7 PM | What a carbon tax can and can’t achieve against climate change | 16th October, 2019

Context: Carbon Tax and the recent report by IMF.

More in news:

  • IMF in a recent report says, “The world needs a massive carbon tax in just 10 years to limit climate change”.
  • The international organization suggests a cost of $75 per ton by 2030.

Carbon Tax:

A carbon tax is a fee imposed on the burning of carbon-based fuels (coal, oil, gas). In other words, carbon tax is the core policy for reducing and eventually eliminating the use of fossil fuels whose combustion is destabilizing and destroying our climate.

A carbon tax is a way or the only way, to have users of carbon fuels pay for the climate damage caused by releasing carbon dioxide into the atmosphere. If set high enough, it becomes a powerful monetary disincentive that motivates switches to clean energy across the economy, simply by making it more economically rewarding to move to non-carbon fuels and energy efficiency.

Problem in calculating Carbon tax: Economists working on climate change have had to grapple with several technical issues to estimate the social cost of carbon.

  • One way is selecting the rate at which future costs are to be discounted to arrive at their monetary value today.
  • Another is to think of climate change policy in terms of tail risks rather than averages, or extreme events that have relatively low probability but whose impact could be catastrophic. 

Profound uncertainty about the impact of climate change means that estimates of the social cost of carbon would be equally uncertain; which can be seen in two of the most influential estimates:

  • Nicholas Stern of the London School of Economics estimated it at $85 per tonne of carbon.
  • William Nordhaus of Yale University came up with a much lower estimate of $8 per tonne. 

IMF Policy Paper: Fiscal Policies for Paris Climate Strategies – From Principle to Practice

  • The world needs a massive carbon tax in just 10 years to limit climate change.
  • The international organization suggests a cost of $75 per ton by 2030.
  • The global average carbon price is $2 a ton — a small fraction of the estimated $75 a ton price that is estimated to be consistent with a 2 C warming target.
  • Increasing the price of carbon is the most efficient and powerful method of combating global warming and reducing air pollution.
  • The IMF team argues that such a Pigouvian tax will help limit global warming to 2 degrees Celsius above pre-industrial levels, as embedded in the 2015 global climate change agreement in Paris.
  • Need of higher prices: Global temperatures are projected to rise by roughly 4 C above preindustrial levels by 2100. The 2015 Paris climate accord aims to limit warming to 2 C, with a long shot goal of 1.5 C. Most countries are not on track to achieve those targets, and the U.S. plans to formally withdraw from the Paris agreement in 2020.  
A Pigovian (Pigouvian) tax is a fee which is assessed against private individuals or businesses for engaging in activities that create adverse side effects. Adverse side effects are those costs which are not included as a part of the product’s market price. The Pigovian tax is meant to discourage activities that impose a net cost of production onto third parties and society as a whole.     

The price impact of a carbon tax of $75 per tonne of carbon consumed in India: The IMF estimates that a tax of this magnitude will increase the price of

  • Coal by 230%
  • Natural gas by 25%
  • Electricity by 83% and
  • Petrol by 13%.

Problems with the global carbon tax:

  • It will penalize incremental carbon emissions rather those that have already been spewed into the atmosphere since the Industrial Revolution.
  • A homogenous global carbon tax will, in effect, impose costs on developing countries rather than those that have been responsible for most of the existing stock of pollution.
  • Taxes are part of national social contracts that emerge out of very specific conditions that cannot necessarily be replicated on a global scale.


The idea of a carbon tax in itself is a good one. It does its work thorough the price system, rather than rationing quantities through instruments such as carbon credits. However, the underlying principle should be of Common but Differentiated Responsibilities and Respective Capabilities that has been recognized by the United Nations Framework Convention on Climate Change.

India should be part of the global alliance to fight the climate change, but it also needs to reiterate that it is not responsible for what has been pumped into the atmosphere over the past three centuries. Its average citizen consumes too little energy, and that the developed world needs to help finance its transition to cleaner energy.

Source: https://www.livemint.com/opinion/columns/opinion-what-a-carbon-tax-can-and-can-t-achieve-against-climate-change-11571163318243.html

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