India, too, has similar complementary policies. The PAT scheme showed that effectiveness increases when there are relatively fewer regulated entities. Regulating fewer upstream entities (say, a refinery) reduces administrative costs compared to many dispersed downstream points of emissions (say, millions of small industrial units). For its stage of development, India should choose either an increasing emissions cap, or one based on emissions intensity of production. While consistent with its current policies, the choice would ultimately depend on international ETS market developments. Whether emissions permits are allocated by government or auctioned, it must be fair and transparent. If there were no global and equitable allocation of emissions allowances, could an ETS in India trade with other markets in China, Europe or North America? Could carbon and non-carbon credits be linked, to capture co-benefits of mitigation and adaptation? Answering such questions would help India design more fit-for-purpose ETS markets, with robust monitoring and verification, while continuing to reduce abatement costs.
A second option is a carbon tax.
There are 26 carbon tax
systems worldwide, which raised $33 billion in 2017. By 2020, existing and planned taxes will cover about 5 per cent of global CO2 emissions. Economists debate whether a carbon tax
should apply to two or more sources using the same rate per tonne of CO2 equivalent (tCO2e). Such a definition would exclude India’s coal cess or excise duties on petrol and diesel. The real question should be: What tax would nudge behaviour? Relative prices that shift behaviours vary across sectors. From a sectoral perspective, carbon taxes have worked best when alternatives are readily available. Otherwise, the cost imposition does not translate into desired mitigation outcomes.
The hardest decision concerns the tax rate. It varies from $3 per tCO2e in Japan, $5 in Chile to $132 in Sweden. India’s choice would depend on its priority: Social cost of carbon; GHGs abated; targeted revenues; or benchmarking against trading partners to maintain competitiveness. Tax rates could be further indexed to inflation (Iceland), gradually increase (France) or have formula-based adjustments to factor in macroeconomic conditions and technological advances (Switzerland).
Carbon tax revenues must be deployed justly and transparently. A revenue-neutral approach would reduce other taxes. Alternatively, governments could spend revenues on low-carbon infrastructure. The least favoured option would be transferring revenues to fund the general budget.
Thirdly, the Paris Agreement’s Article 6 permits transferring mitigation results from one country towards meeting another’s low-carbon goals via Internationally Transferred Mitigation Outcomes (ITMOs). The challenge would be to account for mitigation consistently when some countries have a single-year (2030) target and others have multi-year trajectories. Furthermore, the experience of the Clean Development Mechanism has soured trust in such processes. It is critical that ITMOs are not only accounted for transparently but that transactions are honoured.
A fourth route is via company-level initiatives. Some Indian industries have used internal carbon pricing to finance energy efficiency and clean energy. When it makes business sense, companies adopt sustainable practices. Some firms (Mahindra, Wipro, among others) have adopted science-based targets to align with the global imperative for net carbon neutrality by 2050 or earlier.
But a wider portfolio of policies, applicable to all competitors, are needed before businesses consider deep mitigation actions. Even a low internal carbon price, if combined with supporting policies, could assist firms in choosing best available technologies and deliver significant outcomes. As with ETS and carbon taxes, greater transparency (starting with voluntary reporting on internal carbon prices) would help to design responsive policies.
No single instrument will suffice. Nor will one option optimise across several dimensions: Co-benefits and co-costs, distributional impacts, alignment with economic structure, feasibility of implementation, revenues and administrative burden, and links with global developments. India’s low-carbon transition must be linked to broader sustainable development priorities. It is time to experiment with price and quantity nudges to drive innovation and climate leadership, while remaining competitive.