Carbon tax vs cheap talk

Nov 25 2009, 21:10 IST
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SummaryRich countries seem to have abandoned the idea that the upcoming Copenhagen conference will make much progress on global warming.

Rich countries seem to have abandoned the idea that the upcoming Copenhagen conference will make much progress on global warming. The UN General Secretary’s office is trying to dampen expectations. However, this should not dampen India’s stance at the conference. Copenhagen offers India a chance to make an important statement on the international scene. With only self-interest in mind and with enough resolve, the country can also set itself up for forward-looking, efficient industrial growth and make it easier to maintain fiscal balance.

India should tax carbon at rates that will embarrass the rich world. We can bargain for deals compensating for rich countries’ previous profligacy later. Unilateral action on taxes will not only help India claim the moral high ground—a good place to bargain—but also help fix some of our own problems.

Carbon taxes are easily assessed on fixed location industrial activities and on fuel sources for automobiles, heating and cooking fuels. This is a good place to start. Actually, implementing taxes that are the true instruments for pollution reduction rather than declaring ‘targets’ for emission control would be another way of leading the rich countries to good behaviour. Let’s face it: ‘targets’ are empty promises. Concrete policy moves show true commitment. They can also be adapted as their effects are monitored and judged. Easily administered taxes should be announced and acted on as quickly as possible so that there is no accusation of ‘cheap talk’ on India’s part as it deals with the rest of the world.

The country’s self-interest in executing such a policy goes beyond public relations. Deficits are rising. The introduction of sweeping new tax reforms, while long overdue, will be longer in coming. India’s ‘tax resiliency’—the rate at which revenues keep up with economic growth—is distressingly low and lags far behind expenditure needs for infrastructure growth, which will increase with a low industrial base. A tax that reduces pollution in our cities, cuts carbon worldwide and raises potentially large sums of tax revenue in the short-run should be appealing indeed. It only makes sense to tax ‘bad’ things like pollution emissions before taxing ‘good’ things like wages, income or wealth.

Won’t extra taxes on an industrial sector that is already too small for a country of India’s income slow its growth even further? By themselves, of course. However, it’s not expensive energy that’s held back the sector. Manufacturing firms are hamstrung by a myriad of constraints that

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