A carbon tax is a tool that captures the external costs of Green House Gas (GHG) emissions—costs of emissions that the general public bears—and links them to their sources through a price, typically in the form of a CO2 price emitted. External costs of emissions include damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise.
Environmental destruction caused by the lack of pricing of natural resources like air and forests has resulted in the emission of carbon causing climate change.
To address this issue, countries need to agree on valuing nature, including pricing carbon effluents, starting with the biggest economies of the G-20.
The establishment of a local carbon tax, as in Korea and Singapore; the use of an emissions trading system (ETS), as in the European Union (EU) and China; and the imposition of an import tariff on the carbon content, as the EU is suggesting, are the three methods of pricing carbon.
The average price of carbon is only $6 per tonne across 46 nations, which is a tiny fraction of the expected damage from pollution. For the US, China, and India, respectively, the IMF has suggested price ceilings of $75, $50, and $25 per tonne of carbon dioxide. It believes that by 2030, this could contribute to a 23% decrease in global pollution.
Impact on India
A carbon tax may be the most attractive of the three pricing options for India because it can directly deter the use of fossil fuels while generating income that can be used to fund the development of cleaner energy sources or the protection of disadvantaged consumers. Policymakers must decide on the tax rate, which ranges greatly from Denmark’s $165 per tonne scheduled for 2030 to Japan’s $2.65 per tonne of CO2.
The manufacturing companies claim that importers from nations with low carbon prices are stealing market share from them is the primary barrier for India.
Allowing businesses to use premium foreign carbon allowances to make up a portion of their taxable pollution might also make sense. The EU does not include transportation because higher costs would have been transmitted directly to consumers. Singapore offers vouchers to consumers impacted by energy price increases. California uses money from the selling of carbon permits to partially subsidize the purchase of electric vehicles.
Issues with the carbon tax
Distributional effects: A carbon tax may have a large distributional effect, which means that low-income households and particular economic sectors or areas may be disproportionately affected.
Complexity: The design and implementation of carbon tax systems can be challenging, necessitating careful evaluation of variables like the tax rate, exclusions, and the intended use of the collected funds.
Global cooperation: Since carbon pollution are a global issue, carbon tax schemes may need global cooperation to be successful. The diverse economic and political goals of various nations have made it difficult to achieve international cooperation on carbon price policies.