Carbon Tax: Analysis Of Role Of Carbon Taxation

Analysis Of Role Of Carbon Taxation

This article is written by Silky Kumari currently pursuing, 3rd year of BA.LLB(Hons) from National University of Study and Research in Law, Ranchi. The content of the article(Carbon Tax) is related to environmental law focusing on the role of carbon taxation.


Environmental issues are at an alarming rate and it’s high time to understand the delicacy of the matter. The problem of increased human interference by exploitative methods is apparent and has resulted in rising temperatures and this has been caused mainly due to the excessive emission of greenhouse gases or carbon emissions. The paper focuses on one part of the threat that is caused by increased carbon emission.

One of the major steps taken to reduce it is to tax at a rate fixed at a level directly proportional to the damages caused by a ton of carbon emission. India being a developing nation though has taken some steps to enact various environmental laws addressing the issue but lacked efficiency and effectiveness. In order to reduce the number of carbon emissions, it is submitted that a price or tax be set on the carbon emission[1].

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Such taxes are termed as Pigovian tax, which is imposed on any market activity that generates negative externalities. This paper aims at analyzing the role of carbon taxation at the national and international level and also to study requisite legislation for making carbon taxation more robust and acceptable among various sectors of the country.

Keywords: Carbon tax, Global warming, NITI Aayog, World Trade Organisation.


International Aspect

The deleterious effect of Carbon Emissions is quite evident at the global level. The impact of carbon emission can be felt in countries worldwide. A carbon tax is an economic-incentive, a market-based alternative to direct, command-and-control curbs on carbon emissions. Since fossil fuels do not emit carbon in their natural state that is before mining, so the imposition of such tax on these fuels would be meaningless. Ideally, this would take the form of an excise tax imposed upon each unit of carbon emitted when fossil fuels are used to produce energy for consumption and production activities.

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Unfortunately, it is not administratively feasible to impose the tax at the actual time of carbon emissions. However, feasible alternatives are available such as the imposition of an excise tax on fossil fuels either (a) when they are mined or imported into a nation (a primary carbon tax), or (b) when they are sold to businesses and households for use in energy production (a final carbon tax)[2]. The Montreal Protocol, an international treaty for the abatement of ozone-depleting chemical agents, has been ratified by 92 nations.

Also under the World Trade Organisation imposition of a carbon tax is allowed on the imports of carbon content and rebate[3] on the exports of carbon content. Detailed rules on border tax adjustments (BTAs) exist in the General Agreement on Tariffs and Trade (GATT) and the WTO Agreement on Subsidies and Countervailing Measures (SCM). These rules permit, under certain conditions, the use of BTAs on imported and exported products[4]. In all these conventions the point of concern is that the tax is imposed on the manufactured goods only and not on the finished products. In the case of the Kyoto Protocol, the signatories do not have a binding obligation. Internationally, exemptions are given to industries that agree to a voluntary emission reduction program with the government[5]. Such practices must be ceased for all evident purposes of reducing climate change.

The countries across the globe need to understand that the idea is not to permit carbon taxes rather encourage and implement them with utmost effectiveness. There should be a codified law either globally applicable or in the respective country to have de jure carbon taxing. As the imposition of various treaties may not be as effective because of the political and economic pressure inside the countries regarding the regulation of taxes which harm the domestic business and in response they do not turn up to follow it in affirmation.

Further, it also needs to be kept in mind that imposition of a carbon tax as a result of such conventions or treaties should be considerably harmonized with other taxes, otherwise it may create an excessive burden on the companies and they will not be able to keep up with the terms.

The signatories while implementation at the domestic level can further shift the taxes to carbon emission instead of carbon content. The countries should extend the carbon rebates on the exports and by the imposition of a carbon tax on the imports which would prove beneficial for both the workers and the business[6]. As international carbon taxation, most of the time is relegated to a mere footnote in substantive conversations concerning international environmental issues[7].

Indian Aspect

The importance of carbon can be understood in India as it is used in both manufacturing and distribution of almost all products such as iron, plastic, steel, cars, etc. out of the total number of electricity produced here Coal continued to supply the most(45%) followed by petroleum and other liquids (26%)[8]. India has taken several fiscal and non-fiscal measures for environmental protection. Though these measures to check carbon emissions have been useful, but not fully effective. On 1st July 2010, it was for the first time a carbon tax of Rs.50 per tonne on both coals produced and imported in India was put forth.

Subsequently the same was increased in 2014 to Rs.100. At that time India already has an extensive regulatory regime and with its commitment to the National Development Council targets, it was an appropriate time to bring carbon tax. The then, Finance Minister, Pranab Mukherjee also stated that carbon tax will be significant in financing National Clean Energy Fund. But various industrial bodies were apprehensive of the idea to levy a tax on domestic carbon emission as they felt it would inflate the prices of coal.

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The step to introduce such a tax was to ensure that by 2020, approximately 25 percent of the amount of carbon dioxide released in 2005 be reduced. Effectivity of such tax can be achieved through two main options. First, an Emission trading system (ETS) that fixes a ceiling on the total level of greenhouse gas emissions and allows those industries with low emissions to sell their extra allowances (Carbon credits) to larger emitters, thereby creating a marketplace for greenhouse gas emissions.

Most European Union member countries follow ETS while some members like Sweden impose a carbon tax. In 2020, emissions from sectors covered by the system are estimated to be 21% lower than in 2005. Secondly, a Carbon Tax Charge (CTC) sets a price on carbon by defining a tax rate on greenhouse gas emissions or the carbon content of fossil fuels.

Unlike the ETS system, Carbon Tax pre-defines the price of carbon pollution, thereby pushing businesses towards clean energy. Canada imposes a carbon tax at a rate of $20 per tonne of CO2 emissions in 2019 which is rising to $50 per tonne.  This is estimated to significantly reduce greenhouse gas pollution by between 80 and 90 million tonnes by 2022[9].

At present, carbon-emitting substances such as coal, briquettes, and other similar solid fuels are subject to, a cess of INR 400 per tonne in addition to GST. According to the report of NITI Aayog in 2018, taxing on carbon has gone a bit far for and hence a need for easing out carbon tax was felt.

It was a significant observation the reduction in carbon tax was required so that the domestic industries, which are energy-intensive could compete in the global market. The point of tax levy should be such that it minimizes collection and monitor costs and maximize coverage. Since India is a developing nation with an overwhelming population comprising of small, moderate, and large scale industries, it needs a more rationalize plan to implement a carbon tax.

The Report has explained that the regulations made to discourage the consumption of coal and increase the use of wind and solar power has proved to be distasteful for the downstream industries who are punished by excessive energy costs. As they lack technologies for the efficient and effective working of the industry.

It is worth mentioning the view of Chief Economic Advisor Arvind Subramanian who suggests that to ensure that our country’s future energy needs be secured by realistic and rational planning and that the narrative of carbon imperialism would only put a strain on the progress[10].

So, the need for a carbon law that provides for an efficient and robust carbon tax system can be felt which would ascertain that tipping point that would warrant carbon tax to be decided properly then the same would also reflect the damages to climate precisely. It should be kept in mind before implementing any tax that even after adding the tax the enhanced price one pays for such products are comparatively low than the damage caused by the production of it.



It is found that carbon taxation is not a new concept yet its effectiveness is not sufficient. It is a process to keep a check on carbon emission which is a major cause of global warming. Human actions are the major cause of the resultant climate change as we have been exploiting the environment since time immemorial for meeting our needs and desires.

In the present situation, various organizations at international platforms need to make a futile strategy of carbon taxing system and ensure that the obligation should be binding on the signatories. Countries need to formulate robust codified carbon taxing systems and ensure effective implementation of the same. Also at the same time, the taxes levied should take into consideration various economic and political aspects of the country to make sure maximum acceptance of it.



[1]J. Freeman, Efficacy of Carbon Taxes and recommendations for cutting carbon emissions, HBTLJ. 15(2), 268-299 (2015).

[2] Bernard P. Herber, Jose T. RAGA, An International Carbon Tax to Combat Global Warming: An Economic and Political Analysis of the European Union Proposal, AJES, 54(3), 257-267 (1995).

[3] A partial refund to someone who has paid tax, rent or a utility.

[4] Trade and Climate Change A report by the World Trade Organization and the United Nations Environment Programme, UNEP, <>

[5]Shakti, Discussion Paper on Carbon Tax Structure for India, Shakti Sustainable Energy Foundation, <>

[6] Saurabh Sood, Role of carbon tax in containing emission- A Comprehensive Analysis. NJEL. 2(1), 22-29 (2019).

[7] Sood, supra, 9.

[8] Independent Statistics & Analysis, US Energy Information and Administration. Sept 30, 2020


[9] Vijyasarathy, D. Opinion: Carbon Tax and its impact on India, Energy World from The Economic Times (2020). <>

[10] Sood, supra, 9.

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