Can carbon tax be India’s silver bullet?

India needs to reflect on, discuss and debate the possible threats to its future growth. Reports highlighting how our larger cities are choking in a web of air pollution and traffic congestion are increasingly common. 39 Indian cities appear in the list of the world’s 50 most polluted cities. If this continues, it could threaten the very bastions of our growth.

Our primary growth engine post-liberalisation has been our Services export successes. These are globally envied, in contrast to our merchandise exports (still a lowly 14th globally). This primary growth engine, anchored mainly in our primary cities/metros, could now come under threat. Our long-ignored pollution/congestion challenges could scare away future clients/investors.

Coincidentally, a new non-tariff barrier has come up against our merchandise exports, too. The European Union has launched the world’s first system to impose CO2 emissions tariffs on imports (steel, cement, etc) to stop “more polluting foreign goods” from undermining its green transition. The UK is likely to follow suit. Market rumours are that our FTA talks may stumble on this. We are globally the third largest emitter of greenhouse gases (GHGs), behind China and the US. Our negotiators point out that India’s per capita emission of 1.8 tons is way below the world average of 4.2 tons, but the world reminds us that we count among the highest emitters in ‘emission per dollar of GDP’. The global average emission per dollar of GDP is 0.45 kg; the US/UK/EU emissions are below 0.30 kg; India is at about 1 kg per dollar of our GDP. This new threat to our export competitiveness could hit our economic success story.

However, our fiscal woes would come in the way of any action programme we undertake. Our tax-to-GDP ratio has remained stuck at around 11.46%, one of the lowest globally, despite a series of policy actions/reforms. Since our fiscal woes cannot be wished away, we need mechanisms to enhance revenues. We need not blindly imitate western-style taxation to control carbon emission. We could devise our own way.

Resolving urban development challenges requires managing a large number of players. We have over 4,000 ‘Statutory’ cities and towns, apart from an equally large number of ‘Census’ towns. About 400 of our cities have a population in excess of 100,000, and 40 cities, including our six metros, in excess of 1 million (2011 Census). We need to leverage this and broad-base our urban population by enhancing the attractiveness/quality of our large number of lower-tier towns and cities to decongest the bigger ones.

A more equitable distribution of fiscal spend/managerial strength is needed to enhance civic facilities in lower-tier cities. What is required is a more energetically empowered, decentralised state presence using a combination of incentives/disincentives to ensure policy goals are achieved without unduly straining our fiscal balance.

Voluntary decongestion is best obtained by graded levy of taxes. Illustratively, owners of multiple vehicles could be made to bear higher taxation per vehicle than single-vehicle owners. Further, companies and firms currently get depreciation allowances/tax set-offs on fuel consumption on vehicles, unlike individuals. This facility could be withdrawn for personal transport vehicles owned/used by firms in our congested cities. Also, firms headquartered in metros/tier-1 cities could be made to bear a higher ‘congestion tax’ than if based in lower-tier cities, to motivate corporate offices to shift to the latter. The Jamshedpur story of handing over managerial responsibility to large corporates shifting to low-tier cities could be replicated.

As for industrial emissions, the primary causes of our poor performance have been well pointed out by various experts, including government reports. We have over 250,000 medium/large scale industrial units, and a much larger number of MSME industrial units, not all of which mandatorily locate inside notified industrial estates. Principally, it is a combination of the use of outdated technology, poor environment supervision and poor/outdated infrastructure in our very large number of relatively small-sized, and thus often indifferently managed, industrial estates. Adequate and guaranteed availability of power is still a distant dream in most centres, forcing companies, regardless of size, to still make huge investments in captive power production.

Also, effluent and waste management systems are still often an individual responsibility and only intermittently monitored by agencies. This set of challenges are again best tackled by combinations of carbon emission taxation and provision of subsidies for technological upgradation of firms/upgradation of our industrial estates. The starting point should be sectors/companies which are our current export champions. Strengthening/reinforcing existing success stories before widening the circles may create better efficiencies.

In sum, a carefully crafted strategy of taxation/subsidies could help alleviate our weakness on three fronts -- fiscal, urban planning and industrial strength -- simultaneously.