The way to curb pollution is to tax carbon. Only then will households look for greener substitutes
It wouldn’t be an exaggeration to say that air pollution is one of the biggest public concerns in India today. Its implications are many but just two will suffice here. A report of the Lancet Commission on pollution and health states that around 19 lakh people die prematurely every year from diseases caused by outdoor and indoor air pollution. A study by the Indian Journal of Pediatrics shows that the lungs of children who grow up in polluted environments like Delhi are 10% smaller compared to the lungs of children who grow up in the U.S. This is nothing short of a public health emergency. What is needed, therefore, is a comprehensive policy to curb pollution. We need to act now.
At the heart of the problem of pollution are carbon dioxide (CO2) emissions. About 75% of all greenhouse gas emissions are CO2 emissions produced through burning fossil fuels — oil, coal and natural gas — to generate energy. Since the early 2000s, carbon emissions have increased because of high growth in the Indian economy. In 2014, India’s total carbon emissions were more than three times the levels in 1990, as per World Bank data. This is because of India’s heavy dependence on fossil fuels and a dramatically low level of energy efficiency.
Remodel the energy mix
Emissions can be curbed only if people are persuaded to move away from fossil fuels and adopt greener forms of energy. But how do we achieve that? Tax carbon, period.
A part of the carbon revenue thus generated can be used for a systemic overhaul of the energy mix, which, to a large extent, would address the pressing problem of environmental degradation. The Indian economy’s energy mix needs to be remodelled through investments in clean renewable sources of energy like solar, wind, hydro, geothermal and low-emissions bioenergy, and by raising the level of energy efficiency through investments in building retrofits, grid upgrades, and industrial efficiency. According to our estimates, this energy mix overhaul requires an additional 1.5% of GDP (to the current annual level of 0.6%) annually over the next two decades. Assuming that the Indian economy grows at 6% per annum and the population is likely to rise from 1.3 billion to 1.5 billion over the next two decades, the per capita emissions will still fall as a result of this policy, from the International Energy Agency’s 2035 Current Policy Scenario of 3.1 metric tonnes to 1.5 metric tonnes — a 52% decline. Since this expenditure is financed by the carbon tax revenue, it will be a revenue-neutral policy with no implications on the fiscal deficit.
There is, however, a problem with carbon tax. It’s regressive in nature — it affects the poor more than the rich. Fortunately, there’s a way out. Economists in the West have argued for a ‘tax and dividend’ policy according to which the revenue thus generated is distributed equally across its citizens and as a result, the poor are more than compensated for the loss, since in absolute amounts the rich pay more carbon tax than the poor. Such a policy of cash transfer, which might work in the West, however, has a problem in the Indian context, which has been discussed in the context of the Right to Food debate.
Instead of a cash transfer, the other part of the carbon revenue can be used for an in-kind transfer of free electricity to the population that contributes less carbon than the economy average, and universal travel passes to compensate for the rise in transport costs and to encourage the use of green public transport. Such a policy justly addresses the widening schism between Bharat, which bears the climate impact burden, and India, which is imposing that burden because of its lifestyle choices.
As of 2014, more than 20% of India’s population did not have access to electricity. In July 2012, India experienced a blackout affecting roughly 70 crore people. Through this Right to Energy programme, every household in India will have access to electricity, a feat that almost all the governments since Independence have dreamt of but have failed to deliver. The free entitlement of fuel and electricity for a household works out to 189 kWh per month based on our calculations from the National Sample Survey data. Anything above this limit will be charged in full to control misuse of this policy. Travel passes with a pre-loaded balance amount of around ₹4,600 per household per annum, which can be used in any mode of public transport — private and government alike — will be available for every household.
The level of carbon tax required for this policy to come into effect is ₹2,818 per metric tonne of CO2. It will be levied upstream, namely, at ports, mine-heads, and so on. While the prices of almost all the commodities will rise, the highest rise in price will be in fuel and energy since the carbon content is the highest in this category. To give an idea about the pinch that will be felt, the average price of electricity will rise from its current value of ₹3.73 to ₹4.67 per kWh.
Other benefits
This policy not only curbs emissions but also delivers on providing more employment since the employment elasticity in greener forms of energy is higher than those in fossil fuel-based energy. Higher prices of commodities according to their carbon content will induce households, including the rich, to look for greener substitutes. They have the effect of enticing even the poor to move away from traditional forms of energy consumption because the price of energy will be zero for them (provided they consume less than the cut-off limit) as compared to a shadow positive price in terms of the time used for collection of wood or cow dung cakes. Availability of free energy also addresses the issue of stealing of electricity, since there will be no incentive left for those who steal. In India, even in 2014, the value of electricity stolen through corrupt means amounts to about 0.8% of GDP. It’s difficult to put a figure on the health benefits that such a policy will entail, but as a rough measure, a significant part of more than 3% of India’s GDP currently spent on pollution-induced diseases will surely come down.
If we want to breathe to live, India needs to make such a policy leap.
Rohit Azad teaches economics at JNU, New Delhi, and Shouvik Chakraborty is a research fellow at the Political Economy Research Institute, Amherst, U.S.
