India has recently updated its Nationally Determined Contributions (NDCs), a set of long-term goals to cut carbon emissions under the Paris Agreement.

According to the updated NDCs, India is committed to bringing down the emissions intensity of its GDP by 45 per cent by 2030 and achieving 50 per cent electricity from non-fossil fuel-based energy resources by 2030.

These commitments aside, the country’s growing economy will continue to demand higher levels of fossil fuels, resulting in a corresponding rise in GHG emissions.

According to published data, India’s energy and industry-related carbon emissions are projected to double by 2050. Therefore, there is a need to have stringent policies and a regulatory framework that has a fair mix of carrot-and-stick approaches that incentivise green investments or a switch to clean energy and penalises defaulters.

Parallelly, India could consider cutting down subsidies for the fossil fuel industry. Fossil fuel subsidies were nine times higher than renewable energy subsidies in FY20-21. In addition, newer avenues, such as carbon trading, if adapted to suit India’s unique framework, can be a valuable tool in the arsenal to mitigate and adapt to climate change.

Governments globally are deploying a range of “carrot and stick” strategies — from green taxes on harmful environmental activities to tax rebates for meeting the new environmental standards. Denmark, for instance, has approved a new corporate carbon tax, which is reportedly the highest in Europe. On the other hand, China has incentivised the three major bus operators to transition to electric vehicles through an annual subsidy of US$75,500 for each vehicle.

India’s journey

The Centre and State governments have been offering incentives to EV manufacturers and tax exemptions to EV buyers. The Centre has issued a Production Linked Incentive (PLI) scheme that sanctions $3.5 billion for manufacturing EVs and components. This supply-side initiative is over and above the PLI scheme of $2.6 billion that was already approved for advanced chemistry cell battery manufacturing.

Adding these to the FAME-II customer incentives on EVs, the Centre is offering substantial benefits across the market. States such as Assam, Andhra Pradesh, Haryana, Goa, Gujarat, Karnataka, Orissa, Madhya Pradesh, Telangana, and Tamil Nadu also offer subsidies across the EV supply chain.

In addition, some States have implemented strategies that are more punitive in nature. For instance, the Goa government has been levying a ‘Green Cess’ on products and substances causing pollution since 2013. Similarly, the Uttarakhand government had initiated an ‘Eco Tax’ system on vehicles entering the hill station of Mussoorie.

State governments will have more options once the Energy Conservation (Amendment) Bill, 2022 is passed. The Bill empowers States to change building by-laws so that real estate development takes steps to be more energy efficient and sustainable. While various measures are being taken in different sectors, to achieve deep impact, there is a need to build a comprehensive regulatory framework that includes a balanced approach to corporate participation in meeting the country’s climate targets.

For example, the EU taxonomy classifies economically viable environmental practices. Such a classification provides clarity to businesses as well as policymakers on which economic activities are considered environmentally sustainable and which are not. Having clarity has two direct advantages.

One, it allows investors and businesses to adopt appropriate and genuine sustainability strategies. Two, it synchronises policymakers and businesses, thus avoiding regulatory friction, greenwashing, market fragmentation and misdirected capital investments.

Policy measures

The climate change challenge can be addressed through two policy alternatives — market-based instruments and regulatory measures. While the regulatory measures focus on setting limits or standards for emissions, the market-based instruments include subsidies, penalties, and taxes.

The market-based instruments will nudge businesses to align investments with climate goals while encouraging innovation to develop newer technologies that help reduce emissions cost-effectively. Taxes can also raise additional revenues that can be utilised toward environmental protection objectives. Learning from international experience, it is time to consider bringing in carbon taxes that impose a burden based on polluters’ carbon emissions. Implemented in an appropriate manner, the carbon tax would complement the existing fiscal and non-fiscal measures. It would also help Indian exporters, who may be subject to the EU Carbon Border Adjustment Mechanism (CBAM), explore obtaining credits in EU to remain competitive.

On the support side, the government should extend a concessional tax rate to companies investing in green technologies and allow full deduction toward purchasing green assets. China, for instance, provides free land, concessional power and low-interest funding to companies developing solar energy. Malaysia, Taiwan and Vietnam have become solar manufacturing hubs on government incentives.

Secondly, the regulators must consider lowering the GST rate on goods and services in the renewable sector to align them with the country’s ambitious green energy goals. For instance, while the GST on EVs and EV chargers is 5 per cent, the levy of 18 per cent on EV charging services is a dampener to the mass adoption of EVs. There is also ambiguity about the Services Accounting Code (SAC) classification in GST that needs to be clarified by the GST Council.

In addition to developing a comprehensive as well as balanced green tax framework, steps should be taken to develop a carbon trading market in India. The Energy Conservation (Amendment) Bill, 2022, is a step in this direction as it proposes creating a domestic carbon credit trading market and issuance of Carbon Trade Certificates.

The window is closing rapidly against climate change. Market-based instruments alone will not solve the problem. The government can take a big step by developing a green tax framework.

The writer is Partner and Energy Tax Leader, EY India. Views expressed are personal