Fiscal instruments for environment and climate change: experience from Indian states
Greenhouse gases (GHGs) and other pollutants are negative externalities imposing an external cost on the entire society and not just on the individuals who consume a certain product. Though India does not have an obligation to reduce the emissions of GHGs, it is important for Indian States to adopt a sustainable growth path. The emissions of GHGs and other pollutants, if left to free market forces, are unlikely to be reduced on their own. Hence, Government intervention is needed to internalize the externalities in production and consumption decisions of firms/individuals. The Government can achieve this in a number of ways. One of them is to impose a per unit tax/charge on output of the firm generating the negative externality. This tax/charge referred to as Pigouvian fee is levied equal to that of the external cost in order to internalise the externality. If the regulator can succeed in levying optimal taxes/charges, less polluting alternatives are encouraged, and can raise significant revenues, which can subsequently be used to fund or subsidize green technologies. Several Indian States have already levied such taxes on different polluting substances and activities. However, little is known about their operational mechanics and performance to date. This policy brief series compiles experiences from some of these States that have implemented fiscal instruments to address environment and climate issues.