The Many Benefits Of An Eco Tax

Context: Environmental fiscal reforms will reduce pollution and generate resources for financing the health sector.

Types of Environmental Regulation: While India’s environmental regulation is based on command and control approach, it may take different other forms like:

• Economic planning/urban planning;
• Environmental tax (eco tax)/subsidies.
• Cap and trade.

Challenges in funding the pandemic:

• Sustaining fiscal discipline: The fiscal deficit for FY 2020-­21 (revised estimates) is projected to be 9.5% of the GDP; for 2021-­22, it is pegged at 6.8%.
• Huge out-of-pocket expenditure: According to WHO data, 17.33% of the population in India (12.67% globally) spent more than 10% of their income on health (higher in rural areas).
  • 3.9% of the population in India made more than 25% of out-of-pocket payments on health, with 4.34% in rural areas.
• Need for public spending: The Economic Survey of India 2019­-20 has outlined that an increase in public spending from 1% to 2.5­3% of GDP, as envisaged in the National Health Policy of 2017, can decrease out-­of-­pocket expenditure from 65% to 30% of overall health­ care expenses.

Eco-Tax as an alternative source of funding: On the analysis of the above challenges, there is a need for alternative sources of funding. Fiscal reforms for managing the environment are important, and India has great potential for revenue generation in this aspect.

• Fixing the Eco-Tax rate with a marginal social cost: Arising from the negative externalities associated with the production, consumption or disposal of goods and services.
  • This requires an evaluation of the damage to the environment based on scientific assessments, including adverse impacts on the health of people and climate.
• Eliminating existing subsidies and taxes: That has a harmful impact on the environment and restructuring them In an environmentally supportive manner.
• Initiating new environmental taxes: Can be designed either as revenue neutral or revenue augmenting.
  • In case of revenue augmenting, the additional revenue can either be targeted towards the provision of environmental public goods (to poor) or directed towards the overall revenue pool.
• Targeting of the eco-tax: Eco taxes can target three main areas:
  1. One, differential taxation on vehicles in the transport sector purely oriented towards fuel efficiency and GPS-­based congestion charges.
  2. Two, in the energy sector by taxing fuels which feed into energy generation.
  3. Three, waste generation and use of natural resources.
• Integrate environmental tax­es in the Goods and Service Tax framework.
• Benefits:
  1. Fiscal: Can mobilise revenues to finance basic public services, reduce other distorting taxes such as fiscal dividend, help internalise the externalities and funds R&D.
  2. Environmental.
  3. Poverty Reduction.
• Debunking the negative impact on economy and prices: It is often believed that environmental costs would lead to a rise in prices and high cost of compliance, leading to ‘no-growth economies’
  • However, the European experience shows that most of the taxes also generate substantial revenue, and there is a negligible impact on growth.

Conclusion: This is the right time for India to adopt environmental fiscal reforms as they will reduce environ­ mental pollution and also generate resources for financing the health sector.