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Copyright@2024 Centre for Budget and Governance Accountability

Authors: Subrata Rath and Jyotsna Goel

You can reach the authors’ at [email protected] and [email protected]
Research Support: Nandini Ghosh

Published by:
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About Project:
Assessing the Feasibility of Instituting an inclusive Carbon Tax Policy in India

The project intends to build a holistic understanding of the need for, and the trade-offs
associated with instituting a Carbon Tax in India. The project has four key objectives
around assessing feasibility of Carbon Tax.

This discussion Paper under objective three, suggest policy measures for reducing
regressive impacts of Carbon Tax and inclusive transition. This paper discusses
possible regressive impact for India and suggest way forwards based on learnings from
various countries’ experiences with Carbon Tax.

Disclaimer: Views expressed in this policy note are those of the authors and do not
necessarily represent the positions of CBGA and its affiliates
 CONTENTS

1.0 Context 3

2.0 Methodology and Approach 5

3.0 Findings of various studies: Possible Regressive Impacts of Carbon 5

Tax for India

4.0 International experiences and policy measures on mitigating 9

regressive impact of a Carbon Tax
Box1: Case study: Sweden and Canada’s experience with Carbon Tax. 10
Box 2: Case study: Policy introduction as climate change mitigation 13
and lump sum allocation of carbon tax funds in Mexico and
Indonesia

5.0 Key insights from countries’ experience on effectiveness of 14

mitigation measures and Carbon Tax revenue use
Box 3: India's Direct Benefit Program for Vulnerable Households and 16
the "Chullo Asmaan" Scheme under the District Mineral Fund

6.0 Way forwards for bringing inclusiveness in a Carbon Tax Policy for 17
India

7.0 Conclusion 20

References 21

Annexure 1: Different Countries’ experiences

measures to reduce regressive impact of
their Carbon Tax Policy

https://drive.google.com/drive/folders/1NrP7
FPJfqIqzj-2F9OplcEe_FeP6dlO3?usp=sharing
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

1. 1.0 Context

Climate change is one of the main challenges facing us today. To reduce emissions of
greenhouse gases (GHGs), and thereby mitigate climate change, the exploration of new and
alternative mechanisms becomes crucial. Carbon pricing emerges as a pivotal instrument,
addressing the external costs of greenhouse gas emissions and reallocating responsibility for
the associated damages to their source. The environmental and economic efficiency of Carbon
Taxation is often highlighted, but it is important to understand how the burden from a Carbon
Tax is shared across households, stakeholders, and businesses since it might be regressive for
certain segments of the population.

Inclusivity is the backbone of sustainable development. Carbon Tax is extremely effective in

abating carbon emissions, but it leads to an undesirable trade-off between economic growth
and climate change mitigation.

Figure 1: Advantages of implementing a Carbon Tax.

It can use income to reduce

other taxes, to address family
justice and to change
competition.

There can be investment in There can be changes

emissions reduction and made in business modes
climate goals. to reduce debt.

As of 2023, 28 countries have rolled out a multitude of mechanisms to tax carbon emissions
and subsequently target the carbon content in energy consumption1. According to the World
Bank, there are 68 direct carbon pricing instruments operating as of June 2022 in 46 national
jurisdictions around the globe. These comprise 36 Carbon Tax regimes and 32 emissions
trading systems2.

In India, at least 13 million people in the poorest regions depend on the coal ecosystem for a
living3. A critical aspect of a good Carbon Tax policy is in ensuring equity and minimising impact
on low-income households. However, there is no negating that a Carbon Tax could raise a
significant amount of revenue: 1-2 per cent of GDP for a US$ 35 per ton of CO2 in 20304. Such
financial heft can help offset the harmful macro-economic effects and drive a sustainable future. Another way to achieve this is by using revenue from the Carbon Tax to provide subsidies for low-income households to offset any increases in energy costs. Additionally, the tax revenue could be used to support clean energy development in rural areas, which would create new job opportunities and reduce energy poverty.

3
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

Although India is the third-largest emitter of CO25, after China and the United States, the
country does not have an explicit Carbon Tax in place. India's carbon emissions are set to
surge 50% by 2030 due to rising electricity and transportation demands, emphasising its crucial
role in combating global warming. A nationwide Clean Environment Cess, akin to a Carbon Tax,
was introduced on coal, lignite, and peat in 2010. Implementing a Carbon Tax of US$40 per
tonne of CO2 e ,could potentially reduce emissions by up to 1.7 billion tonnes by 2030
equivalent to 30 per cent of India's projected increase.6 This tax rate would also generate
significant revenue for the government, which could be used to support clean energy
development and climate adaptation measures including loss and damage response financing.
The major inhibition of the India to adopt Carbon Tax is general trend of regressivity associated
with Carbon Tax particularly burdening the poor population and vulnerable socio- economic
segments of its population.7

India, grappling with low per capita income and limited energy access primarily focuses energy
consumption on essentials like cooking and lighting with minimal commuting. However,
implementing a Carbon Tax raises concerns about regressive impacts disproportionately
affecting poorer households due to increased energy prices necessitating careful consideration
in design and implementation. There are currently several proposals being considered by the
Government of India for a nationwide roll-out of carbon markets. These are based on a
cap-and-trade system like the European Union’s Emissions Trading System (EU-ETS) for certain
sectors. Such measures will require amendments to the Energy Conservation Act 2023.8
Further, an explicit system of domestic Carbon Tax might also be imposed as a way to comply
with the upcoming CBAM (Carbon Border Adjustment Mechanisms) rules imposed by the EU.9
Until now, emissions trading has been the carbon pricing instrument of choice in most
jurisdictions.

In the EU, the ETS covers nearly half the total greenhouse gas emissions. Similar to a Carbon
Tax, cap-and-trade programmes impose a price on carbon emissions, affecting consumers,
shareholders, and workers, potentially leading to regressive impacts on lower-income
segments. Policymakers must carefully assess how these costs are distributed across different
groups and income classes when considering implementing a carbon pricing policy like a
Carbon Tax in India.

Navigating the multifaceted and wide-ranging regressive impact of a Carbon Tax demands a
nuanced strategy. From its effects on low-income households and small enterprises, to its
implications for export competitiveness and domestic inequality, addressing these concerns
requires a thoughtful approach. To counteract the negative externalities, a set of mitigating
mechanisms exist. Crafting region- and sector-specific policies, informed by international
experiences, can enhance the effectiveness of this crucial climate change mitigation tool.

4
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

1.1 Objectives

Keeping this in mind, this discussion paper covers two key objectives for drawing up a way
forward for a socio -economic benefit and inclusive Carbon Tax policy in India.

The first objective is to review the policy measures adopted in different developing countries
and collate learning from international experience for compensating adversely affected
sections of the population. And the second objective is to attempt for devising policy for
mitigating regressive-ness measures suited to the Indian context based on learning, especially
from developing countries.

2.0 Methodology and Approach

A review of several studies was carried out on the potential regressive effects of a Carbon Tax
on socio-economic indicators for various countries including India.

To understand how to compensate populations affected by Carbon Taxes, a comprehensive

review of global policies was carried out using a secondary literature survey. The analysis
delved into the implementation strategies of about 30 countries, examining unique
approaches, challenges, and lessons learned. The information is compiled in the annexure of
this discussion paper. For ease of understanding, the countries have been segregated as
developing and developed countries as per the classification of the United Nations (UN).10

Additionally, mitigation measures were assessed for their applicability and effectiveness in the
Indian context, considering socio-economic factors and policy frameworks of a few developing
countries that had adopted a Carbon Tax. Clear criteria were established to differentiate
between developed and developing countries, considering economic indicators and
industrialisation levels, while studying their measures on mitigating the repressiveness of a
Carbon Tax. This holistic approach aimed at providing insights for an India-specific strategy.

3.0 Findings of various studies: Possible

Regressive Impacts of Carbon Tax for India

Several studies have revealed that carbon pricing mechanisms in developed countries often
result in the negative. In most developed nations, the wealthier individuals spend less on
energy, but for those with lower incomes, energy expenditures constitute a larger proportion
of disposable income. Consequently, lower-income households may encounter challenges in
adopting emission reduction measures, as they may find it difficult to afford improvements for

5
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

poorly insulated homes, less energy-efficient appliances, or vehicles with low fuel economy.
However, these challenges are manageable through designing an inclusive Carbon Tax and
using a Carbon Tax revenue neutral approach. The following sections discuss the possible
regressive impact of Carbon Tax.

3.1 Impact for rural and urban poor

In contrast, the scenario varies notably in developing countries. A significant contributing factor
to this difference is the distinctive pattern of energy spending between urban and rural
households. Higher-income developing countries often have a more urbanised population
than lower-income countries. Unlike in rural households, urban households primarily depend
on transportation and lack access to untaxed energy sources, such as biomass. The urban poor
could face disproportionate challenges due to carbon pricing unless relief measures are
instituted. In the initial part of the 1990s, nations including Denmark, Norway and Finland
implemented energy taxes that were based on carbon content. In 2008, the Canadian province
of British Columbia imposed a Carbon Tax and worked to mitigate the regressive impact on its
rural populations.11

3.2 Double-dividend impact for economic and environmental dimensions

The stories from the developing world towards achieving sustainable goals are also inspiring.
Chile is the first country to implement a Carbon Tax in South America and was also the first to
roll out green bonds in the region. It is a common finding in Economics literature that Carbon
Taxes are regressive in its impact. The distributional effect may undermine the political
acceptability of the tax. A Carbon Tax in France contributed to the “Yellow Vest” protest. Mexico
also witnessed a minor regressive effect 12. On the flip side, the approach of double-dividend
hypothesis reflects upon economic and environmental dimensions and can help formulate
balanced measures to respond to the regressive impact. The dividends of these corrective
measures are also visible in the form of sustainable development and a better future to leave
behind.13

3.3 Impact on households due to transition to sustainable fuels

In India, households navigate the use of multiple fuels to meet their energy needs, requiring
decisions not only on the quantity but also the type of fuel to employ. Energy stands as a
fundamental necessity for households, with a surging demand for cooking and lighting in the
country. A 2022 study conducted by R. Maheshwari on Economic, Sustainable Development,
and Fuel Consumption delves into the economic, sustainable development, and fuel
consumption dimensions of Indian households.14 The findings indicate that transitioning to
sustainable fuels would yield mixed impacts at the household level. Despite the environmental
benefits of cleaner fuels, the economic costs also tend to disproportionately burden the poor.
Studies in the developing world, like Aggarwal et al., 2021, explore the socio-economic impact
of Carbon Tax, revealing critical trade-offs between climate change mitigation and economic

6
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

development. The research highlights significant reductions in demand for various energy
sources alongside regressive welfare effects, emphasising the need for nuanced policy
responses to mitigate adverse impacts on vulnerable households.

3.4 Impact on essential commodities prices

The paper "Green Growth and the Right to Energy in India, 2021" by Rohit Azad, highlighted that
New Delhi remains the most polluted city globally, showing no significant improvement over
time.15 Azad suggests introducing a Carbon Tax in Delhi to shift the city's economy toward clean
and sustainable energy sources. This strategy aims to ensure universal access to electricity,
transportation, and food up to a certain level. A study analysed the carbon prices associated
with commodities in the National Sample Survey (NSS), revealing that as income levels rise, the
lower-income sections would be more adversely affected by a Carbon Tax due to a higher
proportion of expenditure on household goods and food.

3.5 Impact on industrial competitiveness

A study of British Columbia’s Carbon Tax has found very limited impacts on industrial
competitiveness, which is now home to a growing clean energy sector with more than 200
companies that generate an estimated US$ 1.7 billion in revenue annually16. Most ex-post
empirical studies find no statistically significant effects of carbon pricing on different
dimensions of competitiveness. Also, Pearson and Smith (1991) studied that the distributional
effects of a Carbon Tax equivalent to US$10 per barrel of oil would have a regressive impact for
Ireland and the United Kingdom17. The adoption of a Carbon Tax is likely to affect firms engaged
in energy-intensive outputs significantly. It would inflate their production cost, which would
lead to loss of competitiveness.

3.6 Impact on government revenues from fuels

India, the world's third-largest oil consumer, currently consumes approximately 5 million
barrels daily, with a growth rate of 3-4 per cent annually. Projections suggest that within a
decade, this consumption could surge to about 7 million barrels per day. The Petroleum
Planning and Analysis Cell (PPAC)18 reported a rise in crude oil imports to 212.2 million tonnes
in 2021-22 from 196.5 million tonnes in the previous year. Despite efforts to boost output, the
oil import dependence for April 2022-23 reached 86.4 per cent, marginally up from the
corresponding period last year. The escalating demand for oil is outpacing production, leading
to concerns about a heightened crude oil import bill, with potential repercussions on
macroeconomic indicators.19 This trend also reveals the vulnerability of the sector which could
fluctuate with global dynamics and a need for diversification.

7
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

Table 1: Revenue from coal and petroleum at Union level along with
Government of India (GoI) revenue (In Rs crore)

Source of GoI Revenue 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

From Coal India 42143
43946 39498 34705 41768 40357
From the petroleum sector 336163
348041 334315 455069 492303 428067
From the fossil fuel sector 378306 391988 3373812 489774 534071 468424
GoI revenue 2111753 2316170 2337216 2234734 3074427 2414860
Percentage share of fossil fuel revenue 18% 17% 16% 22% 17% 19%

Source: Coal India financial report and Petroleum Planning and Analysis Cell, GoI-Government of India

3.7 Impact on employment and electricity price

As coal-based energy production becomes more expensive, power generation companies may
transfer additional costs to end-users, electricity price might increase, potentially straining
budgets and altering consumption patterns. The ripple effect could extend to industries heavily
reliant on coal, such as manufacturing, cement, and steel, potentially diminishing profitability,
eroding competitiveness, and leading to reduced output and job implications. This, in turn, may
affect the overall investment attractiveness of coal-related industries, contributing to potential
declines in employment and economic growth.

3.8 Expected impact on trade competitiveness.

An additional tax does inflate the production cost and this leads to reduced trade
competitiveness in the international marketplace. In 2022, India exported a total of US$ 468
billion and ranks fifteenth in the world20. In 2022, 27 per cent of India’s exports of iron, steel,
and aluminium products worth US$ 8.2 billion went to the E21. India's steel sector faces
significant challenges due to the EU's carbon border tax, which could cost up to US$ 8 billion in
exports to the EU. The country's manufacturing industry is expected to face increased tariffs on
iron, steel, aluminium, and cement. Compliance with the Carbon Border Adjustment
Mechanism (CBAM) would require taxes on carbon emissions and fair competition. India's
Developing Country Key mitigative measures
sustainable commitment and sectoral compliance with CBAM could lead to innovative
Strategic adoption of climate mitigation as an objective: Framing of
solutions and improved domestic scenarios.
Carbon Tax as a climate change mitigation measure, rather than solely a
revenue-raising tool, garnered public support and made it more acceptable
Mexico among the political circles of the country.
Tax exemption to certain fuels in upstream usage and offset projects:
The Carbon Tax is applied to fossil fuels based on their carbon content,
covering petroleum derivatives and fossil gases used for combustion. Entities
proving carbon neutrality by offsetting emissions from taxed fuels are
Colombia exempt, while coal faces taxation upon sale or withdrawal for personal use.
Importance of monitoring underutilisation of coal cess revenues: The initial
cess was Rs.50 per tonne underwent multiple increases and was revised to
Rs.400 per tonne in five years. The funds initially directed towards renewable
energy expansion were later integrated into tax reforms, alongside sub-
national compensations. There was strict earmarking of revenue solely for
climate mitigation efforts however it raised concerns about its efficient
utilization and required proper monitoring of expenditure of funds.
India
Revision in tax target based on inflation: Uruguay implemented the
highest rate globally at UYU5,645.45/tCO2 for the year 2022. The tax targets 8
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

4.0 International experiences and policy

measures on mitigating regressive impact of
a Carbon Tax
As per the World Bank dashboard22, a total of 28 countries have implemented an explicit
Carbon Tax. This is the tax directly placed on the greenhouse gases emitted from various
sources. Uruguay has the world’s highest Carbon Tax rate as on March 31, 2023, at nearly 156
US$ per metric ton of CO2 equivalent (US$/tCO2e). By comparison, Poland had a tax rate of less
than 1 US$/tCO2e, while Finland – the world's first country to implement a Carbon Tax – had a
rate of some 84 US$/tCO2e.23

Table 2: List of countries where a Carbon Tax has been implemented

Year of Carbon Tax Rate

S.No. Country
Enactment (US$ 2023)
Developing Countries
1 Argentina 2018 6
2 Chile 2017 5
3 Columbia 2017 5.06
4 Mexico 2014 4.07
5 South Africa 2019 8.99
6 Uruguay 2022 155.78
7 Argentina 2018 6
8 Chile 2017 5
9 Singapore 2019 5
Developed Countries
10 Canada 2008 48.03
11 Denmark 1992 27
12 Estonia 2000 2
13 Finland 1990 83.74
14 Iceland 2010 39
15 Ireland 2010 53
16 Japan 2012 2
17 Latvia 2004 16
18 Liechtenstein 2008 131
19 Luxembourg 2021 48
20 Netherlands 2021 56
21 Norway 1991 91
22 Poland 1990 14
23 Portugal 2015 26
24 Spain 2014 16
25 Sweden 1991 125.56
26 Switzerland 2008 131

Source: Authors’ compilation from World Bank Carbon Pricing Dashboard as on February 2024
Note : Australia and Indonesia not included in this list since they rolled back Carbon Tax recently.

9
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

A complete repository of different countries that highlights the key features of a Carbon Tax in
both a developing and developed country and how it has been priced based on the objective of
the tax has been created (Annexure1). Several countries have focused on recycling measures
which are progressive and aim to protect the vulnerable and low-income segments of the
population from the potential regressive impacts of implementing a Carbon Tax. A summary of
approaches taken by various developed and developing countries in consideration of
mitigating regressive impact of Carbon Tax are discussed in subsequent two sub-sections.

4.1 Approaches taken by developed countries.

This section looks at the countries, mostly from the European Union (EU), that already have a
Carbon Tax in place for more than a decade and developed countries. Most of the countries
under the EU had exempted certain fuels and sectors from the Carbon Tax. For example,
Denmark has exempted electricity and EU-ETS participating sectors from the Carbon Tax. The
levy complements the EU-ETS scheme in this case, with this exemption criteria and at the same
time managing the possible regressive impact of Carbon Tax. Certain countries have followed
a graduated increase in Carbon Tax rate over the years and the partial coverage of sectors.24

Box1: Case study: Sweden and Canada’s experience with Carbon Tax

Case 1 of Sweden: “Despite the high Carbon Tax on transport sector, the
Sweden economy continued to grow faster”

Sweden is one of the first countries in the world to implement a Carbon Tax in 1991.
It was introduced at the level of US$30 per ton of CO2 and then successively
increased to today’s rate of US$132, currently one of the highest Carbon Taxes in the
world. The tax revenue from Sweden mainly comes from the transportation sector.
Around 90 per cent of the revenues from the Carbon Tax comes from the
consumption of gasoline and motor diesel. Furthermore, sectors such as industry
and agriculture also are required to pay a lower Carbon Tax.

Despite the high Carbon Tax, the Swedish economy has continued to grow at a faster
rate than the European average. This outcome challenges the notion that
environmental regulations or policies aimed at reducing carbon
emissions inevitably hinder economic growth. Instead, despite
₹
the high Carbon Tax on transport sector, the Sweden
economy continued to grow faster rate.

10
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

Case 2 of Canada: “Tax structure differs depending on the province’s

geopolitical situation and public opinion”

The Carbon Tax first started in British Columbia (BC) in Canada. The emergence of a
Carbon Tax in BC reflected a confluence of political conditions ripe for Carbon
Taxation: availability of untapped hydro potential, a surge in public concern for
climate change, a committed leader with the institutional capacity to pursue his
personal policy preferences, and a right-of centre government with the trust of the
business community.

Interestingly, BC's GDP growth during this period was on par with the national
average. The province also attracted double the national rate of investment in clean
energy and hybrid vehicles, and now enjoys the lowest corporate and individual
income taxes in Canada. Industries with high emissions, such as cement production,
petroleum refining, oil and gas extraction, and certain manufacturing sectors, were
most impacted by the tax. It is worth noting that the tax rate and its reception can
depend on the geopolitical situation and public opinion in each region. The structure
of the tax differs depending on the province in Canada. Some provinces have
implemented the federal Carbon Tax, some have an alternative regional Carbon Tax,
and others are currently involved in a legal process that aims to avoid the
implementation of a Carbon Tax. However, all Carbon Taxes upon implementation
seem to follow a similar structure. There is a single
Carbon Tax rate for smaller businesses and
households while industrial emitters face a separate
carbon pricing scheme based on a portion of their
emissions rather than on fuel purchases.

Sweden's experience demonstrates that it is possible to achieve economic growth while simul-
taneously reducing GHG emissions through appropriate policy measures. Canada's example
suggests that tax structuring can be done considering the province’s geopolitical situation and
public opinion to mitigate regressive impacts. Several countries like Denmark and the Nether-
lands had exempted certain sectors participating in EU-ETS from Carbon Tax. Most of the
countries opted for revenue recycling for various purposes. Countries like Switzerland,
Sweden, Denmark, Ireland and France have either used their Carbon Tax revenue to lower
household bills or allocated it for spending on green infrastructure. Under the Carbon Tax
plans, the Netherlands government proposed a price of €30 per ton of CO2 in 2021. The price
will increase so that in 2030, steel industries, oil refineries and chemical companies will pay
€125 for a ton of CO2. The final tax price will be the difference between the price per ton of
emitted CO2 under the EU-ETS and the national carbon price of a certain year. This measure

11
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

helped the Netherlands government in accelerating its climate goals by complementing the
carbon market under EU-ETS.25 Different approaches were followed for exemption to electricity
and EU-ETS participating sectors, including tax rebates to non-combustible industries, exemp-
tion to fuels which might burden households’ income or are used in small electricity generating
stations and comprehensive measures for Carbon Tax revenue recycling. Box1 provides a com-
pilation of such measures in the case of Sweden and Canada. Unlike other countries, all the
UK’s receipts have disappeared into general funds26 or the state treasury.

4.2 Approaches taken by developing countries

Studies suggest that Carbon Taxes in developed nations tend to have regressive effects, while
developing countries experience mild progressive effects. However, there is limited experience
with Carbon Taxation in developing countries. Only 3 Per cent of lower- and middle-income
countries have implemented or plan to implement Carbon Taxation.27 A compilation of mitiga-
tion approaches from developing countries.

Table 3: Developing Countries’ Experience

Developing Country Key mitigative measures

Strategic adoption of climate mitigation as an objective: Framing of
Carbon Tax as a climate change mitigation measure, rather than solely a
revenue-raising tool, garnered public support and made it more acceptable
Mexico among the political circles of the country.
Tax exemption to certain fuels in upstream usage and offset projects:
The Carbon Tax is applied to fossil fuels based on their carbon content,
covering petroleum derivatives and fossil gases used for combustion. Entities
proving carbon neutrality by offsetting emissions from taxed fuels are
Colombia exempt, while coal faces taxation upon sale or withdrawal for personal use.
Importance of monitoring underutilisation of coal cess revenues: The initial
cess was Rs 50 per tonne underwent multiple increases and was revised to
Rs 400 per tonne in five years. The funds initially directed towards renewable
energy expansion were later integrated into tax reforms, alongside sub-
national compensations. There was strict earmarking of revenue solely for
climate mitigation efforts however it raised concerns about its efficient
utilization and required proper monitoring of expenditure of funds.
India
Revision in tax target based on inflation: Uruguay implemented the
highest rate globally at UYU5,645.45/tCO2 for the year 2022. The tax targets
emissions from fuel combustion (excluding jet fuel) and may fluctuate based
Uruguay on inflation or fuel prices, which reduces its negative impact on citizens.
Delay roll out and tax rate adjustment with currency rate: Africa
demonstrated a nuanced approach to balance global alignment and
economic stability by delaying the second phase to January 2026 and going
for rate adjustment with recent Rand-based rate increases in Carbon Tax,
South Africa deviating from the initially proposed US dollar linkage.
Revision in mitigative measures: Initially, the revenue generated served
multiple beneficiaries, such as the National Housing Fund, the Transport
Infrastructure Trust, and the social security system. However, it was
eventually decided to divert 100 per cent of the revenue to the national and
sub-national governments, which resolves the vertical fiscal imbalances
generated by the gaps between expenditure and revenue-generation through
Argentina inter-governmental transfersi
Tax exemption to small scale units: The reform is restricted to large 12
Uruguay on inflation or fuel prices, which reduces its negative impact on citizens.

Policy MeasuresDelay roll out

for Reducing and Regressive
Possible tax rate Impacts
adjustment withTax
of a Carbon currency
in India rate: Africa
demonstrated a nuanced approach to balance global alignment and
economic stability by delaying the second phase to January 2026 and going
for rate adjustment with recent Rand-based rate increases in Carbon Tax,
South Africa Country
Developing Key mitigative
deviating measures
from the initially proposed US dollar linkage.
Revision in
Strategic mitigative
adoption of measures: Initially, the
climate mitigation as revenue generated
an objective: served
Framing of
multiple Tax
Carbon beneficiaries,
as a climate such as the
change National measure,
mitigation Housing Fund,
rather the
thanTransport
solely a
revenue-raising tool, garnered
Infrastructure Trust, and thepublic
socialsupport
securityandsystem.
made itHowever,
more acceptable
it was
Mexico eventually
among the decided
political to divert
circles of100
the per cent of the revenue to the national and
country.
sub-national governments, which
Tax exemption to certain fuels in upstreamresolves theusage
vertical
andfiscal
offset imbalances
projects:
generated by the gaps between expenditure and revenue-generation
The Carbon Tax is applied to fossil fuels based on their carbon content, through
28
Argentina inter-governmental
covering petroleum transfers
derivatives and fossil gases used for combustion. Entities
Tax exemption to small
proving carbon neutrality scale
by units: The reform
offsetting is restricted
emissions from taxedto large
fuels are
Colombia exempt, while
industrial coal faces
and power taxationsources
generation upon salewithorthermal
withdrawal
powerfor greater
personal use.
than
Chile 50 megawatts (MW).
Importance of monitoring underutilisation of coal cess revenues: The initial
Gradual
cess was increment in Carbon
Rs.50 per tonne Tax: The
underwent multiple
Carbonincreases
Tax ratesand
will was revised
be raised to
from
Singapore $50 to $80 per tonne by 2030.
Rs.400 per tonne in five years. The funds initially directed towards renewable
energy expansion were later integrated into tax reforms, alongside sub-
Source: Author compilation from various sources.
national compensations. There was strict earmarking of revenue solely for
Note: Details available in Annexure 1
climate mitigation efforts however it raised concerns about its efficient
utilization and required proper monitoring of expenditure of funds.
India
Box 2: Case study: Policy introduction as climate change mitigation and lump sum
Revision
allocation in tax tax
of carbon target
fundsbased on inflation:
in Mexico Uruguay implemented the
and Indonesia
highest rate globally at UYU5,645.45/tCO2 for the year 2022. The tax targets
emissions from fuel combustion (excluding jet fuel) and may fluctuate based
Case 1 of Mexico: on
Uruguay “Carbon
inflationTax originated
or fuel from
prices, which climate
reduces law and
its negative presented
impact to
on citizens.
public as environment friendly
Delay roll andtax
out and economically rational
rate adjustment with policy”.
currencyMexico
rate: Africa
experiences suggest that framing
demonstrated of Carbon
a nuanced Taxtoasbalance
approach a climate
globalmitigation
alignment and
measure can help economic stability
in garnering by delaying
public support.the second phase to January 2026 and going
for rate adjustment with recent Rand-based rate increases in Carbon Tax,
South Africa deviating from the initially proposed US dollar linkage.
Mexico, as an emissions-intensive economy
Revision in mitigative facing Initially,
measures: global competition, marked served
the revenue generated a
historic milestone by becoming
multiple the first such
beneficiaries, developing nation toHousing
as the National implement
Fund,athe
Carbon
Transport
Infrastructure
Tax. This decision was anchored inTrust, and the social legislation
the comprehensive security system. However,
package it was
known as
eventually decided to divert 100 per cent of the revenue to the national and
the General Law on Climate Change, enacted in 2012. This law aimed to coordinate
sub-national governments, which resolves the vertical fiscal imbalances
Mexico's response generated
to climatebychange,
the gaps setting
betweentargets across
expenditure andsectors and fostering
revenue-generation through
sustainable development.
Argentina The adoption
inter-governmental of the Carbon Tax was strategically framed
transfersi

Tax exemption
as an environmentally to small
friendly and scale units:
economically The reform
rational is restricted
policy, gaining to large
support
industrial and power generation sources with thermal power
from the Ministries of Environment and Finance. The tax's presentation to the public greater than
Chile 50 megawatts (MW).
focused on climate change mitigation rather than revenue generation, leveraging
Gradual increment in Carbon Tax: The Carbon Tax rates will be raised from
environmental
Singapore appeal for
$50 to broader
$80 acceptance
per tonne by 2030. and overcoming
opposition within the industrial policy subsystem. This framing,
emphasizing long-term environmental benefits over short-term
economic costs, played a pivotal role in garnering public support
and neutralizing opposition.

13
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

Case 2 of Indonesia: “Uniform lumpsum distribution of revenues proved progressive”

Indonesia had developed a Carbon Tax policy and adopted it in 2022, which is no
longer in effect. It follows the emission trading system today. The emission trading
system (ETS) in Indonesia had a more pronounced impact on urban households
than on rural ones. In rural areas, the effect was characterized as progressive, with
poorer households experiencing relatively more benefits than wealthier ones. In
urban areas, the distributional outcome hinged on the method of redistributing the
revenue generated from the Carbon Tax. When uniform lump sum transfers were
implemented, the impact remained progressive. These changes not only
contributed to mitigating climate change but also improved the efficiency and
productivity of the sector, as rural areas often concentrated more on agricultural
activities and lower-income households. Indonesia taken
uniform lump sum transfers approach of revenues and the
impact remained progressive. Regarding the agriculture
sector, the introduction of a carbon pricing system enhanced
its efficiency.

Source: Authors’ compilation from various sources.

Note : Details available in Annexure 1

5.0 Key insights from countries’ experience on

effectiveness of mitigation measures and
Carbon Tax revenue use

Insights from international experience for policymakers emphasize the need to address the
poverty and distributional impacts of carbon pricing as an integral part of reform packages.
This ensures public support and protects the wellbeing of vulnerable groups. Canada's
example highlights the importance of tailored strategies based on local socioeconomic
vulnerability. Policy designs should align with objectives, available instruments, administrative
capacity, and political environment. It is crucial to mitigate regressive impacts of Carbon Tax
through appropriate measures, which can vary between countries and purposes. Some
important insights can be seen below.

Adopting a gradual approach to carbon pricing reforms, which allows firms and
households time to adjust. Carbon pricing of several recent schemes starts at very low levels,
and this may reflect uncertainty about its impacts (e.g., China, Colombia, Singapore, and South
Africa).

Building some mitigative measures aimed to soften the impact on firms. This includes tax
cuts (British Columbia), exemptions (Colombia, France, South Africa), and low initial Carbon Tax
rate (Singapore and Sweden). In the case of Colombia, the Carbon Tax covers petroleum

14
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

derivatives and fossil gas used for combustion, entities proving carbon neutrality by offsetting
emissions from taxed fuels are exempt, and coal faces taxation upon sale or withdrawal for
personal use.

Some countries introduced measures to support households. China, Columbia, South

Africa have seen very low effects of carbon pricing which would not impact the low-income
households. South Africa does not tax the household for electricity. Sweden has applied an
industry-specific Carbon Tax where separate lower Carbon Taxes are applied to agriculture and
other industries to support smaller industries. Revenue distribution models from Canada (The
British Columbian Climate Action Tax Credit29) and Finland show a tax-shifting approach
without impacting household finances.

Implementing a Carbon Tax on transportation fuels can have a progressive effect.

Individuals with higher income would be more impacted due to larger consumption of
gasoline. This could be done initially and expanded later.

Some countries incorporate a Carbon Tax as part of a comprehensive tax reform

strategy. An opportunity arises to support affected households and businesses via tax
adjustments, as seen in Sweden's Carbon Tax introduction alongside broader tax reforms in
the 1990s. Recent examples from Chile, Argentina, and Colombia also demonstrate integrating
Carbon Taxes within comprehensive tax overhauls.

5.1 Countries’ experience in Carbon Tax revenue use

Carbon revenue recycling is an important policy measure for addressing distributional impacts
and in ensuring social equity. The expansion of carbon pricing in the coming decades presents
an opportunity for substantial flows of carbon revenues to support investment in the
developing world. According to a World Bank analysis in carbon revenue and tier utilisation,
country-specific circumstances will determine appropriate use of revenues, but there are
general considerations for policy makers when assessing options for revenue use.30 Countries
or Jurisdictions have used their carbon revenues to achieve various objectives, which generally
fall into one of six categories. Tax reform, to target higher economic growth alongside lower
pollution (e.g. Sweden);

1. Climate mitigation, such as investment in low-carbon technologies (e.g. Japan)

2. Pursuit of other development objectives, such as in education and health (e.g. Colombia);

3. Prevention of carbon leakage, to achieve carbon pricing’s environmental and economic

objectives (e.g. South Africa);

4. Assistance for individuals, households, or businesses affected by higher carbon costs,

through transfers or social programs (e.g. India);

5. Debt reduction, to reduce the fiscal burden on future generations (e.g. Ireland).

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 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

Box 3: India's Direct Benefit Program for Vulnerable Households and the "Chullo Asmaan"
Scheme under the District Mineral Fund

India: Implementing the world’s largest direct benefit program for vulnerable
household

In 2014, the Indian government moved to eliminate all diesel subsidies by fiscal year
2015-16 and implemented a tax on produced and imported coal of around Rs 400/t
(US$ 3.29/t) LPG (liquid petroleum gas) and kerosene price supports were cut in
January 2015. The total estimated oil and gas subsidies in India decreased.31 Savings
from these reforms made it possible to implement the world’s largest direct benefit
transfers program for vulnerable households, namely the Pratyaksh Hanstantrit Labh
(PAHAL). Initially implemented at reduced scale in 2013 and extended nationwide in
January 2015, PAHAL has subsidised natural gas and LPG for
cooking by directly transferring refunds to each consumer’s bank
account. India already has these examples which demonstrate
that the application of reforms such as Carbon Tax can contribute
towards benefitting the vulnerable, including women.

Chattisgargh State: “Chhulo Aasman” Scheme

“Chhulo Aasman” an initiative to support dreams of tribal students in the Bastar

Sambhag region of Chhattisgarh. 65 tribal children have qualified for the NEET from
Dantewada district in 2023. This telling example champions the cause of ‘social
justice’ through District Mineral Foundation. The Dantewada district administration
received Rs 12.68 crore for the scheme ‘Chhulo Aasman’ from the total
disbursement of Rs 712.08 crore to the district from 2016-17 to 2021-22. As a
percentage of profit of mining can change the fate of many
mining affected families, similarly such initiatives can transform
lives of many affected families due to comprehensive Carbon
Tax roll out and subsequent green transition.

Revenue recycling, although offering economic benefits by reducing distortionary taxes and
improving the economy, is complex and may lack public understanding, hindering political
support for such initiatives. Additionally, there's a perception that the richest companies and
individuals typically benefit the most from tax reductions32, potentially diminishing its
popularity. Governments can enhance support by ensuring transparent use of revenues.

16
 Gradual increment in Carbon Tax: The Carbon Tax rates will be raised from
Singapore Policy Measures$50
for to
Reducing
$80 perPossible
tonne byRegressive
2030. Impacts of a Carbon Tax in India

6.0 Way forwards for bringing inclusiveness

in a Carbon Tax Policy for India
Drawing from international experience, it's clear that while carbon pricing is crucial, it can't be
the sole solution to global climate challenges. Challenges like political resistance, public
opposition, revenue recycling complexities, and economic competitiveness concerns vary
regionally. India has encountered similar hurdles in its past reforms and policies, offering
valuable lessons for adopting a Carbon Tax. By examining India's experiences, policymakers
can devise effective strategies to navigate challenges and implement a robust carbon pricing
framework. These insights underscore the importance of learning from past successes and
failures to shape India's climate policy effectively.

Table 4: Key challenges to carbon pricing and preferred policy pathways for India

Challenges Policy Pathways

Political economy Implementing a two-pronged strategy that includes taxation plus

considerations revenue recycling
Public opposition 1. A fee and dividend strategy under which tax proceeds are
used to pay dividends to firm and households
2. A robust strategy for communication, public dialogue, and social
deliberation to ally public fears.
3. Implementation of the tax through a phased and incremental
approach to gradually increase acceptability

Challenges to revenue 1.When revenues are directed towards green projects/ initiatives/
recycling research, it is critical to
Devise a clear, transparent roadmap for identifying
viable projects.
Sequester revenues to avoid carbon dependence in
public finance.
2. When revenues are recycled using a fee and dividend approach,
it is important to:
Have a clear and considered identification of size, distribution/
payment channel duration and frequency.

Ensure targeting efficiency and adequate monitoring.

Concerns regarding Protecting trade-exposed sectors.

economic competitiveness

Source: ORF Paper Pricing Carbon: Trade- off and opportunity of India33

6.1 Considering a revenue neutral approach in India’s Carbon

Tax policy

This review examines international experiences with carbon pricing and highlights the crucial
role of revenue recycling in its public acceptance. Many countries successfully allocate Carbon
Tax revenue towards societal benefits, like funding green initiatives or directly reducing the

17
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

burden on vulnerable populations. India's experience with the coal cess emphasizes the need
for efficient revenue utilization. The underutilization of funds from the National Clean Energy
Fund (NCEF) underscores the importance of strategic planning before implementing Carbon
Taxes. This ensures targeted use of revenue and avoids over-reliance on carbon income, as
seen with the coal cess becoming a significant source for compensating for the Goods and
Services Tax (GST).

6.2 Laying clear objective of Carbon Tax policy for improving political
acceptability

Globally, spending Carbon Tax revenues on climate projects enhances acceptability, perceived
fairness, and effectiveness. In India, despite states owning natural resources, the central
government determines pricing and taxation, primarily through coal cess accruing to the
Centre. The Government of Odisha has appealed for a portion of the coal cess to be shared
with it, arguing that coal-bearing States bear environmental and rehabilitation costs.34 Imple-
menting a Carbon Tax can offer a holistic approach, including climate adaptation and social
sector improvements, aiding the fight for net-zero emissions by 2070. Experiences from the
coal cess show that the idea of revenue maximisation instead of emission mitigation could lead
to an incentive mismatch and can deviate from the original objective of the Carbon Tax policy.

6.3 Considering implementation of a Carbon Tax through a phased and

incremental approach

India's transition from coal to solar and wind power aligns with international climate targets,
but regional disparities pose feasibility concerns. Analysing political economy constraints and
understanding winners and losers at societal and state levels is essential. French experience
indicates that Carbon Tax increases are not based on substantial revenue and distributional
neutrality may not be viable. Most countries have taken a “low cost and high impact approach”
by setting a low Carbon Tax rate. Other ways of ameliorating impacts include off-setting the
Carbon Tax impacts with corresponding reductions in other taxes and ameliorating impacts on
businesses (with flow-on benefits to consumers) through phased/incremental implementa-
tion.35 A phased ten-year increase in Carbon Tax may be evaluated to facilitate a smoother tran-
sition, aligning with climate goals while minimizing adverse effects on households, industry,
and employment.

6.4 Considering a transparent monitoring-and-evaluation framework for

assessing impact

Even though a Carbon Tax would be used to mitigate the GHG emissions over time, other
factors such as revenue recycling, specifying how the generated funds will be invested in envi-
ronmental and climate-friendly initiatives are also an integral part of a pricing mechanism.
Maintaining policy stability is vital as it offers businesses and households a predictable environ-

18
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

ment for effective planning and decision making. Continuously monitoring and evaluating the
impact of the Carbon Tax and the effectiveness of compensation measures allows for timely
adjustments. A local example of the importance of transparency and funds mismanagement
could be derived from the state Compensatory Afforestation Fund Management and Planning
Authority (CAMPA) funds which were created to increase the green cover in India and increase
ecosystem services.36 A total of Rs 23,607 crore was released by the Supreme Court but only Rs
2,829 crore was demanded by the state’s plan of action across India. Furthermore, only Rs
1,775.84 crore could be spent by the states.37 Considering a monitoring and evaluation frame-
work for evaluating the impact of a Carbon Tax and bringing transparency is important to have
an efficient Carbon Tax.

6.5 Compensating some of those who are severely affected vulnerable

population beyond social safety nets.

Understanding the channels of carbon pricing impact can identify heavily affected groups,
enhancing the political viability of such policies. Support measures for workers transitioning
from fossil fuels could include extended unemployment benefits, training, relocation assis-
tance, and healthcare subsidies. Policy-specific factors should guide revenue redistribution, as
seen in the PAHAL scheme. Assistance for regions affected by industry closures could include
reclaiming abandoned sites and temporary budget support for local governments to bridge
transitions. Finance mobilisation is crucial for social goals, with green benefits outweighing
costs, as demonstrated by initiatives like “Chhulo Aasman” 38
supporting tribal students in
Chhattisgarh from the direct revenues of the District Mineral Fund. Such initiatives can trans-
form lives and offer double dividends to affected communities, informing Carbon Tax revenue
utilisation strategies.

6.6 Complementing with newly-launched carbon market for India and

ensuring CBAM compliance

India does not have an explicit carbon price or a market-based mechanism such as
cap-and-trade. It does, however, have an array of schemes and mechanisms that put an implic-
it price on carbon. This includes Perform Achieve and Trade, Renewable Energy Certificate,
Internal Carbon Pricing, grant in aids, fuel pricing and the recently launched tradeable certifi-
cate scheme under the Carbon Market, based on the EU-ETS. Several countries like Denmark
and the Netherlands have exempted electricity and EU-ETS participating sectors from the
Carbon Tax.39

In the Netherlands, a Carbon Tax complements the EU-ETS scheme by targeting emissions
from sectors not covered by the trading system. This approach ensures comprehensive emis-
sion pricing while mitigating the potential repressiveness of the Carbon Tax through carefully
designed exemption criteria. The final carbon price for a given emitter is determined by the
difference between the EU ETS allowance price and the national Carbon Tax for that year. This
combined approach has effectively accelerated the Netherlands' progress towards its climate

19
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

goals by going beyond the reach of the EU-ETS alone. Different approaches were followed for
exemption to electricity and EU-ETS participating sectors, tax rebates to non-combustible
industries, exemption to fuels which might burden households’ income or exemption to fuel
used in small electricity generating stations and comprehensive measures for Carbon Tax reve-
nue recycling. A domestic Carbon Tax enroute a compliance mechanism with CBAM. Setting
complimentary inclusive Carbon Tax policy with other implicit mechanisms, can foster greater
acceptability of Carbon Tax and accelerate the green transition.

7.0 Conclusion

As India continues to roll out their carbon pricing schemes to meet their Nationally Determined
Contributions (NDCs) under the Paris climate agreement, the analysis of policy measures taken
globally offers several considerations in addressing the poverty and inequality impacts of
Carbon Tax policy for India. Firstly, the country should be focusing on the pathways that are
most relevant given state-specific conditions as it would be challenging to consider all path-
ways. Secondly, focusing initially on the pathways/ measures that have short- to medium-term
effects. While many countries are taking steps to introduce carbon pricing schemes, policymak-
ers are concerned over their uncertain impacts, particularly on households and firms. India
might also need to take a review-and-reevaluate approach for channelising a Carbon Tax that
is inclusive and comprehensive for achieving its climate change mitigation goals.

20
 Policy Measures for Reducing Possible Regressive Impacts of a Carbon Tax in India

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