As Australia Repeals Carbon Tax, India Doubles Down on Coal

July 24, 2014

Just as Australia repealed its debated carbon tax, India is intensifying its own taxation of non-renewable energy by doubling its coal tax from $0.83 to $1.67 per metric ton.

India estimates that the tax increase will generate $1.2 billion of additional revenues for its National Clean Energy Fund, which pays for renewable energy projects and environmental cleanup. Notably most of the funds will be devoted to meeting India’s goal of achieving 20,000MW of solar energy by 2022.

India also plans to invest in wind energy, new transmission corridors to distribute the renewable energy, clean energy research and a Ganges River cleanup project.

How is a Coal Tax Different from a Carbon Tax?

Compared to Australia’s attempt, India’s tax on coal is an even further step backwards. Carbon taxes are by definition distortionary. By design they manipulate market incentives to reduce the demand for products that produce carbon emissions. However, some distortions are worse than others.

Theoretically, the best carbon tax decreases CO2 emissions to an acceptable level with the least cost to the economy.

Unlike a carbon tax, which targets the actual negative externality, a coal tax only targets a single factor in that externality’s production. So, instead of letting the market decide the most efficient way to reduce CO2 emissions, India has made that decision for the market by attempting to drive it away from coal.

Then, by transferring coal tax revenues to the National Clean Energy Fund, India bypasses the market again by selecting solar-power as the primary alternative energy solution.

A tax on coal will decrease use of coal, but it does not change the price of emitting greenhouse gasses when producers convert the coal (or any other fossil fuel) into energy.

Despite the political failings of Australia’s tax, they did reduce their carbon emissions by 0.8 percent overall. India’s coal tax seems to be nothing more than a cash grab for politically favored projects.

Is There a Good Carbon Tax?

As carbon taxes shift people away from fossil fuels and carbon emission, the economic distortions involve more of the economy than meets the eye. Industries with low carbon footprints like much of the service industry would gain a preferential tax treatment. Meanwhile, industries with large carbon footprints would be heavily taxed, shifting the economy further away from manufacturing and transportation.

Carbon tax proposals often use the new revenue to pay for lower tax rates. The tax that Australia recently repealed used some of the new revenue to lower tax burdens on low income energy consumers. A similar carbon tax proposal in Massachusetts would have implemented a series of credits and deductions that would further complicate the tax code. But even if general rate cuts are accompanied by tax code simplification, carbon taxes face the same problem as all excise taxes.

If the tax is high enough to reduce carbon emissions it will simultaneously reduce the tax base on which it depends. As we have seen with cigarette taxes, revenues diminish over time. In an attempt to maintain stable revenue, excise taxes devolve in to a cycle of narrowing bases and increasing rates.

It is also important to remember that the unseen burden of raising the price of carbon or coal will be shouldered most directly by the world’s poorest citizens. Cheap energy is essential to raise people out of poverty and small changes in the price will leave those with little income with few options.

As countries around the world balance the risks of climate change and the benefits of economic growth, it is important to understand that some taxes are better than others. As governments begin to implement policies to reduce carbon emissions, the best policies will be those that damage the economy the least.

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