QUESTION : Discuss the concept of carbon tax, also analyse to what extent it can prove to be an effective policy instrument in achieving INDC targets for India ?
THE BENEFITS OF A CARBON TAX
Carbon Tax and Climate
WHY IN NEWS ?
China, the largest carbon dioxide emitter, announced that it would balance out its carbon emissions with measures to offset them before 2060. The spotlight is now on the U.S. and India, countries that rank second and third in emissions.
- Record heat waves in Delhi, floods in southwest China, and catastrophic forest fires in California this year are indicative of the existential danger from global warming.
- India ranks fifth in the Global Climate Risk Index 2020.
- Between 1998 and 2017, disaster-hit countries reported $2.9 trillion in direct economic losses, with 77% resulting from climate change, according to a United Nations report.
- The U.S. faced the highest losses, followed by China, Japan, and India.
- Air pollution has fallen worldwide after the COVID-19 outbreak, including in India. But with resumption of polluting activities, emissions in India are set to rise sharply unless strong action is taken.
- Carbon dioxide, the chief culprit in global warming, was 414 parts per million in August 2020 because of past accumulation. As one half comes from the three top carbon emitters, they need to drive de-carbonisation
WHY CARBON TAX ?
- Carbon tax is a form of pollution tax. It levies a fee on the production, distribution or use of fossil fuels based on how much carbon their combustion emits
- It is imposed on the burning of carbon-based fuels (coal, oil, gas) for reducing and eventually eliminating the use of fossil fuels whose combustion is destabilizing and destroying climate.
- It is a powerful monetary disincentive that motivates transition to clean energy across the economy, simply by making it more economically rewarding to move to non-carbon fuels and energy efficiency.
- A carbon tax’s burden would fall most heavily on energy-intensive industries and lower-income households.
- Policymakers could use the resulting revenue to offset those impacts, lower individual and corporate taxes, reduce the budget deficit, invest in clean energy and climate adaptation, or for other uses.
- Will Balance Marginal social costs:
The carbon tax will be a Pigovian Tax which balances the marginal social costs such as disease etc and additional emissions.
- Greener alternatives:
high price of the materials or energy source according to their carbon content will induce households, including the rich, to shift towards greener alternatives.
- Employment generation:
It will provide more employment since the employment elasticity in greener forms of energy is higher than those in fossil fuel-based energy.
- Expenditure will come down:
a significant part of more than 3% of India’s GDP currently spent on pollution-induced diseases will come down
- Increase tax-revenue :It will also increase tax-revenue which can be used for other green projects.
CONCERN/CHALLENGES OF TAXING CARBON :
- Carbon tax is regressive in nature -it affects the poor more than the rich.
- Inflation : high transportation cost will lead to inflation and affect the informal sector.
- Alone insufficient: increasing carbon taxes is alone insufficient to reduce emissions as income levels rise.
- The highest rise in price will be in fuel and energy which affects the poor.
- India has committed to 40% of electricity capacity being from non-fossil fuels by 2030, and lowering the ratio of emissions to GDP by one-third from 2005 levels.
- It is in the country’s interest to take stronger action before 2030, leading to no net carbon increase by 2050.
- One way to price carbon is through emission trading, i.e., setting a maximum amount of allowable effluents from industries, and permitting those with low emissions to sell their extra space.
- Pilot projects on carbon trading in China have shown success. There is valuab
Ram singh, [28.09.20 16:52]
le experience in the EU, and some American states — for example, the regional greenhouse gas initiative in the U.S. northeast.
- Another way is to put a carbon tax on economic activities — for example, on the use of fossil fuels like coal, as done in Canada and Sweden.
- Canada imposed a carbon tax at $20 per tonne of CO2 emissions in 2019, eventually rising to $50 per tonne.
- This is estimated to reduce greenhouse gas pollution by between 80 and 90 million tonnes by 2022.
- The fiscal gains from pricing carbon can be sizeable. A carbon tax at $35 per tonne of CO2 emissions in India is estimated to be capable of generating some 2% of GDP through 2030.
- An internally recommended carbon price of $40 per metric tonne in China could generate 14% additional revenues.
WAY FORWARD :
- Universal travel passes with a pre-loaded balance to compensate for the rise in transport costs.
- Encourage the use of green public transport.
- Carbon tax regime in india will be effective only if it is harmonised internationally and carbon tax is levied in other countries too because energy-intensive businesses may move to less strict national regimes.
- Most practical way to change energy consumption habits is to lower the price of renewable energy and energy efficiency.
Carbon tax will help in achievement of goals under Paris Agreement to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees celsius above pre-industrial levels.
QUESTION : Explain all aspects how a global crisis like covid-19 can devastate developing nation’s economic growth and give some remedial steps by government tackling this.
GROWTH COMPULSIONS , FISCAL ARITHMETIC
WHY IN NEWS ?
Global growth prospects for 2020 have been projected by a number of multilateral institutions and rating agencies including that for India.
REAL GDP GROWTH NUMBERS :
- Pandemic Devastated Growth: India’s growth in the first quarter of 2020-21 at (-) 23.9% showed one of the highest contractions globally
- Real GDP Growth Projection: Reserve Bank of India’s Survey of Professional Forecasters estimate 2020-21 real GDP growth for India in the range of -5.8% to whereas Goldman Sachs projects it as -14.8%.
- OECD in its September 2020 Interim Economic Outlook has projected a contraction of -10.2% in FY21 for India
Inflation Projection for this Fiscal
- The latest data released by the Ministry of Statistics indicate a Consumer Price Index (CPI) inflation rate of 6.7% for August 2020.
- The average CPI inflation during the first five months of 2020-21 is estimated at 6.6%.
- Given the injection of periodic liquidity into the system and the inflation trends, the year as a whole may show a CPI inflation of close to 7%.
- Since deflator-based inflation tends to be lower than the CPI inflation, it may be about 5% or less.
- Sharp fall in GDP: The challenge is to minimise this sharp contractionary momentum in real and nominal growth.
- No fiscal stimulus:
o The sector ‘Public Administration, Defence and other Services’ contracted at (-) 10.3%.
o States’ capital spending fell by 43.5%.
o It is because of decline in revenue than increase in expenditure.
o It appears that governments are withholding expenditure. That is not the right approach.
- Revenue erosion
o The revenue calculations of the Budget were made on the assumption that the nominal income of the country would grow at 10%.
o In the first quarter of 2020-21, the Centre’s gross tax revenues contracted by (-) 32.6%.
o The CAG-based data of 19 States show a contraction of (-) 45% in tax revenues.
- Limits to fiscal deficit
o The economic situation warrants enhanced government expenditure.
o Both monetisation and Open market Operations (OMOs) involve expansion of money supply which can potentially stoke inflation.
o RBI has the mandate to maintain annual inflation at 4 per cent until March 31, 2021 with an upper tolerance of 6 per cent and a lower tolerance of 2 per cent.
HOW TO FUND THE HIGH FISCAL DEFICIT ?
- There are not adequate resources to support a fiscal deficit of nearly 14% of GDP.
- All this will therefore require substantial support from the RBI which will have to take on itself, either directly or indirectly, a part of the central government debt
- In the direct mode, the RBI takes on the debt directly from government at an agreed rate.
- In indirect mode the RBI would operate only in the secondary market through the OMO (open market operations) route. OMOs involve the sale and purchase of government securities to and from the secondary market by the RBI to adjust the rupee liquidity conditions
FISCAL DEFICIT :
- It is the difference between the government’s total expenditure and its total receipts excluding borrowing
- Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)
- Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad.
- Net borrowing at home includes that directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR).
THE GDP DEFLATOR :
- It is also called implicit price deflator, and is a measure of inflation.
- It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year.
- This ratio helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output.
- The deflator covers the entire range of goods and services produced in the economy compared to the limited commodity baskets for the wholesale or consumer price indices.
- It is seen as a more comprehensive measure of inflation.
- GDP deflator is available only on a quarterly basis along with GDP estimates, whereas CPI and WPI data are released every month.
REAL VS NOMINAL GDP :
- GDP price deflator measures the difference between real GDP and nominal GDP.
- Nominal GDP doesn’t include inflation, while the real GDP includes inflation.
- Therefore nominal GDP is more often higher than real GDP in an expanding economy.
- The formula to find the GDP price deflator:
o GDP price deflator = (nominal GDP ÷ real GDP) x 100
The economic situation warrants enhanced government expenditure; the policy challenge is to minimise the growth fall