An idea that is getting very popular among environmentalists is a Carbon Tax. While Europe is seriously considering one for all EU states, it is a very touchy issue in the US (despite one-offs like this). But is this the right time for such a tax in India, and what would be the implications?
What is it?
The Carbon Tax is a tax on energy sources that release pollution, primarily in the form of carbon dioxide into the atmosphere. Like taxes on alcohol and cigarettes, the carbon tax would be a Pigovian tax which is meant to discourage what is termed a negative externality – a tax on something “bad”.
How would the tax work?
A carbon tax can work at many levels because there are so many different emittors of CO2. The most obvious target would be power stations. When new power plants come up, they would have to provide a clear estimate of how much CO2 they would release and they will have to pay tax in that proportion for every unit of power they sell. So a gas-based power plant will pay very little when compared to a coal-based power plant. But a wind, hydro or solar plant will pay no tax at all. And neither will biogas- or biofuel-based plants, since they are also considered carbon neutral.
In the next stage, we could target manufacturing plants. This is not just to target industries that use kilns and furnaces and release a lot of smoke. We must also ensure that the clean energy sources remain clean through-out their lifecycle. For instance the manufacturing process that goes into making wind turbines or solar panels does cause CO2 pollution.
In the last stage, we could target automobiles, starting with commercial vehicles and moving on to individual vehicles. A tax at this level could be implemented by taxing fossil-based fuels at the point of sale. This would benefit more fuel efficient vehicles, which also tend to be less polluting. Electric vehicles would not pay any tax at all.
Using the tax
Using the tax revenues is the most critical aspect. The obvious answer would be to use this revenue to balance the subsidies given to wind and solar power projects. Ideally cigarette and liquor tax revenues must solely be used to promote healthcare in the country. This does not happen, and we must ensure that a carbon tax also does not go the same way.
The carbon tax must also not be seen as an alternative to direct taxes like income tax. In effect, the govt must work on the assumption that this tax is a punitive tax and must at some stage be phased out – along with the sources of pollution. Thus it should be used for the specific purpose of promoting the alternate energy industry till the time that the industry is cost competitive with fossil-based fuels.
How the incentives would change industry
The next time say Lanco or REL offer to set up a coal-based power plant, they might seriously consider clean-coal technologies if the post-tax cost works out the same.
If tax revenues should be channeled into the renewable energy sector, we will see a whole new industry blooming. A part of the money should flow into R&D, but we must realize that there is cutting-edge research being done in this field all over the world and it would make more sense at this stage to tie up with foreign companies to manufacture in India for local consumption (and export).
It might be prudent to not subsidize the power producers, and instead provide time-based subsidies to the manufacturers in a way that there are incentives for capacity addition to continuously produce more efficient and cheaper power generation products. For instance a manufacturer could get subsidies on a solar cell of 20% efficiency for maybe 3 years. Beyond that the subsidy will be available only if they move to an efficiency of say 25% – or if the product is better is some other way. The subsidy structure should encourage the industry to move towards competing with conventional energy sources without subsidy – the subsidy should aim to phase itself out.
Solar photovoltaics are already competing with electronics for complexity in the semi-conductor manufacturing space. If done well this would give India an opportunity to build a world-class capability in a cutting-edge industry. Of course along the way we could also meet the more mundane goals of energy independence and a clean environment.