CARBON TAX (Syllabus: GS Paper 3 – Environment)

Context: Commerce and Industry Minister of India recently said that the government will address the issue of the European Union’s plan to impose carbon tax on some imports. It is mainly known as carbon border adjustment mechanism (CBAM).

Carbon tax:

• Meaning: It is a tax levied on the carbon emissions required to produce goods and services.

oCarbon taxes are intended to make visible the "hidden" social costs of carbon emissions, which are otherwise felt only in indirect ways like more severe weather events. 

oIt is a form of ‘pollution tax’.

• Purpose: To reduce greenhouse gas emissions by increasing prices of the fossil fuels that emit them when burned. 
• History and Rationale: David Gordon Wilson first proposed this type of tax in 1973.
• Design: A carbon tax involves two primary factors: the level of the tax, and the use of the revenue.

Carbon leakage:

• About: It happens when the regulation of emissions in one country/sector pushes those emissions to other places that with less regulation.

oLeakage effects can be both negative (i.e., increasing the effectiveness of reducing overall emissions) and positive (reducing the effectiveness of reducing overall emissions).

oNegative leakages, which are desirable, can be referred to as "spill-over".