaptation, but also to decarbonize the Indian economy in a relatively more predictable way.
Janak Raj, Valbha Shakya and Kritima Bhapta, respectively, Senior Research Fellow, Research Associate and Research Analyst, Center for Social and Economic Progress, New Delhi.
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