ECOLOGICAL TAX REFORM

ECOLOGICAL TAX REFORM

Subject: Governance

Context: The COVID-19 pandemic has also forced countries all over the world to rethink climate change and the need for preservation of the environment. The fiscal reforms for managing the environment are important, and India has great potential for revenue generation in this aspect.

Concept:

Ecological Tax Reform

• The environmental tax reforms generally involve three complementary activities:
• Eliminating existing subsidies and taxes that have a harmful impact on the environment;
• Restructuring existing taxes in an environmentally supportive manner; and
• Initiating new environmental taxes
• The taxes can be designed either as revenue neutral or revenue augmenting.
• The additional revenue can either be targeted towards the provision of environmental public goods or directed towards the overall revenue pool.

In India, eco taxes can target three main areas:

• Differential taxation on vehicles in the transport sector purely oriented towards fuel efficiency and GPS based congestion charges;
• In the energy sector by taxing fuels which feed into energy generation; and
• Waste generation and use of natural resources

Fixation of Eco Tax Rate

• The success of an ecological tax in India would depend on its architecture, that is, how well it is planned and designed.
• The eco tax rate ought to be equal to the marginal social cost arising from the negative externalities associated with the production, consumption or disposal of goods and services.
• It requires an evaluation of the damage to the environment based on scientific assessments which would include the adverse impacts on the health of people, climate change, etc.