The origins of carbon trading can be traced to 1997, when the Kyoto Protocol established carbon as an internationally tradable commodity and developed countries (except economies in transition) were mandated to have carbon markets. This changed with the Paris Agreement making it voluntary for countries. This piece discusses the importance of the steps taken by Indian Parliament and the need for a holistic framework to reduce carbon emissions.
Carbon is one of the most abundant elements in the world. We are made of carbon and so are our homes and hearth. Most economic activities lead to carbon emission into the atmosphere. Rapid industrial growth, an outcome of the Industrial Revolution and its spread, led to the accumulation of carbon in the atmosphere. Climate change is already being experienced and would only intensify once a tipping point is reached. This uncertainty is a worry to all.
In the absence of a carbon price, economic agents do not factor in the social cost of their emissions. Setting a price for carbon emissions has been conceded as an optimal strategy to internalize these costs. Carbon pricing is often done explicitly through specific carbon taxes and carbon markets, and implicitly through indirect taxes, subsidies, etc. In addition, it is widely accepted that a portfolio-based approach with non- pricing policy measures can positively incentivize a gradual shift to low-carbon and green alternatives. Regulatory instruments like setting standards for products, technologies, performance reporting requirements, etc, nudge polluters to consider their emission levels as they try to meet regulatory requirements. Policy support for the funding of R&D for low-carbon technology and support for testing of prototypes boost innovation and its diffusion.
India has already put in place implicit prices on carbon emissions. The current regime of indirect taxes imposes high tax incidence on petroleum fuels. The GST compensation cess, which replaced the pre-GST era clean energy cess, levies a tax on coal. Moreover, the market-based Perform, Achieve and Trade (PAT) scheme works to enhance energy efficiency and thus indirectly reduce carbon emissions from energy consumption in energy-intensive industries, as does ethanol blending in petrol. The move to establish a carbon market—an explicit pricing mechanism—is therefore the natural next step.
Explicit and implicit carbon pricing are external stimuli impacting the composition of energy use, bringing about a change in consumption patterns and production decisions. A shift to low- carbon technologies can, however, be successful only if developing countries have access to resources, including finance, on concessional terms. It also depends on the availability of critical minerals, as much green technology is intensive in its use of these. There are also transition costs, as countries, especially developing ones, move towards less carbon-intensive production in a shorter period than their developed peers. The role of the latter in mobilizing capital at reasonable or concessional terms for enabling this transition of developing countries is a sine qua non, and, quite frankly, part of their promise made at the Earth Summit in 1992 and as part of the Paris Agreement in 2015.
Instead, one of the biggest contributors to the world’s cumulative carbon emissions of the last 150 years, the EU, is now using disparities in carbon prices across countries as a tool to justify carbon border taxes. Europe is responsible for around 22% of the world’s carbon emissions, while a country as large as India has contributed only 3%. These taxes are being promoted as a way to prevent supposed carbon leakage from a country with stringent carbon-control policies to those with laxer policies. Seeking to establish a uniform emission trading system, similar regulations and comparable carbon taxes across countries violates the principle of common but differentiated responsibilities and respective capabilities set out in the Rio convention and Paris Agreement, which also required developed countries to provide financial resources to assist developing countries in implementing the objectives of the convention. In principle, carbon mitigation should be a shared responsibility, but the burden of carbon prices cannot be shared uniformly by all.
These are the authors’ personal views.
V. Anantha Nageswaran, Chandni Raina & Ritika Bansal are, respectively, chief economic adviser; and officers of the Indian Economic Service working with the ministry of finance
