Carbon Tax: Global Insights, Legal Challenges & Future Roadmap

INTRODUCTION TO CARBON TAX

1. SIGNIFICANCE OF GLOBAL CARBON TAXES

A carbon tax is a fee levied on the carbon content of fossil fuels. The objective is to reduce greenhouse gas emissions. It is a form of carbon pricing designed to encourage businesses and consumers to switch to low-carbon alternatives. Around the world, countries such as Sweden, Canada, and the United Kingdom have enacted carbon taxes to reduce greenhouse gas emissions. This is in line with international climate agreements such as the Paris Agreement.[1]

2. SOURCES AND EMISSION LEVELS

The primary cause of climate change is thought to be greenhouse gas (GHG) emissions, which are mostly made up of six gases: water vapour (H2O), carbon dioxide (CO2), nitrous oxide (N2O), methane (CH4), sulphur hexafluoride (SF6), and halocarbons (PFCs & HCFCs).[2]

The primary sources of CO2 are the burning of biomass and fossil fuels. Deforestation, land clearance for agriculture, and soil degradation are other activities that raise the atmospheric concentration of CO2. Methane is mostly produced by domesticated animals (such pigs and dairy cows) as well as by mining, gas flaring, and rice cultivation.

The primary sources of nitrous oxide are the burning of fossil fuels, the handling of animal dung and agricultural land, and the manufacturing of nitric acid and fertilisers.

3. INDIAS ENERGY CARBON EMISSION PROFILES

India is one of the 175 countries that have accepted the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement. India has committed to adopting a cleaner, more climate-friendly lifestyle and to spreading a healthy, sustainable way of living. More particular, it committed in its Nationally Determined Contribution (NDC) to create an additional carbon sink of 2.5 to 3 billion tonnes of CO2 equivalent by 2030, achieve about 40 percent cumulative installed capacity of electric power from non-fossil fuel based energy resources by 2030, and reduce the emissions intensity of its GDP by 33 to 35 percent from 2005 level by 2030.[3]

India has also implemented fiscal policies aimed at lowering carbon emissions. Coal is subject to a 400 INR per tonne cess.
Furthermore, the decisions to set the market prices for petrol and diesel, to remove subsidies (the LPG subsidy was removed for customers earning more than INR 10 lakh in taxable income), and to rationalise the kerosene quota under the Public Distribution System (PDS) over time are all consistent with the goal of lowering carbon emissions.

B. COMPARISON OF INDIA’S CARBON TAX WITH OTHER COUNTRIES

Case Studies: Carbon Pricing Systems in the EU, Canada, and Sweden

1.Sweden: One of the first and most effective examples of carbon pricing was implemented there in 1991 when the country imposed a carbon tax. The tax is levied on fossil fuels that are used to generate power, heat, and transportation; the tax rates vary depending on the fuel type and sector. Sweden had the highest carbon price in the world as of 2020, at over €114 per ton of CO2. Sweden has reduced its emissions dramatically while sustaining economic development, in spite of the hefty tax.[4] Because of the tax’s promotion of energy efficiency and greener technology, emissions from transportation and heating have mainly decreased.

India should learn from this:

Adoption: Sweden’s performance demonstrates that a carbon price can coexist with economic expansion provided it is structured to encourage the use of cleaner alternatives and progressively wean off of fossil fuels. India may learn from Sweden’s strategy of taxing high-carbon businesses more heavily while offering incentives for clean technology.

Avoidance: Because of administrative capacity limitations, it could be difficult to reproduce the Swedish system’s complexity, which includes several exclusions and variable rates, in India.

 2. Canada: The country launched its national carbon pricing scheme in 2019, which consists of two mechanisms: an output-based pricing scheme (cap-and-trade) for industries that emit more than 50,000 tons of CO2 annually, and a fuel charge (carbon tax). In cases when province systems fall short of federal requirements, the federal carbon price is imposed. By 2030, the price per tonne will have increased from CAD 20 to CAD 170. Crucially, the Canadian model incorporates household subsidies to offset the regressive effects of the tax, particularly in low-income areas.

 India should learn from this:

Adoption: To address socioeconomic gaps, Canada’s approach highlights the value of a flexible, tiered system that combines carbon pricing with rebates. India could modify this strategy by providing subsidies or refunds to rural areas or lower-income households.

 Avoidance: India’s complicated political system and current fossil fuel-favoring subsidy regimes may make it difficult to implement a federal carbon pricing scheme similar to that of Canada.

 3. European Union (EU): The EU has adopted the Emissions Trading System (ETS), a cap-and-trade mechanism that includes electricity generation, manufacturing industries, and aviation. A maximum amount of emissions is defined by the system, and businesses can exchange emission permits on the carbon market. Although it varies according to market demand, the cost of carbon has generally gone up over time. The EU system is the biggest global carbon market and is used as a template for collective carbon pricing in other legal frameworks.

India should learn from this:

 Adoption: A market-driven system where supply and demand determine carbon pricing is possible, as demonstrated by the ETS. To establish a comparable market for emissions, India can investigate regional carbon markets within South Asia or among industrial sectors.

 Avoidance: When building its system, India must take into account the difficulties that the EU’s carbon market has encountered, such as price instability and carbon leakage. Stable pricing floors or ceilings could stop market gyrations and guarantee more predictable results.

 4. India’s Involvement in Talks About Carbon Pricing and Global Climate Initiatives

India actively participates in international climate initiatives, especially the Paris Agreement and the United Nations Framework Convention on Climate Change (UNFCCC). On the other hand, India does not currently have a legally recognized national carbon price or emissions trading scheme. Rather, it has prioritized growing the capacity for renewable energy sources and imposing sector-specific levies like the coal cess. India’s strategy has been heavily influenced by its commitments to combating climate change and its developmental objectives.

India has argued in favor of climate justice in international fora by highlighting the shared but differentiated responsibilities (CBDR) theory, which holds that industrialized countries ought to shoulder a larger portion of the burden because of their previous emissions. In keeping with international efforts to stop carbon leakage and maintain the competitiveness of home sectors, India is likewise looking into adjusting its carbon borders.

C. THE DIFFICULTIES OF INDIA’S CARBON TAX IMPLEMENTATION

1. Fossil fuel industry lobbying and political challenges

 The fossil fuel industry is quite powerful in India because the country’s economy is mostly dependent on coal, oil, and gas. These industries frequently oppose attempts to implement carbon taxes or raise the coal cess because they worry about the consequences on costs and competitiveness. For instance, industrial entities successfully contested some environmental rules in Jindal Stainless Ltd. v. State of Haryana (2006)[5] on the grounds that they imposed an undue hardship, demonstrating the opposition that industries have to planned environmental policies.

Fossil fuel marketers contend that a carbon tax may result in decreased energy security, inflation, and job losses because coal is still India’s main source of electricity. State governments can also provide political difficulties, especially those whose economies primarily depend on the extraction of coal and the generation of energy.

2. Obstacles in the Administrative and Infrastructure

 India’s currently undeveloped infrastructure for tracking, reporting, and verifying emissions across sectors would need to be strengthened in order to effectively administer a carbon tax. India lacks adequate mechanisms for measuring carbon emissions at the micro-level, especially for small and medium-sized firms (SMEs), in contrast to developed countries with robust regulatory frameworks.

The Supreme Court underlined the need for improved environmental governance in Indian Council for Enviro-Legal Action v. Union of India (1996), [6]arguing that insufficient administrative capabilities have historically impeded the enforcement of environmental regulations. This highlights the challenges that India may encounter in implementing a carbon tax system that is fair, open, and enforceable

3. The Public’s View and Knowledge of Carbon Taxes

India has a low level of public understanding and acceptance of carbon pricing. The average customer would probably see a carbon price as an extra financial hardship, especially in rural areas where energy access is still difficult to come by. As demonstrated in the 2004 case of Bharat Petroleum Corp. Ltd. v. Union of India[7], when rises in gasoline prices were greeted with court challenges and significant public outcry, past experiences with fuel price spikes have frequently resulted in protests.

Subsidies for fossil fuels, which maintain artificially low energy costs, have historically influenced India’s energy policy. Because of this, any policy that raises the price of energy is likely to encounter opposition unless it is supported by public awareness campaigns and compensatory measures like direct cash transfers, which is how Canada has done it.

4. Case Law Endorsing Difficulties in India

 Several court rulings have addressed the difficulties in enforcing environmental laws and levies in India:

Maharashtra Electricity Regulatory Commission v. Tata Power Company Ltd. (2009): [8]This case highlighted the difficulties in factoring environmental costs into energy price and dealt with the legislative framework for electricity pricing. Similar changes to power rates would be necessary for a carbon tax, which would result in more legal challenges from both the business community and consumers.

M.C. Mehta v. Union of India (2001)[9]: This case demonstrated the Supreme Court’s readiness to enforce environmental laws by upholding strict emissions rules for industries near the Taj Mahal. The case did, however, also demonstrate the strong opposition from sectors that would have to bear the brunt of the increased expenses.

Although enacting a carbon price has the potential to significantly reduce emissions and encourage the use of cleaner technology, India will encounter particular difficulties in doing so. Taking into consideration the experiences of nations such as Sweden, Canada, and the EU, India has to create a carbon pricing mechanism that takes into consideration its developmental aspirations, tackles socio-economic inequality, and effectively handles political opposition. Legal examples demonstrate the possibility of imposing these levies as well as the difficulties presented by opposition from the business community and public opinion. These elements must be carefully taken into account, together with strong administrative frameworks and public involvement, for India’s carbon tax regime to be successful.

D. FUTURE PROSPECTS OF CARBON TAX IN INDIA

Possible Adjustments to the Coal Cess and Growth into New Areas Since 2010, India has imposed a coal cess, which is currently referred to as the Goods and Services Tax Compensation Cess. By 2016, it had risen from its initial setting of ₹50 per tonne of coal to ₹400 per tonne. The proceeds from this cess have been assigned to the National Clean Energy Fund (NCEF) for renewable energy projects, however its overall architecture can be changed to serve as a full-fledged carbon tax.

Possible Changes

1.The coal cess is primarily sector-specific, although there is room for change to include other fossil fuels including natural gas and petroleum. This may lead to more thorough carbon pricing in the chemical, steel, and cement industries.

2. Since coal accounts for more than 70% of India’s electricity production, progressively raising the cost on coal can encourage the use of renewable energy sources. This gradual approach will facilitate the switch to cleaner sources while allowing industries to adapt.

3. Any revision to the carbon tax framework should include procedures that incentivise renewable energy use. A tiered structure, where reduced taxes apply to sectors with energy-efficient technologies or renewable energy sources, could hasten the energy transition.

4. Reforms to the carbon tax might give priority to using the money raised for clean energy initiatives, public transport, and assistance for companies that are at risk of failing during the shift, including areas that rely heavily on coal.

Possibilities for International Trade Impacts and Carbon Border Adjustments

In the context of global commerce, carbon border adjustment mechanisms (CBAMs) are becoming increasingly significant instruments, especially within the European Union (EU). The imposition of carbon pricing presents India with both opportunities and difficulties in global commerce.

India, a supplier of goods with high emissions, such as steel and cement, may pay more for trade with nations like the EU who have CBAMs in place. The “carbon leakage”—the movement of industries with high emissions to nations with loose regulations—can be stopped by a well-crafted carbon price.

Should India impose its own carbon price, it may be able to argue—by demonstrating its commitment to climate goals—for exemptions from CBAMs, maintaining the competitiveness of Indian goods in international markets.

3. International Cooperation: To standardise norms and lower trade obstacles, India might look into bilateral or multilateral agreements on carbon pricing systems with trading partners, particularly in areas with advanced carbon pricing policies.

India’s Nationally Determined Contributions (NDCs) and the Carbon Tax India’s Nationally Determined Contributions (NDCs) specify important goals under the Paris Agreement, such as reducing the emissions intensity of its GDP by 33-35% by 2030 (relative to 2005 levels) and achieving 50% cumulative electric power installed capacity from non-fossil sources by 2030.

 Contributions to the Carbon Tax:

Internalising the social cost of carbon would be facilitated by a carbon tax, which would lower emissions intensity. Increased levies on industries with high emissions levels may improve NDC compliance.

The NDC aim of increasing non-fossil fuel energy can be achieved by taxing carbon-intensive fuels and using the proceeds to fund renewable energy projects or subsidies.

Renewable Purchase Obligations (RPOs) and the Perform, Achieve and Trade (PAT) program are two existing methods in India. By strengthening and uniting these measures, a carbon price can be used to create a market-driven strategy for lowering emissions.

 E. HOW INDIA’S CLIMATE ACTION UNDER THE PARIS AGREEMENT CORRELATES WITH THE CARBON TAX

India’s Paris Agreement commitments concentrate around climate resilience, emissions reduction, and energy transition.

Policy instruments that are essential to achieving these goals include carbon taxes:

The polluter-pays theory, which is consistent with the Paris Agreement’s focus on equity and economic viability in lowering global emissions, is directly correlated with a carbon tax.

By enacting a carbon price, India may be able to show that it is a major participant in climate diplomacy and that it is committed to the worldwide battle against climate change.

F. GREEN FINANCING AND THE ROLE OF INTERNATIONAL AID IN SUPPORTING CARBON TAX

Policies Making the shift to a low-carbon economy will cost a lot of money. India’s carbon tax policy can receive support from green financing methods such as climate funds, international aid, and private investments.

To assist in the implementation of carbon taxes and the switch to renewable energy, India can make use of international climate finance instruments such as the Green Climate Fund (GCF). Under the Paris Agreement, developing nations are entitled to financial and technical support; India can use these resources to lessen the impact on sectors that are more susceptible.

India can promote PPPs in areas like sustainable agriculture, renewable energy, and the development of green infrastructure to finance climate adaptation and mitigation initiatives while making sure that the proceeds from the carbon price are used wisely.

Foreign aid can be utilised to strengthen capacities, especially in developing nations where the implementation of a carbon tax may encounter opposition. Cleaner technology adoption and industry modernisation can be aided by this support.

CASE LAWS WHEN TALKING ABOUT CARBON TAXES, A NUMBER OF  INDIAN COURT RULINGS AND CASES ARE PERTINENT:

1.M.C. Mehta v. Union of India (1986):[10] The “polluter-pays principle,” which is at the heart of the reasoning behind carbon taxes, was highlighted in this seminal case on environmental protection in India. The Supreme Court emphasised that the party accountable for pollution should pay the associated costs.

2. In the 2009 case of Tirupur Dyeing Factory Owners Association v. Noyyal River Ayacutdars Protection Association[11], the court upheld the polluter-pays doctrine and made dyeing industries liable for any contamination of the water supply. The legal foundation for the implementation of a carbon tax as a means of controlling and pricing emissions is strengthened by this decision.

These cases establish a legal basis for carbon taxation by reinforcing environmental responsibility and the polluter-pays principle.

[1] Paris Agreement, United Nations Treaty Series, 2015.

[2] Intergovernmental Panel on Climate Change (IPCC), Sixth Assessment Report (2021)

[3] Government of India, “India’s Intended Nationally Determined Contribution: Working Towards Climate Justice”, UNFCCC, 2015.

[4] World Bank, “Carbon Pricing Dashboard”, 2024.

[5] Jindal Stainless Ltd. v. State of Haryana, (2006) 7 S.C.C. 241.

[6] Enviro-Legal Action v. Union of India, (1996) 3 S.C.C. 212.

[7] Bharat Petroleum Corp. Ltd. v. Union of India, (1997) 6 S.C.C. 157

[8] Maharashtra Elec. Regulatory Comm’n v. Tata Power Co. Ltd., (2009) 16 S.C.C. 659

[9] M.C. Mehta v. Union of India, (2001) 9 S.C.C. 520

[10] M.C. Mehta v. Union of India, (1987) 1 S.C.C. 395

[11] Tirupur Dyeing Factory Owners Ass’n v. Noyyal River Ayacutdars Prot. Ass’n, (2009) 9 S.C.C. 737 (India).