Carbon Tax - Environment Notes

Carbon Tax – UPSC Notes – Environment

A Carbon Tax is a form of pollution tax applied to the utilization of carbon-based fuels, such as coal, oil, and gas. This tax is specifically directed at products emitting greenhouse gases, primarily stemming from fossil fuels. The purpose of this tax is to safeguard the environment by curbing the production of greenhouse gases and carbon dioxide. Research indicates that carbon taxes stand out as the most efficient and effective approach to addressing climate change, with the least negative economic consequences. It serves as a low-cost method for reducing emissions of greenhouse gases into the atmosphere. In this article, we will delve into the topic of Carbon Tax, crucial for UPSC exam preparation.

Carbon Tax – Background

  • Carbon dioxide is a significant heat-trapping greenhouse gas, along with others like methane and water vapor, released due to human activity.
  • The scientific consensus attributes man-made greenhouse gas emissions as the primary driver of global warming, with carbon dioxide being the most impactful among these anthropogenic gases.
  • Human activity contributes to a substantial annual emission of 27 billion tonnes of CO2 globally.
  • The atmospheric impact of CO2 can be quantified through its role in altering the energy balance of the Earth-atmosphere system, known as radiative forcing.
  • In 1973, David Gordon Wilson proposed the inaugural carbon tax.
  • Climate change has been a focal point in various treaties and agreements.
  • Countries pledged to reduce greenhouse gas emissions in the 2015 Paris Agreement over the upcoming decades.
  • The global warming potential serves as an internationally recognized metric, expressing the equivalence of other greenhouse gases in tonnes of carbon dioxide equivalent.

Carbon Tax

  • A Carbon Tax is a type of pollution tax levied on the production, distribution, and use of fossil fuels, determined by the amount of carbon released during combustion.
  • It represents a potential alternative to the current ‘cap and trade’ method outlined in protocols.
  • The tax calculation is based on the carbon content in fuels like coal.
  • The primary objective is to reduce fossil fuel consumption while creating incentives for the adoption of alternative energy sources.
  • Implementation of a carbon tax would likely follow a phased approach, starting with a low initial amount and gradually increasing. This allows for the development of improved industries and technologies over time.

Why Carbon Tax is Preferred for Cap and Trade System?

  • Predictability: A carbon tax offers the advantage of predicting energy prices, potentially fostering investments in energy efficiency and alternative fuels.
  • Implementation: The adoption of a carbon tax can occur at a quicker pace compared to the legal complexities associated with the ‘cap and trade’ system.
  • Understandable: The simplicity of the carbon tax makes it more easily comprehensible, likely leading to greater acceptance among the general public.
  • Lack of Manipulation: The straightforward nature of a carbon tax reduces opportunities for special interest groups to manipulate it.
  • Rebates: Similar to other taxes, the carbon tax may be eligible for public rebates, providing potential financial incentives.

How Can Carbon Tax Help Reduce Air Pollution?

  • Reduced Consumption: The tax elevates the cost of using dirty fuels, prompting businesses and individuals to curtail consumption and enhance energy efficiency, thereby restricting the reliance on fossil fuels.
  • Increased Use of Alternative Energy Sources: Alternative energy sources like solar, hydro, and wind become more competitive due to the carbon tax on fossil fuels, encouraging their greater adoption and displacing conventional, polluting energy sources.
  • Revenue: Carbon taxation yields both social and economic benefits, generating revenue while aligning with climate change policy goals. The funds can be directed towards socio-economic objectives such as health, education, and pollution reduction initiatives, including programs like afforestation.
  • Better Air Quality: By reducing consumption and emissions, the carbon tax contributes to improved air quality. The fee structure encourages users to utilize less fossil fuel, protecting the environment and fostering good air quality, especially in urban areas like Delhi and Kanpur.
  • Meet Emission Targets: Implementing a carbon tax supports India in achieving its voluntary target of reducing carbon dioxide emissions per unit of GDP by 25% from 2005 levels by 2020. It also aids in meeting India’s committed INDC of a 33% reduction by 2030.
  • Clean Energy Investment: The tax contributes to establishing a National Clean Energy Fund (NCEF), utilizing the entire amount raised to subsidize environmental programs and clean energy initiatives. This aligns with India’s efforts to reduce reliance on nonrenewable fossil fuels and promotes flagship programs like the International Solar Alliance, Start-up India, and Make in India.

Largest Carbon Emitting Countries

Largest Carbon Emitters

Impact of Carbon Tax

  • Carbon Taxes and Emission Reductions: Research indicates that carbon taxes are effective in significantly reducing greenhouse gas emissions.
  • Efficiency of Carbon Taxes: Most economists assert that carbon taxes stand as the most efficient and effective strategy for combatting climate change, causing the least harm to the economy.
  • Impact on Electricity Prices: Carbon taxes have the potential to influence electricity prices.
  • Success of Sweden’s Carbon Tax: A study highlights that Sweden’s carbon tax successfully led to an 11% reduction in carbon dioxide emissions from transportation.
  • Greenhouse Gas Reduction in British Columbia (2015): According to a 2015 study in British Columbia, taxes reduced greenhouse gas emissions by 5-15% with minimal overall economic effects.
  • Impact on Industries in British Columbia (2017): A 2017 study in British Columbia revealed that, while industries in general benefited from the tax, carbon-intensive and trade-sensitive industries experienced setbacks, with a 0.74% annual increase in employment.
  • Effect on Economic Growth (2020 Study): A 2020 study evaluating carbon taxes in wealthy democracies found no discernible impact on economic growth.

Analysis of Carbon Tax in the World

  • Global Adoption of Carbon Pricing Mechanisms: Various countries worldwide have instituted carbon pricing mechanisms, which entail placing a monetary value on carbon emissions.
  • UN’s Observation on Carbon Taxes: According to the UN, 23 countries have embraced carbon taxes, primarily at the national level. The inception of carbon taxes dates back to the early 1990s, with Finland leading in 1990, followed by Norway and Sweden in 1991, and Denmark in 1992.
  • Diversity in Carbon Tax Implementation: Carbon taxes have not only been adopted by developed economies but have also found their way into emerging economies. Notable examples include the introduction of carbon taxes in countries such as Chile and South Africa.
  • Variation in Mechanism and Rate: Carbon taxes exhibit differences in both mechanism and rate across each country, reflecting a growing trend of adoption not solely for mitigating climate change but also as a preventive measure against international penalties.

Carbon Tax Regime in India

  • India’s Climate Vulnerability: According to the Global Climate Risk Index 2021, India ranks among the top ten countries most impacted by extreme weather events linked to climate change.
  • Importance of Carbon Emission Reduction for Developing Nations: For a developing country like India, minimizing carbon emissions is crucial.
  • Progress and Challenges in Paris Agreement Targets: While India is progressing toward its emission reduction targets under the Paris Agreement, additional efforts are necessary to fortify its resilience against climate change.
  • Fragmented Carbon Taxation in India: Currently, India lacks a unified carbon taxation system nationwide; however, individual state governments have instituted their own taxes, such as the Green Cess in Goa and the Eco Tax in Mussoorie, to offset external costs.
  • Government Measures and the Clean Energy Cess: Although the Government of India (GOI) hasn’t implemented a dedicated carbon tax, past measures like the Clean Energy Cess aimed to promote clean fuel usage by raising coal consumption costs and funding research and clean energy projects.
  • Impact of GST and Compensation Cess: The introduction of the Goods and Services Tax (GST) in 2017 led to the repeal of the Clean Energy Cess and the introduction of a Compensation Cess on coal production at Rs.400 per tonne. This tax, effective until 2022, targets coal use rather than the carbon emissions resulting from it.
  • Rudimentary and Non-Progressive Carbon Taxation System in India: India’s current carbon taxation system is rudimentary and lacks progressiveness. This not only hampers capturing external carbon costs adequately but also holds potential repercussions for India’s international trade.

Utilities of Carbon Tax

  • Impact of Carbon Taxes on Emission Reduction: Carbon taxes serve to discourage the utilization of highly emissive materials and energy sources, promoting the adoption of renewable energy sources.
  • Encouraging Environmentally Friendly Practices: These taxes motivate companies to opt for greener inputs by elevating the costs of highly emissive alternatives.
  • Shifting Costs to Polluters: Carbon taxes redirect the external costs of carbon emissions from the general public to the polluter, compelling the use of eco-friendly production methods.
  • Revenue Collection for Climate Mitigation: Additionally, they empower the government to amass revenue, which can be directed towards mitigating potential disasters arising from climate change.
  • Progressive Taxation with Emission Limits: A system of carbon taxes could adopt a progressive approach by setting a maximum emission limit. Emissions exceeding this limit would then become subject to taxation.
  • Balancing Economic Disadvantages: By focusing on taxing emissions instead of the use of essential fossil fuels, a carbon tax system could benefit the country without causing harm to economically disadvantaged individuals who rely on such fuels.
  • International Trade Considerations for India: Implementing carbon taxes in India would not only prevent international shunning or penalties but also safeguard the country from negative impacts on its exports.

Disadvantages of Carbon Tax

  • Impact of Generic Carbon Tax Systems: Carbon tax systems not tailored to a specific economy might have adverse effects, particularly imposing heavy burdens on economically disadvantaged individuals.
  • Need for Careful Implementation: Implementing such a mechanism requires a meticulous approach, ensuring it aligns with the unique needs of the economy.
  • Carbon Emissions and Essential Commodities: Many essential commodities contribute to carbon emissions during production. Imposing a carbon tax on emissions could lead to increased prices for these commodities, placing a burden on consumers.
  • Challenges in Countries like India: In nations like India, where a significant portion of the population struggles with affordability, higher prices for essential commodities due to a carbon tax pose significant challenges.
  • Potential for Concealing Emissions: Businesses may attempt to avoid carbon taxes by concealing their true emission levels, potentially masking the extent of the environmental problem.
  • Dilemma with Voluntary Disclosure: Relying on voluntary disclosure for emission monitoring can be problematic; governments may need to resort to more stringent measures, involving the establishment of manpower and infrastructure, which could be both time-consuming and costly.


  • Effectiveness of Carbon Taxes: Carbon taxes serve as a potent mechanism in diminishing carbon emissions and combating climate change.
  • Comprehensive Cost Capture and Incentives: They not only capture the costs of negative externalities but also act as incentives, motivating businesses to adopt cleaner and greener production methods, yielding benefits for both the environment and the economy.
  • Advantages of Introducing Carbon Taxes in India: The implementation of such a tax in India would be advantageous.
  • Consideration for Indian Economy’s Specific Needs: It is crucial, however, to establish such a system with due consideration for the specific needs and dynamics of the Indian economy.

FAQs on Carbon Tax

Q1: What is Carbon Tax?

A1: Carbon tax is a form of environmental taxation imposed on the usage of carbon-based fuels, such as coal, oil, and gas. It involves placing a monetary fee on the production, distribution, and utilization of these fuels, directly linked to the amount of carbon emissions they generate.

Q2: Why is carbon tax preferred to the cap and trade system?

A2: The preference for carbon tax over the cap and trade system is often attributed to its simplicity and predictability. Unlike cap and trade, which involves setting emissions limits and trading allowances, carbon taxes provide a straightforward approach by directly taxing carbon emissions. This simplicity makes it easier to predict energy prices, implement quickly, and gain broader public acceptance.

Q3: What effect does a carbon tax have on the environment?

A3: Carbon taxes aim to reduce carbon emissions by making the use of fossil fuels more expensive. By creating a financial disincentive for high carbon-emitting activities, businesses and individuals are encouraged to adopt cleaner energy sources and more environmentally friendly practices. The ultimate goal is to mitigate the impact of climate change by reducing overall greenhouse gas emissions and promoting sustainable practices.

UPSC PYQ Prelims

Question: Consider the following statements regarding ‘Carbon Tax’:

  1. It is a type of pollution tax that is levied on the use of carbon-based fuels (coal, oil, gas).
  2. The tax is imposed to protect the environment by reducing the production of greenhouse gases and carbon dioxide.

Which of the statements given above is/are correct?

  • (a) 1 only
  • (b) 2 only
  • (c) Both 1 and 2
  • (d) Neither 1 nor 2

Answer: (c)

Question: The increasing amount of carbon dioxide in the air is slowly raising the temperature of the atmosphere, because it absorbs: (UPSC 2012)

  • (a) the water vapor of the air and retains its heat
  • (b) the ultraviolet part of the solar radiation
  • (c) all the solar radiations
  • (d) the infrared part of the solar radiation

Answer: (d)

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