Fiscal Control of Pollution: Application of Ecotaxes in India (India Studies in Business and Economics) 9811630364, 9789811630361

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India Studies in Business and Economics

Rajat Verma

Fiscal Control of Pollution Application of Ecotaxes in India

India Studies in Business and Economics

The Indian economy is considered to be one of the fastest growing economies of the world with India amongst the most important G-20 economies. Ever since the Indian economy made its presence felt on the global platform, the research community is now even more interested in studying and analyzing what India has to offer. This series aims to bring forth the latest studies and research about India from the areas of economics, business, and management science. The titles featured in this series will present rigorous empirical research, often accompanied by policy recommendations, evoke and evaluate various aspects of the economy and the business and management landscape in India, with a special focus on India’s relationship with the world in terms of business and trade.

More information about this series at http://www.springer.com/series/11234

Rajat Verma

Fiscal Control of Pollution Application of Ecotaxes in India

Rajat Verma School of Economics Narsee Monjee Institute of Management Studies Bengaluru, Karnataka, India

ISSN 2198-0012 ISSN 2198-0020 (electronic) India Studies in Business and Economics ISBN 978-981-16-3036-1 ISBN 978-981-16-3037-8 (eBook) https://doi.org/10.1007/978-981-16-3037-8 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Dedicated to Beloved Prabhu Jee My Parents And Chahna, My Wife

Foreword

Arresting environmental degradation even while development efforts do not get diluted remains a daunting challenge for a developing nation like India. The country has huge inadequacies in the socioeconomic infrastructure which have been stumbling blocks in the country’s economic progress. The policy options to move forward, need to be those that neither slacken the development process by stalling the environmental degradation nor completely bypass the environmental concerns; on the contrary, the country has to discern measures cautiously to balance both concerns. India’s historical and persistent reliance on ‘command and control’ measures has not fetched the desired outcome of arresting environmental degradation; the country cannot bypass mounting global pressure in protecting the ecological balance. Can the country think of alternative policy means to achieve the same without sacrificing the developmental pursuits? This is an important policy question daunting the country. This policy dilemma, presently facing the country, and the effective alternative in the form of ecotaxes is proficiently established by Dr. Rajat Verma in the present book. A well-structured book which provides a complete understanding of the need and process of switch over to an alternative and more effective means to arrest environmental degradation is what one finds in Rajat’s ‘Fiscal Control of Pollution: Application of Ecotaxes In India’. The book’s contribution is immense in dispelling the current policy myths and the hesitation involved in the policy circles. The core issue in the switch over from ‘command and control’ to eco-taxation pertains to the framing of a comprehensive definition of ecotaxes and the design of optimal rates that do not distort the economic activity. Rajat’s construction of a comprehensive definition of ecotaxes is a pioneering contribution to the Public Finance literature. The successful international experience in design and use of ecotaxes is presented with due substantiation which could serve well to motivate the policy-makers in making the switch over. Learning from successful experiments elsewhere in the globe can certainly save us the trouble of reinventing the wheel. Identification of polluting sectors and goods for potential levy of ecotaxes in all three types of pollution, i.e. air, water and land, attempted by the author is a comprehensive approach and captures all major forms of pollution. The design of ecotaxes developed in the book has significant practical utility as it is based on an understanding of polluting behaviour of sectors and interlinks between sectoral activities that generate vii

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pollution in the environment using a novel approach—environmentally Extended Social Accounting Matrix (E-SAM). The likely adverse distributional impacts that eco-taxes tend to have due to their progressive nature is being addressed by advocating recycling of the ecotax resources into the system to nullify the adverse impacts and attain double dividend. This book on ‘Fiscal Control of Pollution: Application of Ecotaxes In India’ goes a long way in filling the research gap prevailing in this field for long, especially in the Indian context. Dr Rajat Verma has reflected his scholarship in the quantitative skills through the use of E-SAM. The book’s value is substantially enhanced due to the policy insights of high contemporary relevance. I am confident that this book will be of great use to the academic community and policy-makers. K. Gayithri Professor, Center for Economic Studies and Policy, Institute for Social and Economic Change, Bangalore, India

Preface

The very fact that the existing regulatory instruments such as Command and Control policies for preserving the environment in India have proved to be inadequate and inefficient in curbing environmental degradation, suggests a strong need for exploring other instruments which can restore environment at the least cost. In this book an attempt has been made to understand the issues in design and implementation of environmental taxes which have been extensively levied in the developed countries successfully, mostly in Nordic countries for almost three decades. This study is a methodological exercise that proposes to examine the adequacy and relevance of ecotaxation in the Indian context. Further, appropriate polluting tax bases at the Union level has been explored on which a potential ecotax could be levied so as to curb environmental pollution in India. The relevance of optimal tax rates, incidence of these taxes on households, double dividend hypothesis and effect on competitiveness of the producers have also been examined. These issues are expected to help in understanding the distortions related to these taxes and therefore form integral constituents of a study with the prime objective of examining the viability of application of such fiscal instruments in the Indian context. I was made familiar with the notion of ecotaxes in the year 2011 during my final semester’s requirement of submitting a dissertation for which I had to work under the supervision of Prof. Kavita Rao at NIPFP. It was she who first asked me what I would like to work on and obviously being a final year Master’s degree student I was clueless! That is when she came to my rescue and introduced the topic of Ecotaxation, the word which then sounded Greek to me. She justified the topic to me as a blend of Environmental Economics and Public Finance disciplines which according to her fit absolutely well in my ambit as I was pursuing my Master’s from TERI University (now renamed as TERI School of Advanced Studies) and was being supervised at a public finance research institute, NIPFP. I never thought that I would finally choose this topic for my future research and pursue my Ph.D. in the topic which gave me shivers during latter years of my post-graduation days. Ecotaxes was a topic in which I finally got interested majorly because of two reasons; first, I had already dirtied my hands in a topic which will certainly make my life easy to begin with, second and more importantly, this is an area which is gravely un-researched ix

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especially so in the Indian context and so this was an opportunity which could not have been left idle. Ecotaxes as a topic of my research, to begin with, was disregarded by a few scholars as this was a topic which was yet to be unearthed, even unheard of and therefore it seemed to be a strenuous path. But it was only when I got a go ahead signal from none other than Prof. R. S. Deshpande, that I felt a lot more confident and it was at that moment I was convinced that this topic is certainly the one which I will feel comfortable with. This exploration then started in the year 2014 with some foundation already been laid in 2011. Any good research starts with a well-designed proposal. That is where I must appreciate the guidance from Prof. K. V. Raju who ensured that he teaches me the fundamentals of research writing by taking me to my school days and relating it to the readings of the NCERT books which focussed on the simple questions of Why, How, When and the Status. I surely followed his advice and it was only later I understood the importance of this exercise. Of course, there were a few alterations in my proposal thereafter but the overall essence of these four questions never changed and this gave a profound background to my research by not only introducing the topic clearly to the observers but by also clarifying the topic to me which came after searching for answers to these four questions. The wholehearted support and guidance in the thesis comes also from my supervisor Prof. K. Gayithri who certainly shaped my thesis and read through the entire work, word by word. The bi-annual seminars in the Institute for Social and Economic Change (ISEC), Bangalore ensured that I was exploring my work in a systemic manner which also ensured continuity in my research. It was these presentations which certainly helped me in curating my thesis and bringing it to a level where I can finally publish this as a book! The five years of hard work as a doctoral researcher in a topic which had to be explored from the fundamentals, gave a strong impetus for eventually publishing this entire work as a Book. The entire volume has been structured by incorporating the notion of interdisciplinarity and the nuances of ecotaxes have been examined by blending Environmental Economics with Public Finance. The need for this emanates from the objective of green taxes which is to preserve environment and the required economic tool belongs to the discipline of public finance. The discussion in this study starts with examining the existing definitions of ecotaxes in the literature and analysing their limitations. We believe that there could not have been a better starting point than this as the context of the argument must be made extremely clear. The definition which we have constructed ensures exactly this. Thereafter, this definition was used to examine the already existing taxes in India and their adequacy to be deemed as ecotaxes, as per the strict Pigouvian notion. This approach ensured that the design issues are probed in the Indian context and further by drawing experiences around the globe and especially from the Nordic countries. It is indispensible to answer the questions of base and optimal rates of ecotaxation while examining the issues with the application of ecotaxes. This has been addressed by exploring the status of environmental regulations in India from a three-fold perspective i.e. Legislative, Executive and Judiciary. Further, the Environmentally extended Social Accounting Matrix (E-SAM) framework has been utilised to validate the literature for identifying

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the polluting base for ecotaxation. The deduction of optimal rates in public finance must be explored while proposing any new tax and so also in the Pigouvian framework. This has been tested by developing an innovative theoretical framework by fundamentally differentiating between the profit and sustainable rate of profit. This theoretical model mathematically proves the pragmatic issues pertaining to arriving at these idealistic numbers (optimal rates) and hence provides a framework for their redundancy. The analysis of the concerns relating to the application of such instruments would not have been complete without understanding the impact of these taxes in a macroeconomic framework. Therefore, in this volume attempts have been made to provide methodological improvements in the existing E-SAM methodologies for computing the effects of these taxes on not only the economy but also on its integral stakeholders; consumers (rural and urban households), producers, labourers and of course environment. The impact on the households has been studied through an improvement in the Price-Vector model and that on the economy and its stake holders by advancing the methodology provided in the literature of SAM. The dialogue concludes by providing certain policy correctives which could be pondered on and with this we wish to steer a debate at the policy level for an earnest consideration for fiscal control of pollution. Bengaluru, India March 2021

Rajat Verma

Acknowledgements

It gives me immense pleasure to write this page which is certainly a dream come true. This dream could not have been fulfilled but for so many people, and it will be unjust to be able to reflect my gratitude towards all of them in just a few words. However, I will make an earnest attempt to do so. This work would not have been possible if I was not selected as a Doctoral Fellow at an Institute of unparalleled repute, Institute for Social and Economic Change, Bangalore. The overall development of my research abilities could not have been possible without the help of each and every person of this institute. Prof. K. Gayithri has nurtured me like her own son and to find a mother in your research supervisor is a rare possibility, for which I feel extremely lucky. This book could not have been published without her continuous support, which she even continues to lend now. Prof. R. S. Deshpande has been so important for whatever I have gathered in my research capabilities. He has nurtured me like his own son and has brought the best out of me by continuously enhancing my ability to question well established doctrines of economics and thus infusing in me the ability to think critically. It is hard to describe my feelings for sir as he had hand-held me from my initial days and continue to do so even now, I am immensely grateful to him for this. I am not sure as to how will I ever be able to thank him for all the love and support that he and Aunty together have given to me. Thanks are due to all my Doctoral Committee members who have given critical comments without which the quality of this work would have suffered. I thank especially Dr. Barun Deb Pal who taught me the nuances of the E-SAM methodology and if not him, completion of the empirical part of this book would have been difficult. Special thanks to Prof. K. V. Raju who was crucial in building the initial proposal for this study and his comments on the foremost chapter has been extremely useful. I am indebted to the valuable comments given at various points in time by Prof. S. Madheswaran. This research topic would not have even crossed my mind had it not been introduced to me by Prof. R. Kavita Rao during my internship days under her able guidance in 2011. I would like to sincerely thank my parents for pushing me towards my dreams. They were constantly there with me in my thick and thin times and encouraged me all throughout my research and professional career. Their support during the time xiii

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when I was drafting this book needs to be applauded. Last but not the least, I must sincerely thank Chahna, my wife, who has been a constant support and has never asked from me much even when I had to devote long hours for refining the contents of this book. Thank you all for making me realise my dream for authoring my first ever book! These feelings will always be close to my heart! Rajat Verma

Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.1 The Canvass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.2 Ecotaxes in India: History and Status . . . . . . . . . . . . . . . . . . . 1.1.3 Ecotaxes: Gains and Externalities . . . . . . . . . . . . . . . . . . . . . . 1.1.4 Practice of Ecotaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Theoretical Scaffolding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Identifying the Involved Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 Economic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 Fiscal Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Missing Links and Focusing the Theme . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1 Questions Seeking Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Approaching to Ecotax Application . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 Need for Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 Methodology and Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7.1 Data and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7.2 Scope of the Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7.3 Scheme of Chapters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 1 8 15 17 17 19 19 25 26 30 31 32 33 33 34 35 35

2 International Experiences of Ecotaxes: A Few Lessons . . . . . . . . . . . . . 2.1 Understanding Environmental Fiscal Instruments (EFIs) . . . . . . . . . 2.2 Approach Towards EFIs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Status of EFIs in Selected OECD and Emerging Economies . . . . . . 2.3.1 Status of Environmentally Related Taxes/Charges . . . . . . . . . 2.3.2 Environmentally Motivated Subsidies and Tax Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Examining the Revenues and Financial Costs from EFIs . . . . . . . . . 2.4.1 Environmentally Motivated Taxes/Charges . . . . . . . . . . . . . . . 2.4.2 Financial Costs of Environmental Subsidies and Tax Expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Preparing Platform for Ecotaxes: Lessons of Interests . . . . . . . . . . . .

39 39 44 46 46 50 56 56 69 69 xv

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References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3 Environmental Regulations in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Defining and Locating Space for Ecotaxation in India . . . . . . . . . . . . 3.2.1 Ecotaxation: Towards Clarity in Indian Situation . . . . . . . . . . 3.2.2 Analysing Status of Ecotaxation: A New Approach . . . . . . . 3.2.3 Specificities and Adequacy of Ecotaxes . . . . . . . . . . . . . . . . . 3.3 Identifying the Polluting Sectors/Goods . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Environmental Regulations in India . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1 Environmental Regulations in India: The Role of Legislative, Executive and Judiciary . . . . . . . . . . . . . . . . . . 3.5 Environmental Compliance in India . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75 75 76 76 79 94 98 106 106 116 124 126

4 Designing Ecotaxes in India: An Environmentally Extended Social Accounting Matrix (E-SAM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.1 Designing Ecotaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Utility of E-SAM in Designing Ecotaxes . . . . . . . . . . . . . . . . . . . . . . . 4.3 Understanding E-SAM in the Context of Ecotaxes . . . . . . . . . . . . . . . 4.3.1 Lessons from Existing E-SAMs . . . . . . . . . . . . . . . . . . . . . . . . 4.4 E-SAM: Design, Theory and Construct . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 Conceptual Framework of E-SAM . . . . . . . . . . . . . . . . . . . . . . 4.4.2 Derivation of E-SAM Multipliers . . . . . . . . . . . . . . . . . . . . . . . 4.5 Data and Methods: E-SAM for India (2007–08) . . . . . . . . . . . . . . . . . 4.5.1 Disaggregation of Electricity Sector . . . . . . . . . . . . . . . . . . . . 4.5.2 Wastewater Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.3 Land Degradation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Tax Bases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.1 Pollution Coefficients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 Optimal Rates for Ecotaxes: Theoretical Deduction . . . . . . . . . . . . . . 4.8 Levying Ecotaxes Under the GST Regime . . . . . . . . . . . . . . . . . . . . . 4.9 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

131 131 132 133 139 140 143 143 144 147 149 150 153 154 154 157 163 165 165

5 Analysis of Incidence Through E-SAM . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 Analysing Incidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Ecotaxes and Principle of Equity: Lessons Learnt . . . . . . . . . . . . . . . 5.2.1 Issues in Incidence of Ecotaxes . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 Criteria for Utilisation of Revenue . . . . . . . . . . . . . . . . . . . . . . 5.3 Onus of Ecotaxes in India: Data and Methods . . . . . . . . . . . . . . . . . . . 5.3.1 Alterations to the Existing Method . . . . . . . . . . . . . . . . . . . . . 5.3.2 Revenue Transfers: Issues in Implementation . . . . . . . . . . . . .

167 167 168 169 169 171 172 174 176

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5.4 Simulating the Incidence of Ecotaxes . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 The Prerevenue Transfer Scenario of Ecotaxes . . . . . . . . . . . 5.4.2 The Post-revenue Transfer Scenario of Ecotaxes . . . . . . . . . . 5.5 Incidence of Ecotaxes on Household Groups . . . . . . . . . . . . . . . . . . . 5.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 Limitations of the Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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177 177 180 182 185 187 187

6 Double-Dividend Hypothesis and Competitiveness: A Critical Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Double-Dividend Hypothesis: Procedural Issues Concerning Revenue Utilisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Competitiveness Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 Testing Double-Dividend Hypothesis: Data and Methods . . . . . . . . . 6.4.1 Direct Transfers to Households . . . . . . . . . . . . . . . . . . . . . . . . 6.4.2 Reduction in Taxes on Households . . . . . . . . . . . . . . . . . . . . . 6.4.3 Reduction in Corporate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 Approach Towards Export Competitiveness . . . . . . . . . . . . . . . . . . . . 6.6 Simulations Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6.1 Double Dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6.2 Export Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 Examining the Double-Dividend Results . . . . . . . . . . . . . . . . . . . . . . . 6.8 Explaining the Export Competitiveness Impacts . . . . . . . . . . . . . . . . . 6.9 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

190 192 193 197 198 198 199 201 201 205 210 213 216 217

7 Summary and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Designing Ecotaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.1 Defining Environmental Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.2 Identifying Tax Bases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.3 Optimal Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Implementation Aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 Incidence of Ecotaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.2 Double Dividend and Competitiveness Issues . . . . . . . . . . . . 7.4 Major Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.1 Understanding Ecotaxes and Definitional Aspects . . . . . . . . . 7.4.2 Data Issues and Experiences from Developed World . . . . . . 7.4.3 Revenue Utilisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.4 Attempts at E-SAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6.1 Experiences from Other Countries . . . . . . . . . . . . . . . . . . . . . . 7.6.2 Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6.3 Approaching Legal Framework . . . . . . . . . . . . . . . . . . . . . . . .

219 219 220 220 223 227 228 229 230 233 233 233 234 234 235 237 237 238 238

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Contents

7.6.4 Revenue Generation and Utilisation . . . . . . . . . . . . . . . . . . . . . 238 7.6.5 Research Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 Appendix A: Analysis of Major Environmental Laws and Acts in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 Appendix B: Analysis of National Green Tribunal Act, 2010, Using a Brief Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 Appendix C: A National Accounting Matrix Including Environmental Accounts (NAMEA) For The Netherlands, 1 Account 1-1 0 in Million Guilders . . . . . . . . . 249 Appendix D: Consolidated Social Accounting Matrix Including Environmental Accounts for the Netherlands 1990 (account 1–12 in million guilders)—Keuning and Timmerman (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 Appendix E: Framework of an Environmentally Extended Social Accounting Matrix—Xie (2000) . . . . . . . . . . . . . . . . . . . . . . . . 277 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007–08 (Monetary Transactions in Rs. Lakhs and Others in Physical Units) . . . . . . . . . . . . . . 281

About the Author

Rajat Verma is presently the Chairperson of the School of Economics at NMIMSBengaluru Campus. Prior to joining NMIMS he taught in Bengaluru Dr. B. R. Ambedkar School of Economics (BASE). He has also taught several courses in the discipline of Economics in various colleges of the University of Delhi from 2011– 2013. He pursued his Ph.D. in Economics with a specialization in Environmental Economics from the Institute of Social and Economic Change, Bangalore. Dr. Verma has published innovative research papers on the topic of environmental taxes and has also published in the field of international trade. He specializes in Social Accounting Matrix based analysis and has research interests in areas of environmental economics, public finance and international trade.

xix

Abbreviations

AGL ASI BMWR BOD CAC CAG CEC CETP CGE CGST COD CPCB CSO DES EEA EFIs EFR EPA EPR E-SAM ETPs ETR FDT FER GDP GHGs GST HWR IGST I-O MCPF MEC

Agricultural Labour All India Survey of Industries Bio-Medical Waste (Management and Handling) Rules, 1998 Biological Oxygen Demand Command and Control Comptroller and Auditor General of India Central Empowered Committee Common Effluent Treatment Plant Computable General Equilibrium Model Central Goods and Services Tax Chemical Oxygen Demand Central Pollution Control Board Centre for Statistical Organization Directorate of Economics and Statistics European Environment Agency Environmental Fiscal Instruments Environmental Fiscal Reforms Environment (Protection) Act Environment (Protection) Rules Environmentally extended Social Accounting Matrix Effluent Treatment Plants Environmental Tax Reforms Forest Development Tax Fertilizers Gross Domestic Product Green House Gasses Goods and Services Tax Hazardous Wastes (Management and Handling) Rules, 1989 Integrated Goods and Services Tax Input-Output Marginal Cost of Public Funds Marginal External Cost xxi

xxii

MED MET MMDR MoEF MoEFCC MPB MPC MSC NA NCEEF NEAA NETA NGT NHY NIT NSSO OECD PAP PILs RASE RNAL RNASE ROH ROW SAM SGST SPCB SRPt STP SUV TB TDS TEX TSS UCL UK UNFCCC UOH US USC USE UTGST WPA

Abbreviations

Marginal External Damage Iron and Steel and Non-Ferrous basic metals Mines and Minerals (Development and Regulation) Act, 1957 Ministry of Environment and Forest Ministry of Environment, Forest and Climate Change Marginal Private Benefit Marginal Private Cost Marginal Social Cost Not Applicable/Not Available National Clean Energy and Environment Fund National Environment Appellate Authority Act National Environment Tribunal Act National Green Tribunal Non-Hydro (Thermal) Net Indirect Taxes National Sample Survey Organization Organisation for Economic Co-operation and Development Paper and Paper products Public Interest Litigations Rural Agricultural Self Employed Rural Non-Agricultural Labour Rural Non-Agricultural Self Employed Rural Other Households Rest of the World Social Accounting Matrix State Goods and Services Tax State Pollution Control Board Sustainable Rate of Profit Sewage Treatment Plant Special Utility Vehicle Tax Burden Total dissolved solid Textile and Leather Total Suspended Solids Urban Casual Labour United Kingdom United Nations Framework Convention on Climate Change Urban Other Households United States Urban Salaried Class Urban Self Employed Union Territory Goods and Services Tax Water (Prevention and Control of Pollution) Act, 1974

List of Figures

Fig. 1.1

Fig. 1.2 Fig. 1.3 Fig. 2.1 Fig. 2.2

Fig. 2.3

Fig. 2.4

Fig. 2.5

Fig. 2.6

Fig. 3.1 Fig. 3.2 Fig. 3.3 Fig. 3.4

Internalising negative externality through Pigouvian taxation. Source http://is.mendelu.cz/eknihovna/opory/zob raz_cast.pl?cast=52067 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . List of issues under ecotaxes. Adapted from Glover (1994) . . . . Budget share of fuels across MPCE Deciles. Source Datta (2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Categorisation of Environmental Fiscal Instruments. Source Author’s representation . . . . . . . . . . . . . . . . . . . . . . . . . . . Environmentally related taxes and charges revenue/GDP ratio for OECD countries (I). Source Author’s computation, based on basic data from the OECD/EEA database . . . . . . . . . . . Environmentally related taxes and charges revenue/GDP ratio for OECD countries (ii). Source Author’s computation, based on basic data from the OECD/EEA database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Environmentally related taxes and charges revenue/GDP ratio for OECD countries (iii). Source Author’s computation, based on basic data from the OECD/EEA database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Environmentally related taxes and charges revenue/GDP ratios for emerging economies (excluding Brazil). Source Author’s construction based on basic data from the OECD/EEA Database . . . . . . . . . . . . . . . . . . . . . . . . . . . Environmentally related taxes and charges revenue/GDP ratio for brazil. Source Author’s construction based on basic data from the OECD/EEA database . . . . . . . . . . . . . . . . Percentage contribution in PM10 . Source CPCB (2010) . . . . . . . . Percentage contribution in NOx . Source CPCB (2010) . . . . . . . . Percentage contribution in SO2 . Source CPCB (2010) . . . . . . . . . Percentage contribution of different vehicle types in PM10 emissions in six cities. Source Author’s Construction after taking the basic data from CPCB (2010) . . . . . . . . . . . . . . .

18 19 21 42

56

57

57

68

68 103 103 104

104 xxiii

xxiv

Fig. 3.5

Fig. 4.1 Fig. 5.1 Fig. 5.2 Fig. 5.3 Fig. 5.4 Fig. 5.5 Fig. 5.6 Fig. 5.7 Fig. 5.8 Fig. 5.9 Fig. 5.10 Fig. 5.11 Fig. 6.1

Fig. 6.2

List of Figures

Percentage contribution of different vehicle types in NOx emissions in six cities. Source Author’s Construction after taking the basic data from CPCB (2010) . . . . . . . . . . . . . . . Optimisation of SRPt in relation to Rt Source Author’s Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structure of incidence of ecotaxes. Source Verma and Pal (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Per capita tax burden (Rs.) of rural households. Source Verma and Pal (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Per capita tax burden (Rs.) of urban households. Source Verma and Pal (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Per capita tax burden (Rs.) of rural households arranged through expenditures. Source Verma and Pal (2018) . . . . . . . . . . Per capita tax burden (Rs.) of urban households arranged through expenditures. Source Verma and Pal (2018) . . . . . . . . . . Per capita tax burden in rural HHs @5% tax rate post-revenue transfer. Source Verma and Pal (2018) . . . . . . . . . . Per capita tax burden in rural HHs @10% tax rate post-revenue transfer. Source Verma and Pal (2018) . . . . . . . . . . Tax burden in rural households. Source Verma and Pal (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax burden in urban households. Source Verma and Pal (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average share of total expenditure by rural HHs. Source Verma and Pal (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average share of total expenditure by urban HHs. Source Verma and Pal (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average percentage change in output for taxed sectors at 5% tax rate. Source Author’s computations based on simulation exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average of the factor income to total output in top five sectors having maximum % change in output at 5% tax rate. Source Author’s computations based on simulation exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

105 161 175 178 178 179 180 181 182 182 183 184 185

212

212

List of Tables

Table 1.1 Table 1.2 Table 1.3 Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 2.5 Table 2.6 Table 2.7 Table 3.1 Table 3.2 Table 3.3 Table 3.4 Table 3.5 Table 3.6 Table 3.7 Table 3.8 Table 3.9

Comparison of definitions of ecotaxes . . . . . . . . . . . . . . . . . . . . Status of taxes similar to ecotaxes in India . . . . . . . . . . . . . . . . . Research issues pertaining to ecotaxses: a bird’s eye view of literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of a green shift in taxation: selected international evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Details of a few environmentally related taxes in OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Some environmentally related taxes in emerging economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Details of a few environmentally motivated subsidies in OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Details of some environment-related subsidies/tax expenditures in emerging economies . . . . . . . . . . . . . . . . . . . . . Pattern of environmental levies’ revenues in OECD countries revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Analysing the pattern of environmental levies revenues in the emerging economies revenues . . . . . . . . . . . . . . . . . . . . . . Classification of ecotaxes in India as per author’s definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Snapshot of the comparison between environmentally related taxes and environmental taxes . . . . . . . . . . . . . . . . . . . . . Issues in collection and utilisation of revenue from taxes similar to ecotaxes in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Details of fund position in NCEEF (Rs. Cr.) . . . . . . . . . . . . . . . Activities undertaken by Department of Forest, Environment and Wildlife Management, Govt. of Sikkim . . . . Major polluting sectors/goods in India . . . . . . . . . . . . . . . . . . . . Contribution of industries in various forms of pollution . . . . . . Extent of land degradation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Five largest polluting industries in India . . . . . . . . . . . . . . . . . . .

4 10 27 40 41 50 51 54 58 70 80 94 96 97 98 100 101 102 105 xxv

xxvi

Table 3.10 Table 3.11 Table 3.12 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 4.7 Table 4.8 Table 4.9 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 6.6 Table 6.7 Table 6.8 Table 6.9 Table 6.10 Table 6.11 Table 6.12 Table 6.13 Table 6.14 Table 7.1

List of Tables

Some important judgements by the Supreme Court of India on environmental interventions . . . . . . . . . . . . . . . . . . . Select cases in environmental compliance in India . . . . . . . . . . Compliance status of CETPs in India . . . . . . . . . . . . . . . . . . . . . Basic Structure of Environmentally Extended Social Accounting Matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Studies using E-SAM-A comparative analytical picture . . . . . . Prototype SAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Concordance map between E-SAM sectors and SAM 2007–08 sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Method of disaggregating source-wise GHG emissions in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wastewater generation in Indian industries . . . . . . . . . . . . . . . . Data on land degradation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Explanation for the usage of data sources . . . . . . . . . . . . . . . . . . Five most polluting sectors in India . . . . . . . . . . . . . . . . . . . . . . Five most polluting sectors in india . . . . . . . . . . . . . . . . . . . . . . . Household categories considered . . . . . . . . . . . . . . . . . . . . . . . . Range of revenue transfer required for making ecotax progressive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Population and expenditure details of the HHs . . . . . . . . . . . . . . Impact of ecotax levied at 5% on the Indian economy . . . . . . . Impact of ecotax levied at 10% on the Indian economy . . . . . . Impact of ecotax levied at 5% on the wages of the labourers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of ecotax levied at 10% on the wages of the labourers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in competitiveness (%) of the taxed polluting sectors due to ecotax at 5% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in competitiveness of the taxed polluting sectors due to ecotax at 10% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in wages of labourers (%) due to change in exports (in Rs. Lakhs)-5% tax . . . . . . . . . . . . . . . . . . . . . . . . . Change in wages of labourers (%) due to change in exports (in Rs. lakhs)-10% tax . . . . . . . . . . . . . . . . . . . . . . . . Percentage change in income accrued to the factor of productions in various policy scenarios for 5% tax rate . . . . Percentage change in income accrued to the factor of productions in various policy scenarios for 10% tax rate . . . Technical coefficients of exports and percentage change in output post 5% tax for polluting sectors . . . . . . . . . . . . . . . . . Technical coefficients of wages . . . . . . . . . . . . . . . . . . . . . . . . . . Change in exports (%) due to 5% tax . . . . . . . . . . . . . . . . . . . . . Summary of effects on key parameters due to 5% levy of ecotax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of the issues, questions and findings . . . . . . . . . . . . .

114 117 123 134 141 145 148 151 152 154 155 157 173 175 181 184 201 201 204 205 206 206 208 209 210 211 214 215 215 217 236

Chapter 1

Introduction

1.1 Introduction 1.1.1 The Canvass Ecotaxes are used extensively in the developed countries especially so in the Nordic countries for last three decades. These have helped successfully curtailing the environmental pollution; however, such fiscal measures are either non-existent in India or those existing are not adequately designed so as to achieve control on pollution. These instruments have been discussed largely in the context of developed countries. The ecotaxes act as deterrent to the pollution process but also serve as an effective fiscal instrument to garner revenue for serving the after-effects of environmental pollution. Ease in their operations as compared to command and control (CAC) institutions helps the government to rein pollution efficiently. The concern for using ecotaxes emerges primarily from the failure and inefficiency of the command and control measures in curbing the environmental degradation. For several decades, India relied on the CAC measures, but these did not yield the desired outcomes, and presently, the environmental degradation is at alarming levels (Karpagam et al., 2012; MoEF, 2009; Sahu, 2007). The climate change concerns also have been mounting primarily due to the continuous increase of the global greenhouse gases (GHGs) effects which have provoked the countries to come together for forming international treaties such as UNFCCC.1 These conventions initiate developed as well as developing nations to make a commitment towards environmental sustainability. India has taken an initiative of growing in a sustainable manner along with other developing countries and has committed, ‘to reduce the emissions intensity [as percent] of its GDP by 33 to 35 percent by 2030 from 2005 level’ (Government of India, 2015, p. 29). Therefore, emission reduction and curtailing of other forms of environmental pollution become a vital concern for India especially when its ‘CO2 emissions almost tripled between 1990 to 2010’ (IEA, 2010). These situations provoke researchers to look into new 1 UNFCCC:

United Nations Framework Convention on Climate Change. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8_1

1

2

1 Introduction

instruments to bring control on unabated polluting agents and away from the usual CAC institutions. Fiscal instrument is certainly one important consideration. In this book, we propose a methodological exercise which provides an emphasis on the design and implementation aspects of ecotaxes with the objective of minimising the distortions caused by unabated pollution process. Here, we propose to examine the adequacy and relevance of ecotaxation in meeting the aforesaid goals in the Indian context and at the same time keeping away the distortions due to the levy. Further, we shall also explore appropriate polluting tax bases at the union level which would help in reducing the environmental pollution in India. The incidence of these taxes on the households and effect on competitiveness of the producer shall also be examined so as to understand the distortions related (if any) due to these taxes.

1.1.1.1

Understanding Pollution and Ecotaxes

Ecotaxes are the taxes that are levied to address ecological/environmental degradation by discouraging the actions of polluters which are deemed as environmentally unfriendly. These are expected to discourage the polluting processes, and therefore, the prime objective of these taxes is not to raise revenue but to disincentivise the consumers and producers of products which are harmful to the environment. Thus, ecotaxes are another form of classical Pigouvian tax which embodies the principle of ‘polluters pay’. This is because ecotaxes, like Pigouvian taxes charge the polluters, consumers or producers, an amount equivalent to the difference between the ‘marginal social cost’ and ‘marginal private cost’ of consuming/producing good at the socially optimal output.2 This then ensures that the polluters pay for the negative externalities caused through the production/consumption of a polluting product. Apart from achieving the reduction in GHG emissions, Chelliah et al. (2007) also point out other reasons necessitating implementation of ecotaxes in India. These include: first, the legal provisions in India permit taxes to be levied on inputs and outputs, and hence, this ensures the feasibility of levying these taxes in India. Second, though the primary objective of ecotaxes is not to raise revenue, still these fiscal instruments generate additional revenue for the government, such revenue could meet the expenditure on arresting the environmental degradation in not only the concerned sector but also in other sectors. These revenues could further be used to subsidise green technologies, such as solar energy and tidal energy that could help in environmental improvement. Third, the need for using economic instruments in India has been raised several times by not only the international organisations such as World Bank but also by Planning Commission and Ministry of Environment and Forest (MoEF).3 It was also been recommended in the National Environmental Policy, 2006 and so also in the India Intended Nationally Determined Contribution (INDC) towards climate change, submitted by the Government of India in the year 2 For

further details please refer to Sect. 1.2.

3 MoEF has been renamed as the Ministry of Environment, Forest and Climate Change (MoEFCC).

MoEF and MoEFCC have been used interchangeably at various places in the book.

1.1 Introduction

3

2015. Fourth, economic instruments have also shown exemplary results in other parts of developing countries such as Columbia, China and Thailand (World Bank et al., 2002 as cited in Chelliah et al., 2007). Further, Chelliah et al. (2007) also suggest three major ways in which ecotaxes could be implemented. First, it could be imposed on polluting inputs, outputs or the proxies which could relate to the pollution level. The polluting inputs are preferred for taxation when the good being taxed creates pollution while producing some other product and hence being used as an input. A few examples of this could be taxing coal, chemicals, plastics used for several manufacturing processes. Second, polluting outputs are preferred as a tax base when pollution is emitted during the consumption stage, for instance, vintage cars, diesel, petrol, etc. The third method of levying ecotaxes is to tax through proxies such as a tax on the type of engine used in a vehicle or age of the vehicle. For example, the Government of Maharashtra levied a tax on vehicles older than 15 years.4 We are concerned about taxes on inputs/outputs and the proxies that are hazardous to the environment and hence not only pose a threat to our future generations but also inflict extra burden on them. Further, the implications and incidence of ecotaxes calls for analytical insights and so also the difficulties in levying them by identifying appropriate tax base for various green taxes.

On Defining Ecotaxes5 In the literature of ecotaxation, there are several definitions given by various economists and organisations like OECD, Eurostat, etc. that complicate the issues. These differences could be analysed on four major aspects: tax base, earmarking of the revenue from the tax, type of tax, i.e. ad valorem or per-unit tax, and whether the tax revenues received are requited or unrequited payments as also the principles of tax administration. Some of these definitions are discussed here (also refer to Table 1.1): In one of the studies, Steinbach et al. (2009, p. 4) cites OECD’s definition: This database defines environmentally related taxes as any compulsory, unrequited payment to general government levied on tax-bases deemed to be of particular environmental relevance. Taxes are unrequited in the sense that benefits provided by government to taxpayers are not normally in proportion to their payments.

OECD seems to emphasise ‘unrequited payment’ and therefore hints at no quidpro, whereas Eurostat (2001, p. 9) simply defined ecotaxes as:

4 This

is further discussed in Sect. 1.1.2. section uses some portions from one of my previously published work, Verma, R. (2016). Ecotaxes: A Comparative Study of India and China. ISEC Working Paper Series, Working Paper353. Also accessible at: http://www.isec.ac.in/WP%20353%20-%20Rajat%20Verma.pdf. Portions re-used here with permission. Please check and cite accordingly.

5 This

Author

OECD/EEA

Country/ Organisation

OECD/EEA

‘This database defines environmentally related taxes as any compulsory, unrequited payment to general government levied on tax bases deemed to be of particular environmental relevance. Taxes are unrequited in the sense that benefits provided by government to taxpayers are not normally in proportion to their payments’

Definition

Table 1.1 Comparison of definitions of ecotaxes

On polluting behaviour having environmental relevance

Focus

Environmental relevance

Tax base

No restrictions

Earmarking of revenue

Both Ad valorem and per unit

Type of tax

No

Whether charges/fee are considered as ecotax?

(continued)

Steinbach et al. (2009)

Reference

4 1 Introduction

Author

Eurostat

Taylor et al

Country/ Organisation

Eurostat

Not Applicable

Table 1.1 (continued)

‘An environmental tax is one which is placed on a good or service to internalise some, or all, of the external costs of the activity undertaken or one which is hypothecated to the use of environmental protection’

‘A tax whose tax base is a physical unit (or a proxy of it) of something that has a proven, specific negative impact on the environment’

Definition

Internalise the externality of polluting agent and environmental protection

On polluting behaviour having environmental relevance

Focus

May/may not be of environmental relevance

Proven specific negative impact

Tax base

No restrictions

No restrictions

Earmarking of revenue

Whether charges/fee are considered as ecotax?

Both ad valorem and per unit

Yes

Only per-unit No taxes

Type of tax

(continued)

Taylor et al. (2010)

Eurostat (2001)

Reference

1.1 Introduction 5

Chelliah et al

India

Source As mentioned in the table

Author

Country/ Organisation

Table 1.1 (continued)

‘An ecotax is a price like instrument which assigns a price to the “unpaid factor” of production. It can translate the “polluter pays” principle into practice’

Definition

On correcting price of an environmental commodity

Focus

No mention

Tax base

No restrictions

Earmarking of revenue

Both ad valorem and per unit

Type of tax

Yes

Whether charges/fee are considered as ecotax?

Chelliah et al. (2007)

Reference

6 1 Introduction

1.1 Introduction

7

‘A tax whose tax base is a physical unit (or a proxy of it) of something that has a proven, specific negative impact on the environment’. The emphasis being on the negative impact on polluting agents. As is evident from the above two definitions, there is not any difference in the manner in which the ‘tax base’ of an ecotax is defined and also both consider that an ecotax necessarily has to be an unrequited payment to the government. Even though the Eurostat’s definition does not explicitly mention this, but in their methodology, they define taxes as, ‘compulsory, unrequited payments, in cash or in kind, made by institutional units to government units’(p. 15); hence, they define taxes similar to the OECD’s definition. In addition, none of the definitions put any restriction on earmarking of the revenue earned from an ecotax. The only difference between the two is that Eurostat deems only per-unit taxes as an ecotax, whereas OECD considers any tax (ad valorem or per-unit tax) as an ecotax, provided the tax base is environmentally relevant. In the case of per-unit tax, the tax base could be a physical unit, as mentioned in the Eurostat’s definition. Examples of per-unit taxes could be waste tax, petroleum tax, etc. Similar issues have also been put forward by Pitrone (2015). In another study by Taylor et al., (2010, p. 2) defines ecotaxes as:‘An environmental tax is one which is placed on a good or service to internalise some, or all, of the external costs of the activity undertaken or one which is hypothecated to the use of environmental protection’. The authors emphasised the internalisation of negative externalities, following could also be deduced from their definition: first, the authors consider any tax (or levy) which internalises the negative externality to be an ecotax. Therefore, even a charge/fee is considered as an environmental tax because a charge such as municipal waste charge will also internalise the negative externality of littering waste on streets to its neighbours, as it increases the cost of generating waste by applying a fee on it. On this basis, it completely differs from OECD/Eurostat’s definition. Second, it does not restricts the nature of taxation, i.e. a tax could be an ad valorem or a per-unit tax. This is because it mentions that a tax, ‘which is placed on a good or service’, and a tax on service is generally an ad valorem tax. So, on this front, it is similar to OECD but different from Eurostat’s definition. Third, if revenue from any tax is hypothecated or earmarked for environmental purposes, then the authors consider that tax to be an ecotax. In this regard, it is completely different from OECD/Eurostat because they consider only those taxes as an ecotax whose tax base is of environmental relevance and not any tax which is earmarked for environmental purpose. Therefore, this definition widens the scope of ecotaxation. For example, even if a tax is on income and some proportion of the revenue earned from that is earmarked for any environmental cause, then the authors would consider it to be an ecotax. But, this conflicts with the basic notion of Pigouvian taxation because in this way, the externality associated with the polluter is not internalised and hence may not lead to an efficient solution. Finally, according to Chelliah et al., (2007, p. 27): ‘An ecotax is a price like instrument which assigns a price to the “unpaid factor” of production. It can translate the “polluter pays” principle into practice’. As is evident from this definition, the authors also consider a charge/fee to be an

8

1 Introduction

ecotax, similar to Taylor et al. (2010). In addition, there is no restriction upon the type of tax or upon the earmarking of the revenue. The above discussion therefore exposes some of the definitional aspects related to ecotaxes. Lack of a consistent definition thus creates a problem in classifying these taxes in a uniformly acceptable manner (Norregaard & Reppelin-Hill, 2000). One of the classifications that is widely accepted is that of the Eurostat (2001), as cited by Steinbach et al., (2009), that classifies it into four basic categories: energy, transport, pollution and resource taxes, and some of the examples falling under these categories are explained below. Energy Taxes include taxation on energy products like petrol, diesel, electricity, coal, etc. which are used for transportation and stationary purposes. But a tax on CO2 is also included in this group. Transport Taxes are the taxes which are confined only to the ownership and the usage of the vehicles. This also includes taxes on aviation industry. Pollution Taxes are the ones which are levied on activities which not only pollute water and air but also on those which create noise pollution and solid waste. These are targeted by measuring the emission levels from these activities. A tax on SO2 also comes under this category. Resource Taxes are the taxes on activities which deplete natural resources such as water and forests. In Netherlands, there is a tax on groundwater extraction which fits in this category and in India certain states levy ‘Forest Development Tax’ which would also come under this category. If OECD and Eurostat’s definitions are considered, then environmental taxes as a whole provide disincentive for using/consuming the polluting input/output to the producer/consumer by increasing its net price and hence help in either reducing its demand or substituting it with a cleaner input for the process of production or for final consumption. Hence, as advocated by Chelliah et al., (2007, p. 27), an ecotax gives the solution to the externality problem posed by polluting inputs/outputs by ‘assigning a price to the unpaid factor of production’, i.e. by attaching a cost for the usage of atmosphere as the dumping ground of the poisonous gases from the production of polluting output or using inputs, which affect the ecosystem negatively. Therefore, it accounts for the ‘polluter pays principle’ by legally compelling the polluter to bear the cost of its actions which create an externality for not only the immediate neighbourhood but in most cases for the entire globe.

1.1.2 Ecotaxes in India: History and Status6 Ecotaxation in India is relatively new as compared to the European countries, and therefore, it does not have a long history. For the past seven decades India had relied 6 This

section uses some portions from one of my previously published work, Verma, R. (2016). Ecotaxes: A Comparative Study of India and China. ISEC Working Paper Series, Working Paper-353. Also accessible at: http://www.isec.ac.in/WP%20353%20-%20Rajat%20Verma.pdf.

1.1 Introduction

9

more on traditional methods of controlling pollution, i.e. through command and control institutions, and therefore, it did not adopt economic measures like ecotaxes to curb environmental degradation (Planning Commission, 2007). But, of late Indian policy makers did realise the ineffectiveness of the regulatory mechanisms without economic instruments and hence both state and union had made an attempt to implement ecotaxes. Even though one of the earliest examples of ecotaxes in India could be attributed to the ‘Forest Development Tax’ introduced by the Government of Maharashtra in 1983, there are not many such instances in India. Further, these taxes are also not designed adequately to preserve environmental degradation.7 One of the main difficulties in centralising the policies of ecotaxes is due to the classification of environmental goods such as water, forests, and soil quality under the ambit of States list according to the Seventh Schedule of the Constitution of India, making the legal structure diverse and thereby complicating the analysis. The responsibility of designing and levying ecotaxes, therefore, rests with the state governments denying any possibility of uniformity but at the same time giving an opportunity of micro-design and decentralisation in implementation. However, with the recent advent of Goods and Services Taxes (GST), the role of union government has become profound. These taxes could be categorised into four groups as per the Eurostat (2001) categorisation mentioned in Sect. 1.1: energy taxes, transport taxes, resource taxes and pollution taxes. In order to trace the historicity of these fiscal instruments, we have also introduced any ‘other events related to ecotaxes’ as the fifth category. These are discussed below (please refer to Table 1.2 for a composite understanding):

1.1.2.1

Energy Tax

There are only two taxes that fall under this category: i.

Clean Environment Cess: This cess was the first attempt by the Government of India to introduce an ecotax at the national level. It was introduced in 2010 at a rate of Rs. 50/metric tonne on coal, peat and lignite either imported or produced domestically which was increased to Rs. 100/metric tonne in 2014 and then to Rs. 200 and Rs. 400/metric tonne in 2015 and 2016, respectively (Ministry of Finance, 2014, 2015; Department of Expenditure 2018). The revenue from the cess is earmarked for the creation of ‘National Clean Energy and Environment Fund’ (NCEF) which would then be utilised for environmental purposes. The revenue generated in 2010–11 was Rs. 10,664.6 million, from which Rs. 2000 million was earmarked for the Green India Mission and the same amount was earmarked for environmental remediation programmes (CAG, 2014; The Hindu, 2011). However, this fund is being used for compensating the states for the loss of revenue due to implementation of GST and therefore, this fund no more exists.8

7 More 8 This

on this can be traced in Chap. 3. has been discussed in detail in the Sects. 3.2.3 and 4.8.

India

Clean Environment Cess

1983

2003

Orissa

2009

2010

Year of Introduction

Maharashtra

Forest Karnataka Development Tax

State

Type of Ecotax

Table 1.2 Status of taxes similar to ecotaxes in India

Tax @ 16% on Tendu leaves 4% on timber 1% on bamboo In 2014, tax on Tendu leaves reduced to 2%

Tax @ 5% on sale of forest produce

Tax @ 8% and 12% on forest produce

Rs. 400/metric tonne on coal, peat, lignite

Tax Rate

Orissa

Maharashtra

Karnataka

India

Location

Generate revenue from sale of Tendu leaves

Narrow the gap between demand & supply of forest products

–

In the public interest

Rationale

2012: 38.28 2011: 51.92 2010: 25.72 2009: 30.95

2011: 47.68 2010: 47.77 2009: 52.74

2012: 609.51 2011: 238.58 2010: 556.79 2009: 271.47

2015: 12,675.60 2016: 28,500 2017: 29,700

Collectiona (in Rs. Crores)

Department of Expenditure, 2018

References

–

(continued)

Barik (2003)

Development of Govt. of forest in Maharashtra Maharashtra and (1983) development of poor people’s dwellings in forest areas

In the creation of Govt. of ‘Forest Karnataka Development (2009) Fund’

Creation of ‘National Clean Energy and Environment Fund’

Earmarking of Revenue

10 1 Introduction

Vehicle Entry Tax

Type of Ecotax

…

Uttarakhand

2009

Madhya Pradesh

2004 in the first three cities and in 2012 in Shimla

1986

Kerala

Himachal Pradesh

Year of Introduction

State

Table 1.2 (continued)

Kerala

Location

Cars/Jeeps: Rs. 30/entry Two Wheelers: Rs. 5/entry Heavy Vehicles: Rs. 100/entry

Car: Rs. 200/entry Two Wheelers: Rs. 100/entry SUV: Rs. 300/entry Bus/Truck: Rs. 500/entry Mussoorie

Manali, Rohtang, Solang and Shimla

Tax @ 5% on Madhya sale and supply Pradesh of timber log

Tax @ 5% on sale of forest produce except charcoal, timber, cane, bamboo and firewood

Tax Rate

–

–

–

–

Rationale

Rs. 5.36 crores in 18 months since its enforcement in first three cities

Collectiona (in Rs. Crores)

Govt. of Madhya Pradesh (2009)

Govt. of Kerala (1986)

References

–

(continued)

Kunwar (2009)

Major part for Chauhan (2007) tourism and beautification of the city, some revenue also spent on renewable power sources

–

–

Earmarking of Revenue

1.1 Introduction 11

Maharashtra

Vehicles Tax (on Old Automobiles)

Year of Introduction

Location

Vehicles older – than 15 years: 1. Petrol Engine: Rs. 3000 (4-wheeler) and Rs. 2000 (2-wheeler) 2. Diesel Engine: Rs. 3500 3. Commercial Vehicles are charged acc. to their capacity and weight

Tax Rate –

Rationale 2015: 12,675.60 2016: 28,500 2017: 29,700

Collectiona (in Rs. Crores) –

Earmarking of Revenue

Source As mentioned in the table a Source Accessed from the website of Comptroller and Auditor General (CAG), accessed from URL: https://saiindia.gov.in/state-accounts

State

Type of Ecotax

Table 1.2 (continued)

Shivadekar (2010) and Gangan (2010)

References

12 1 Introduction

1.1 Introduction

ii.

13

Gujarat Green Cess: The Gujarat Government in 2011 passed a bill which will levy a Rs. 0.02/unit cess on electricity production through non-renewable sources. It exempts electricity generating companies which have a capacity less than 1000 kW. Also, the revenue is earmarked for the creation of Green Energy Fund which will be explicitly targeting environmental purposes and also for promotion of electricity through renewable sources (Government of Gujarat, 2011 cited in Mandal, et al., 2013 and Harikumar, 2011). This cess is presently not under force because of the on-going plea of the Government of Gujarat in the Supreme Court against the verdict of the High Court which invalidated the Gujarat Green Cess Act. But, the Supreme Court has stayed the High Court’s order on the ground that it is legal for the state government to levy a cess for the protection of its people from the environmental problems. The revenue would be collected once the Court gives the final verdict (Mandal et al., 2013).

1.1.2.2

Transport Taxes

There are two types of taxes that fall under the ambit of transport taxes:

i.

ii.

Vehicle Entry Tax: This tax is levied in four cities of Himachal Pradesh which are Manali, Rohtang, Solang and Shimla and also in Mussorie which is in Uttarakhand. The tax rates in all the four cities are the same: Two wheelers—Rs 100 per entry, car—Rs 200 per entry, SUV—Rs 300 per entry and bus/truck— Rs 500 per entry. The tax in first three cities was introduced in 2004 but in Shimla, it was introduced only in 2012 (Chauhan, 2007). On the similar grounds, Government of Uttrakhand has also imposed a tax on vehicles entering into Mussoorie but the rate is very low as compared to that in Manali. Heavy vehicles are taxed with a modest amount of Rs. 100 per entry, cars/jeeps are taxed at Rs. 30/ entry and two wheelers are charged at only Rs. 5/entry (Kunwar, 2009). Vehicles Tax (on Old Automobiles): This tax is levied by six states in India (Andhra Pradesh, Tamil Nadu, Rajasthan, Karnataka, Bihar and Maharashtra) on similar grounds but at various intervals, of which Karnataka is the frontrunner and it levied the tax in the year 2002. The basis of the tax is the inefficiency of the vehicles when they become old, thus emitting more pollution. Therefore, in order to disincentivise the usage of such vehicles various state governments have levied this tax. All the six states have levied this tax on both types of vehicles, private and commercial, except for Bihar which levies this tax only on commercial vehicles. The tax rate for private vehicles ranges from Rs. 250 to Rs. 2000 whereas, for commercial vehicles, it ranges from Rs. 200 to Rs. 5000, annually (Government of Karnataka, 2009; Government of Maharashtra, 1983; Government of Kerala, 2009; Government of Madhya Pradesh, 2009; Mandal et al., 2013; Barik, 2003). Bihar is the only state which levies an ad valorem tax of 10% as the vehicle tax (Government of Bihar, 2010). The details for revenue are available only for Maharashtra, Karnataka and Tamil Nadu. The revenue for Karnataka and Tamil Nadu has been increasing over the years but

14

1 Introduction

for Maharashtra, the revenue is showing irregular patterns. This could be due to the recent implementation of the tax, as also was the case with Tamil Nadu, and may stabilise with time (Mandal et al., 2013). 1.1.2.3

Resource Taxes

There are five states in India that levy ‘Forest Development Tax’ (FDT) in various forms which fall under this category. Since forest is a state subject, any tax to prevent forest degradation will be in the ambit of the states. The list of these taxes: Forest Development Tax: This is an ad valorem tax which is levied at rates that vary from 1 to 12% on the forest produce in the states of Maharashtra, Kerala, Orissa, Karnataka and Madhya Pradesh. Of these five states, three states, i.e. Madhya Pradesh, Kerala and Maharashtra, levy the tax at a rate of 5%. On the other hand, Orissa has various rates such as 1%, 2% and 4% on bamboo, Tendu leaves and timber (Barik, 2003; Government of Kerala, 1986; Government of Madhya Pradesh, 2009; Government of Maharashtra, 1983). Karnataka is the only state which has an exclusive fund called ‘Forest Development Fund’ which is earmarked for the development of forest reserves in Karnataka through forest plantations and other measures (Government of Karnataka, 2009). 1.1.2.4

Pollution Taxes

There are no examples which could be classified under this category.

1.1.2.5

Other Events Related to Ecotaxes

Besides the taxes listed above, there are two important initiatives that have a bearing on the historical development of antipollution instruments which have been mentioned below: i.

ii.

MoEF-MSE Initiatives: The MoEF signed a Memorandum of Understanding (MoU) with Madras School of Economics (MSE) in 2002 which led to the formation of Centre of Excellence (CoE) in environmental economics in MSE. Since its inception CoE has come out with two publications on ecotaxation. A book, ‘Ecotaxes on Polluting Inputs and Outputs’ by Raja G. Chelliah and others, was published in 2007. This was followed by a report, ‘Coping with Pollution: Ecotaxes in a Goods and Services Tax (GST) Regime—A Discussion Paper’ submitted by CoE to the Ministry in 2010. This report was an outcome of six months study which was financed by MoEF in 2009 at a cost of Rs. 0.06 crores (MoEF, 2014). Recommendations by Planning Commission: The erstwhile Planning Commission of India in its 12th Five Year Plan recommended integration of

1.1 Introduction

15

ecotaxes in the Goods and Services Tax (GST) framework in 2011. The recommendation was based upon the study conducted by CoE, as discussed above. Also, they recommended three types of ecotaxes: Forest Development Tax, forest conservation tax and taxes similar to vehicle entry taxes that are implemented in states like Himachal Pradesh, Uttarakhand, etc. The forest conservation tax was proposed to be levied on sale of petroleum products and coal mining. In addition, they also proposed for the creation of a ‘Green Fund’ from the revenue generated by levying the above mentioned ecotaxes (Planning Commission, 2012). In addition to the above, it will be pertinent to understand the levy of a few cesses and operations of the funds associated with these. i.

ii.

Ecological Fund and Environment Cess: Government of Sikkim in 2005 levied a unique cess on the non-biodegradable substances that are either produced in the state or are imported from other states, thus trying to solve the problem of solid waste. The revenue from this cess is deposited in a fund which is called as Sikkim Ecological Fund which is exclusively meant for preserving the ecology of the state (Government of Sikkim, 2005 as cited by Mandal et al., 2013). There are two different rates: 1% of the total turnover from the sales of non-biodegradable substances which includes public, private and all other organisations and also the individuals. On the other hand, the hotels, motels, resorts and lodges are taxed at 5% of their total turnover. Sadly, this cess, along with all the other cesses, was also subsumed under GST since July 1st, 2017 to compensate the state governments for the revenue loss. Goa Green Cess: This cess was levied by the Government of Goa in 2013 so as to reduce the carbon footprint of the state. The rate of the cess was decided to not exceed 2% on the sales value of all the polluting products that harm the environment in any manner. Since, this tax is of recent origin, further details about the revenue, usage of the fund, etc. are not available (Government of Goa 2013 and Mandal et al., 2013).

1.1.3 Ecotaxes: Gains and Externalities There is a need to explore the opportunities of ecotaxation in India because it has strong theoretical underpinnings9 and it has also shown positive results in many countries, especially in the European countries. There are good number of advantages of ecotaxation that have been listed in the literature. Fullerton et al. (2008) and Srivastava et al. (2011) provide the following justifications for using ecotaxes:

9 Ecotaxes

emerge from the strong fundamentals of neo-classical economics which rests on the principle that mismanagement of the natural resources is caused due to inappropriate pricing of the good. Hence, it tries to correct the price of a resource by taxing it so as to internalise the externality caused by it in its price.

16

1 Introduction

a.

Static Efficiency Gains: The major advantage of ecotaxes is that it can achieve an environmental goal in the least expensive way. When a tax is levied on a particular input or output, it equates the marginal abatement cost across the firms which ensures that every firm is minimising its abatement cost function. Further, the cost of regulation by the government is also minimised as compared to the command and control measures, because the tax is levied on the input/output and not on the emissions; thus, it does not require much information from the polluter. Dynamic Gains: With an ecotax, a firm has to pay higher cost for producing goods, and this provides them an incentive to invest in technologies which are cost effective and also less polluting. This incentive does not exist in the case of command and control because there are specific technical requirements which are mandated by the government such as using a particular kind of machinery for production, specific length of the chimneys, quality of fishing nets etc. This leads to dynamic efficiency in the case of an ecotax. Potential for Revenue Generation: Apart from the economic reasons mentioned above, the green tax also has the potential to generate revenues for the government which then can be used for maintaining a natural resource or could be used for reducing the tax rate from other distorting taxes like income tax, corporate tax, etc.10

b.

c.

Srivastava et al. (2011) also argued that environmental taxes not only conserve the environment but could also positively impact the growth of the economy concerned. This is through the direct linkages between the environment and the health standards, the incentives that the taxes might generate from adoption of green technologies and also reducing the deadweight loss by eliminating other distorting taxes. Therefore, environmental taxes provide a term solution for growing Indian economy on a sustainable path and its irritating environmental issues. Also in the Indian context, the major problems of over-exploitation of natural resources emerge from the underpricing of these resources. Therefore, a straight forward and effective solution is to impose appropriately designed ecotax that directly raises the cost of these resources and is expected to decrease the consumption (other things remaining same) to an efficient level (Planning Commission, 2007). Efficient level of consumption/production of a resource is achieved, if a tax is imposed at an optimum rate.11 The report by the erstwhile Indian Planning Commission further emphasises the practical feasibility of an ecotax in India as opposed to tradable permits or ‘command and control policies’ on the basis of high monitoring cost involved in the latter measures. In totality, the discussion above justifies the relevance of ecotaxes in the Indian perspective.

10 This

kind of benefit is called as ‘double dividend’ and will be discussed in Sect. 1.3.1. rate of per-unit tax = Marginal External Damage (MED), where MED is the cost on the society due to overexploitation of an additional unit of the resource. Please refer to Fig. 1.1. 11 Optimum

1.1 Introduction

17

1.1.4 Practice of Ecotaxes Prior to the introduction of GST in the year 2017, the present form of taxes similar to ecotaxes in India could have been broadly classified into union and state taxes. This form of classification is different from the four fold categorisation mentioned above, as this is based on the manner in which the taxes are implemented in India. The former classification (which was utilised in Sect. 1.1.2) was based on the nature of the tax base. Under the union levy, it is only the clean environment cess which is close to the textbook definition of ecotax. Further, taxes could be classified under the sub-category of excise/customs duty. The clean environment cess is levied on both the imported coal as well as domestically produced coal and a union tax on domestically produced products is called as an excise duty whereas a tax on imported products is called as a customs duty. The state taxes prior to GST could further be sub-categorised into value added tax (VAT) and all the forms of ‘Forest Development Tax’ existing in various states will fall under this category. Here, all the types of FDTs are imposed on the final sales of forest produce which were covered under VAT. That leads to a conclusion that in India a tax to conserve environment before the year 2017 could have been levied at union as well as at state level and the major options for implementing this form of tax was either through excise/customs duty at union level and VAT at the state level. According to Ahmad and Stern (2007), if a carbon tax is imposed in India that would fall under the ambit of union excise/customs duty or under the state VAT. However, all the aforementioned categories have been subsumed under the present GST framework as all these taxes are forms of indirect taxes; thus, the only framework under which the ecotaxes are levied in India is the Goods and Services Tax (Government of India, 2018 and 2019).

1.2 Theoretical Scaffolding Ecotaxation as a concept had evolved from the seminal work of Pigou (1920). According to him, the fundamental way in which one could address the problem of negative externality is by levying a tax on the producer/consumer so as to raise their cost of production/consumption. This would ensure that the producer/consumer would incorporate the true cost of their production/consumption, i.e. by internalising the cost of damage inflicted on the environment. This notion could be explained with the help of Fig. 1.1 which could be found in any basic public finance/environmental/micro economics text book (for ex. Kolstad, 2010 etc.). This has been modified slightly to serve the purpose of depicting ecotaxes here.

18

1 Introduction

Fig. 1.1 Internalising negative externality through Pigouvian taxation. Source http://is.mendelu. cz/eknihovna/opory/zobraz_cast.pl?cast=52067

In the above diagram, the x-axis shows the quantity of chemicals produced by a firm. The y-axis depicts the marginal cost and benefits for the firm and the society in value terms, say rupees. The marginal private cost (MPC) for the firm to produce its chemicals is depicted by the line MPC. The marginal social cost (MSC) of producing the chemicals is depicted by the line MSC. It includes the external cost on the society inflicted by the production of chemicals. Thus, the difference between MSC and MPC is the negative externality generated from the production of chemicals, known as Marginal External Cost (MEC). MPC’ (MPC + Tax) depicts the marginal private cost of producing chemicals including the taxes levied by the government so as to ensure that the producer internalises the externality and MPB shows the marginal private benefits to the firms from production of chemicals. The assumption behind the marginal cost and benefit curves is that they are linear. This assumption is made in order to simplify the analyses, but this would not make any difference to the analyses even if the curves are nonlinear. The explanation of Fig. 1.1 is divided into two parts: one without tax and the other with tax. Case I: Without Tax In this scenario, no tax is levied on the firm’s production. The level of output produced by the firm in this case would be Qp . The firm will not produce any further because after this the marginal cost of producing would be higher than the marginal benefit reaped from the production. But, at this level, the firm is not producing at a socially optimum level because it is only taking its own MPC into consideration. The social optimum level of chemicals would be produced at e’ where the MSC equals MPB of the firm, i.e. at Qs . Beyond this, the MSC would be greater than MPB and prior to e’ the MSC is less than MPB. Therefore, if there is no tax on the firm, it will over produce which will generate more than the socially optimum level of pollution. Case II: With a Pigouvian Tax According to Pigou, this problem could be resolved by taxing the producer and thus raising the MPC of production. In order to produce a socially optimal amount, the MPC curve has to be raised to MPC’ so that it intersects the MPB at e’. This is because e’ is the social optimum level of output, as explained above. Thus, at the core,

1.2 Theoretical Scaffolding

19

the notion of the Pigouvian taxation is to increase the cost of production/consumption for those agents whose self-maximising behaviour produces externality to the society. It is this fundamental framework of Pigouvian taxation that will be used for defining and designing the ecotaxes in India.

1.3 Identifying the Involved Issues The pragmatic and theoretical concerns pertaining to the design and implementation of ecotaxes in India have been categorised broadly into three groups. These three groups of major researchable issues, as per (Glover, 1994) are: descriptive, economic and fiscal issues. Among these categories, there are several aspects that are listed as shown in Fig. 1.2 and are discussed here. The descriptive concerns related to ecotaxes primarily pertain to the definitional aspects which were discussed in detail in the Sect. 1.1.1. Here, the other two categories, i.e. economic and fiscal issues, will be examined.

1.3.1 Economic 1.3.1.1

Base and Incidence

One of the most fundamental and important questions in public finance is to define the tax base, i.e. to define ‘the quantity or coverage of what is taxed’ (Bannock et al., 1998, p. 404). Any definition of the tax base should be unambiguous and shall also ensure that its computation is practically viable and uncomplicated. If these two basic conditions are not fulfilled while defining the tax base, then the tax would not yield its desired outcomes. This is a vital concern that needs to be addressed while designing environmental taxes in India. In the case of ecotaxes, ideal tax base would be any consumption/production/extraction behaviour which is polluting the ISSUES

Descriptive Issues i. Issues related to definition of Ecotaxes

Economic Issues i. ii. iii. iv.

Base and Incidence Optimal Rates of Ecotaxes Existence of Double Dividend Competitiveness Issues

Fig. 1.2 List of issues under ecotaxes. Adapted from Glover (1994)

Fiscal Issues i. ii.

Stability of Revenue Administrative Feasibility

20

1 Introduction

society.12 After identifying the tax base, it is also important to understand the issue of its incidence, i.e. ‘the distribution of the burden of the tax payment across the society’ (Bannock et al., 1998, p. 405). The incidence of a tax primarily depends upon the design of the tax base and the elasticity parameter of the affected people. If the consumption/production/extraction behaviour is inelastic, then the effect of an environmental tax on reducing the environmental degradation would be limited because the responsiveness of the polluting behaviour to the price changes will be low. Then it poses the question of how effective are the environmental taxes? The issue of inelasticity would be pertinent if the polluting good (which is generally an input for or an output of a production process) do not have close substitutes. For example, of the most polluting industries in India, almost all of these industries do not have close substitutes. The polluting industries broadly include: iron and steel, oil refinery, fertiliser, sugar and cement industry (Pandey, 2005; Gupta, 2002 as cited in Srivastava & Kumar, 2014). Thus, the choice of tax base and the issue of its incidence are two critical aspects necessary for delving into the design and implementation issues of ecotaxes in the Indian context. In a very text book style, a tax is considered to be regressive (and hence inequitable) if the tax rate decreases as the income of people increases and progressive if the tax rate increases with the income of people, thereby equitable. This formulation if looked from the angle of ecotaxes provides interesting insights. An ecotax being regressive in a society is the major concern of the study, because it is generally levied on fuel and energy products which are consumed either directly/indirectly by every section of a society. The concern of inequity emerges because the proportion of poor households’ total expenditure for some of these products may be larger than expenditure of the higher income households. If this is the case, then the tax levied on these products would tend to be regressive because in proportion to the total expenditure poor would end up paying more than the rich for the same tax rate. An example of such a commodity in India could be kerosene. Kerosene is widely used as a lighting fuel and also as a cooking fuel (by some) in most of the villages of India. Figure 1.3, shows an excerpt from Datta (2010) which depicts the direct budget share13 of kerosene from public distribution system (PDS ) and other sources and of liquefied petroleum gas (LPG ) in India. The x-axis shows the per-capita expenditure deciles where the deciles are arranged from the poorest to the richest in terms of the per-capita expenditures of these household classes. Therefore, it depicts the budget share14 of every decile on fuels consumed directly. It is evident from the figure that the direct budget share of kerosene for both PDS and other sources is declining with the increase in income. Hence, the author concludes that any tax on kerosene in future would be regressive. Here, a tax on kerosene is considered to be 12 To

see the definition of tax base in detail please refer to Sect. 3.2.1 of Chapter-III. budget share means directly consumed fuel (excluding indirect consumption through consumption of commodities using fuel as input) as a percentage of total expenditure. Consumption reported in the household consumption survey is treated to be direct consumption (Datta, 2010). 14 Budget share of a decile is the ratio of the average (weighted) fuel expenditure and average (weighted) total expenditure for that decile (Datta, 2010). 13 Direct

1.3 Identifying the Involved Issues

21

Budget Share of Fuels across MPCE Deciles

Fig. 1.3 Budget share of fuels across MPCE13 Deciles. Source Datta (2010)

regressive because, ‘extra … tax payments represent a higher percentage of income (or of total spending) for poorer households than for the better-off’ (Fullerton et al., 2008, p. 26). Figure 1.3 also shows that the budget share of LPG increases with every decile implying that a tax on LPG would be progressive as the individuals with higher income will contribute more in the tax payment in proportion to their total expenditure as compared to the poor people (Datta, 2010). The above discussion implies that an ecotax being regressive primarily depends upon the budget share of the people for a good in a country. If this share is more by the poorer section of the society, then any tax on that particular commodity would be inequitable for the society as the poorer section would contribute more for the tax payments in proportion to their total expenditure. Further, equity issues are likely to vary from country to country as the taxed good, which could be regressive, would be country specific. For example, Fullerton et al. (2008) found that a tax on domestic energy in UK would be regressive as the budget share of poor income households is larger than richer households. Whereas Datta (2010) showed that if a tax is levied on Kerosene, then it will be regressive but a tax on LPG would be progressive. This shows that a good could be a regressive base depending on the country in which the tax is levied. Therefore, a general argument against the environmental taxes being regressive may not hold.

1.3.1.2

The Optimal Rates

The basic notion behind the levy of ecotax is to ensure optimal level of decision making in the society by internalising externality generated in the course of such 13 MPCE:

Monthly Per-Capita Expenditure.

22

1 Introduction

a decision. Fundamentally, this could be possible only when the base and rate of taxation is designed appropriately and this is evident from Fig. 1.1. Optimal tax rate plays a crucial part in ensuring the optimum level of production at the point Qs . This rate should be equal to the Marginal External Cost (MEC) generated at the optimum level of production so as to internalise the externality which shall then produce socially optimal level of output. Thus, it is the MEC associated with the damage caused by the decision making which is at the core of choosing optimal rate/s of ecotaxation in the partial equilibrium set up as proposed by Pigou. However, the notion of optimal rate in the practical perspective comes from the existence of other taxes in an economy. If other direct and indirect taxes are also existing in the economy, which will be the case in all the countries, then the optimal rate of taxation will not be equal to the MEC, rather it would be a weighted average of Ramsey and Pigouvian taxation (Sandmo, 2009). Sandmo (1975) contributed for the first time to this idea of weighted optimal environmental taxation under the conditions of, what is called as the ‘second best outcome’. In the presence of other distortionary taxes such as direct and indirect taxes, the optimality of environmental taxes will depend on the costs associated in the generation of public funds. This is commonly termed as the ‘Marginal Cost of Public Funds’ (MCPF) in the literature of public finance. According to Sandmo (2009), higher the cost of raising public funds closer will be the optimal rates of ecotaxes towards the Ramsey’s inverse elasticity rule and lower the cost, closer would be the optimal rates to Pigouvian form of taxation, i.e. the optimal rate being closer to the MEC. Ramsey’s inverse elasticity rule proposes that the tax rates should be levied inversely to the elasticity of demand (Sandmo, 2009). This may be due to the relation that higher the elasticity of demand, lower will be the incidence on the agent on which the tax is levied. Thus, the cost of public fund (i.e. cost associated to revenue generation) vis-à-vis the tax base will be higher. In order to minimise the cost of raising an additional rupee of a tax being levied, the tax base should instead be relatively inelastic so that higher revenue could be generated for a given amount of tax rate. This notion exposes a trade-off in the context of environmental taxes. As we observed in the last sub-section, since the objective of an ecotax is to alter the polluting behaviour through taxations, and if the tax is levied on relatively inelastic goods so as to reduce the MCPF, then there is a deviation from the fundamental objective of ecotaxes and hence the trade-off. i. Determinants of Optimal Tax Rates It is imperative to identify issues and certain key determinants of optimal rates after having understood the theoretical underpinnings of fixing these rates. In the scenario of the first best outcome, ecotaxes depend solely on the MEC or MED which further depends upon the identification of the shapes of the marginal private benefits (MPB) and marginal private costs (MPC), among various other factors. Computation of the MED is extremely difficult as externalities can take various forms and these could be categorised into three different types; local, regional and global pollutants. Further, MED is dependent upon individual characteristic of the polluting firms and therefore, every polluting activity would have its own extent of damage, thus complicating the process of computation even more. In the more realistic scenario wherein, other forms of distortionary taxes coexist, the requirements for arriving at the optimal

1.3 Identifying the Involved Issues

23

rates are even more stringent. This is because the rates would require information of the MCPF and also the elasticity of demand of the product on which the ecotax is levied, apart from the knowledge about MED (Bovenberg & Goulder, 2001). The above issues highlight the importance of deducing optimal rate/s but also caution about the problems in arriving at specific numbers for these rates. In this context, theoretical deduction of the rate/s of ecotaxation becomes imperative as it would enhance the understanding of the issues, if these could be reflected in the model. This will be deliberated in the later part of this study (Chapter 4).

1.3.1.3

Existence of Double Dividend

Double dividend of an ecotax implies the double benefit which could be obtained just from taxing one polluted product. By the virtue of taxing a bad (polluting good), one can not only preserve environmental degradation (which is the primary aim) but also can use the generated revenue to reduce the distortion from other forms of taxes (Pearce, 1991; Oates, 1991 as cited by Fullerton et al., 2008). The tax rate would be reduced for those taxes which give a disincentive to work such as wealth tax and income tax because the positive incentive from the reduced tax rate would help in decreasing the unemployment rate and further increase the productivity of the workers (Bernow et al., 1998). The authors though very optimistic on the second benefit (reduction in distortion) of an ecotax, caution that the actual implication of these taxes on the economy depend on the existing distortion in taxes. This double benefit would be more pronounced when the existing distortions in the prevailing tax system manifests, and then, the gains from the reduction in distortions will be substantial to get recognised (Zimmermann & Gaynor, 1999). Several studies such as (Bernow et al., 1998; Bovenberg & Cnossen, 1995; Felder & Schleiniger, 1995; Goulder, 1995; Oates, 1994; Repetto and Austin 1997; Schob, 1996) which estimate the net cost of environmental gain achieved from ecotaxation, and according to the estimates from these studies, the net gain can range between small negative to small positive values. Therefore, the arguments show that the exact cost of achieving environmental gain (strictly positive or negative) from ecotaxation is unclear and case specific. Bernow et al., (1998) point out various examples from different countries where ecotaxes had been successfully implemented. For example, according to the authors in the US in 1989 a tax on chlorofluorocarbon and other ozone depleting chemicals was levied and there was a clear evidence that the decline in the usage of these chemicals was because of the tax levied which acted as a disincentive to the producers. Therefore, it would be useful to examine this issue in the Indian context as unemployment, low labour productivity and tax distortions still remain some of the major concerns.

24

1 Introduction

1.3.1.4

Competitiveness

The issues related to competitiveness of the industries being affected in a country with strict environmental regulations emerge from the belief that the cost of production in such countries would be higher as compared to the countries where the environmental regulations are weak. For example, if country A levies a tax on production of a polluting product whereas country B does not then the industries in country A would have higher production cost as compared to the industries in country B, ceteris paribus. In the international market, this would give country B a relative advantage as opposed to country A. This would in turn lead to the reduction in the profit of firms and may even lead to shutting down of a few firms over medium to long term, which might not be able to strive in the international market. Glover (1994) argues that this may lead to temporary increase in the unemployment in these sectors but there are possibilities of employing more labour instead of technology, at least for the developing countries. Though this argument might be theoretically proven, it could be hard to make a shift from technological-intensive industries to labour-intensive industries. A possible justification could be the level of sophistication that could be achieved by using high-end technologies which would be impossible to match with labour-intensive industries. The firms which are affected by levying of ecotaxes in country A might shift their businesses to country B so as to save the extra burden inflicted by ecotaxes and other environmental restrictions (also known as pollution haven hypothesis). If this is so, then the overall impact of the ecotaxes could be nullified because the greenhouse gases (GHGs) emissions from the industries are global public bad that affects the entire world, and it does not matter where the emissions are being discharged. Fullerton et al. (2008) argue that the effect on competitiveness of the firms could be diminished after reducing the distortions in other forms of taxes (such as corporate tax and income tax). As discussed earlier, this is called as ‘double-dividend hypothesis’, and if this is validated, then the net benefit of the ecotaxes could be positive. Also, Porter (1991, p. 162) as cited by Vlist et al., (2005, p. 2) highlights that environmental regulations might not always hurt the polluting industries and this is commonly known as the Porter’s hypothesis that states: Strict environmental regulations do not inevitably hinder competitive advantage against foreign rivals, they often enhance it

Folmer et al. 2000 cites Gabel and Sinclair-Desgagné (1998) who gives three conditions or variants under which Porter’s hypothesis might prevail under the following arguments: First, the introduction of strict environmental laws gives the firms an incentive to invest in greener technologies which could boost the competitiveness of the firms instead of hurting it. This could further lead to enhancement in the exports of the parent country (as there is relative comparative advantage due to efficient technology). This could be called as ‘The Incentive Effect’ of environmental policies which was also discussed before in Sect. 1.1.3 as the dynamic efficiency gains of levying ecotaxes.

1.3 Identifying the Involved Issues

25

Second variant also follows closely with the first, but it differs from it in the respect that firms which are strictly regulated develop newer technology faster and hence will benefit more because the cost of non-compliance is very high. Also, in terms of cost, these firms have relative advantage when compared to foreign competitors because the cost of compliance for foreign firms is even higher and this leads to an additional relative advantage for the domestic firms (especially in developing countries). Third is much stricter version than the others because it says that not only the environmental health will improve, since environmental policies are introduced, but the policies will eventually lead to a reduction in firms’ costs, instead of raising it. This could be possible under the assumption of the Porters’ hypothesis. According to Palmer et al. (1995), as cited by Brännlund and Lundgren (2009), the inefficiencies in the firms lead to organisational failure, and hence, adopting greener technologies can offset these failures by bringing these firms back on their cost efficiency frontier, which were earlier operating inside it (Folmer et al., 2000). There is an on-going debate on the relevance of Porter’s hypothesis but it is clear that there are conditions under which it might hold. There are studies (such as Schlegelmilch, 2002) which show that for countries like Netherlands and Denmark Porter’s hypothesis exists. The author points out that: ‘No company reallocated abroad because of environmental tax reform; on the contrary, the export of environmental technologies was able to be increased in Denmark’. The issue of competitiveness would be worth examining for India because exports would be indispensable for keeping India’s economy on the growth trajectory. Therefore, it becomes necessary to analyse whether environmental taxation would affect the competitiveness of the Indian firms in the global market (Chelliah et al., 2007).

1.3.2 Fiscal Issues 1.3.2.1

Stability of Revenue

The primary objective of ecotaxation is not to raise revenue, but the revenue generated could be considered as a by-product of imposing such taxes. This revenue could then be used to arrest the environmental degradation in not only the sector in which the tax is levied but also in various other sectors. For example, the revenue earned from an ecotax levied on diesel could be utilised for increasing the forest cover, cleaning water bodies, etc. or it could also be used to cross-subsidise green technologies, like solar energy, tidal energy, etc., that would further help in environmental improvement. Further, it could also be used to reduce the distortions in other taxes and thereby reducing the competitiveness issues that might arise from levying these taxes. Since ecotax is levied on a tax base that is environmentally polluting, it is argued that the revenue from the tax would eventually reduce to zero, if the tax is levied appropriately. This is because the extent of pollution would reduce to zero in response to the optimal tax levied in long run. The problem with this argument is that environmental economists never advocate for zero pollution level rather the optimal rate

26

1 Introduction

of pollution is calculated by equating marginal social cost (MSC) of pollution to the society and marginal social benefit (MSB) to the society from the good produced, in the first best set up. The optimal amount of pollution is seldom zero (for more clarity please refer to Fig. 1.1). Hence, the concern related to the revenue from ecotaxes being zero in medium to long term is ‘overstated’ as also mentioned by Fullerton et al. (2008). For stabilising the revenue, one need not increase the tax rate indefinitely, as proposed by Glover (1994) rather the aim should be to minimise the error between optimal (tax rate at e’ in Fig. 1.1) and actual rate of ecotaxation so that the inefficiency could be minimised. The tax rate should be fixed near its optimal level because the foremost aim of an ecotax is to preserve the environment economically. Once the tax rate is fixed near its optimum, the revenue should also be stabilised keeping other things constant like inflation rate, number of polluters, etc.

1.3.2.2

Administrative Feasibility

One of the other concerns, while levying any tax, in the literature is administrative feasibility of ecotaxes. This implies the ease with which a tax can be levied given the fiscal structure of a country. For example, emissions tax which is levied directly on polluting emissions is difficult to monitor as well as to enforce. This is because measuring the emissions from non-point source16 such as vehicles would require sophisticated technologies which would be expensive and hence economically unviable. Glover (1994) and Chelliah et al. (2007) list various factors on which administrative feasibility to levy an ecotax might depend upon: the data and skills need[ed] to design the tax; the amount of information (e.g. on emissions) needed to administer the tax; susceptibility to evasion; number of tax payments to be made and accounted for and so on

The form of ecotax levied on the polluting inputs and outputs is relatively simple to monitor. For example, instead of levying an ecotax on emissions from the vehicles, it is economically viable to levy a tax on fuel used by the vehicles like petrol/diesel, etc. which are also polluting. Hence, analysing the administrative feasibility of a potential ecotax in India would take into consideration its practical aspects that are necessary for a comprehensive study (Table 1.3).

1.4 Missing Links and Focusing the Theme The economic and fiscal issues highlighted in the prior section necessitates delving into the missing links which still persists even after three decades of the existence 16 Non-point

or non-stationary sources of pollution are those polluting sources which are not stationary such as vehicles, vis-à-vis point source such as industries.

Ecotaxes can ensure optimality only if the base and rate is designed appropriately. Thus, making this issue indispensable

In first best outcome: Optimal ecotax rate = MEC In second best outcome: Optimal rate = weighted average of Ramsey’s and Pigouvian taxes (Sandmo, 2009)

2

Optimal Rates of No Ecotaxes

1

S.

Issue of ecotaxes, particularly energy taxes being regressive in a society

Imperative to analyse the distribution of the burden of tax payment across the society

Existence of double dividend depends on prevailing distortions in the tax system

Double dividend implies double benefit achieved from taxing one polluted product, i.e. preserving environmental degradation and reducing the distortions in other taxes through the revenue generated

Base and Incidence of Existence of Double Ecotaxes Dividend

Table 1.3 Research issues pertaining to ecotaxses: a bird’s eye view of literature

This might affect the employment temporarily, of countries having strict environmental regulations (Glover, 1994)

Issue emerge from the belief that the cost of production in countries with strict environmental regulations is higher than countries with weak regulations

But it is important to estimate the revenue potential of an ecotax so that it could be used for: reducing distortions in other taxes, improving environmental services

Foremost aim of an ecotax is to prevent environmental degradation

Competitiveness Issues Stability of Revenue

(continued)

It might depend on: i. data and skills needed to design tax ii. Amount of information needed to administer the tax iii. Susceptibility to evasion iv. No. of tax payments to be made and accounted for

Concerns with levying any new tax which implies the ease with which a new tax can be levied given the fiscal structure of a country

Administrative Feasibility

1.4 Missing Links and Focusing the Theme 27

3 Key determinants of optimal ecotax rate: Marginal External Cost (MEC), Marginal Cost of Public Fund (MCPF) and Elasticity of Demand

Issues persist in the computation of these determinants: MEC: Different industries have varying levels of pollution MCPF: Depends upon complex parameters thus making computation difficult Elasticity of Demand: Elasticity may vary across the markets in the same economy

Even though it is difficult to arrive at specific numbers for optimal ecotax rate but theoretical deductions of such rates is imperative

4

5

Optimal Rates of No Ecotaxes

3

S.

Table 1.3 (continued)

Tax on kerosene would be regressive whereas, tax on LPG would be progressive (Datta, 2010)

Concern emerges because proportion of poor household’s total expenditure may be larger than higher income household for some products

Regressive Tax: Tax rate decreases with the increase in the income of the people

–

Various examples exist where double-dividend prevails

Studies show that the net gain from ecotaxes could range from small positive to small negative values

Base and Incidence of Existence of Double Ecotaxes Dividend

Validation of Porter’s hypothesis could nullify the claims of hurting competitiveness

Existence of double dividend could diminish the competitiveness issues (Fullerton et al., 2008)

Existence of pollution haven hypothesis i.e. exporting of dirty industries to countries with weak environmental regulations –

(continued)

Ecotax levied on polluting input/outputs is easier to monitor and also economically viable

Administrative Feasibility

If the tax rate is fixed – near its optimum level the revenue should also be stabilised, ceteris paribus

Aim should be to minimise the error between optimal & actual rate of ecotaxation so that inefficiency could be minimised

For stabilising revenue one need not increase the tax rate indefinitely, as proposed by Glover (1994)

Competitiveness Issues Stability of Revenue

28 1 Introduction

–

Optimal Rates of No Ecotaxes

Source As mentioned in the table

6

S.

Table 1.3 (continued)

Distributional issues are country specific

–

Base and Incidence of Existence of Double Ecotaxes Dividend –

–

Competitiveness Issues Stability of Revenue –

Administrative Feasibility

1.4 Missing Links and Focusing the Theme 29

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1 Introduction

of these fiscal instruments. Here we would propose some of these issues, addressing of which is indispensable for the holistic understanding of the ecotaxes and its implications on the economy and further its contextual superiority and limitations. First and foremost is the issue of the existence of conflicting definitions of environmental taxation in the literature which to best of our knowledge has not been addressed adequately in the literature. The clarity in the discourse on ecotax as a concept calls for analytical insights. Second, the issue of defining the base of environmental taxes has also not been addressed succinctly in the existing literature. Even though there have been several studies on environmental taxes, especially so in the Nordic countries, this issue seems to have not been appropriately dealt with. This could also be due to the lack of a comprehensive and uniformly accepted definition of environmental taxes in the literature. Therefore, zeroing on a definition or a theoretically identifiable base calls for analysis. Third, the economic issues pertaining to incidence, double dividend and competitiveness have been addressed only in the European countries. These issues have not been explored much in the developing countries, especially so in the Indian context. Fourth, even though the administrative issues regarding the implementation of ecotaxes have been discussed in the scenario of the developed countries, these have not been addressed adequately in the Indian context. The issue of administering any tax is country specific and therefore it is vital to explore this issue in the native context.

1.4.1 Questions Seeking Answers It is clear that this area needs to be explored from its fundamentals because a comprehensive attempt towards this is still non-existent. It is imperative to put forward some questions which are pertinent to this realm for which one needs to probe deeper into the subject. A cursory glance of the brief historical framework of these instruments in India did reinforce the notion of minimal existence of ecotaxes and thus one needs to examine the present status of these taxes. Further, while delving into the historicity it is imperative to look into the manner in which these taxes are defined and thus designed. The adequateness of any market-based instrument must be examined from the fulfilment of the primary objective of such an instrument and there should not be any ambiguity regarding the prima facie objective of environmental taxes which is by its construct, preserving the environmental quality. Therefore, if an already existing tax is levied on the name of preserving environment but is designed so as to only maximise revenue, then the levy of this tax must be questioned. Seeking an investigation into this matter would a priori require asking the question of, ‘How do we define ecotaxes?’ It is only after systematically defining these taxes one can objectively question the adequateness of such taxes. This definition will not only help in differentiating a common tax from a specially designed tax for environment but will further aid in identifying the polluting tax bases for a potential levy of these taxes in the Indian context. Since the study of ecotaxes is a blend of two established disciplines of economics, environmental economics and public finance, it is important to

1.4 Missing Links and Focusing the Theme

31

utilise the fundamentals of both of these disciplines while answering the questions posed above. A tax in public finance has two primary components, first is the tax base and second is the tax rate. The neo-classical economics had always rested its ideological bearings on the notion of optimality so therefore it becomes necessary to examine that if at all the optimality of ecotax rates is a question to ponder upon. Once these questions on the definition, status, adequateness, tax bases and optimality of tax rates are answered, then one needs to move further from these design issues to the questions pertaining to implications of these taxes in the Indian context. This will lead us to asking questions related to the equity aspects of the ecotaxes. The question of equity is of prime importance to this subject, not only because public finance is one of the fundamental discipline for understanding these taxes and the issue of regressivity of any tax is a concern in this subject, but rather the fact that India is still a developing country and if a tax for environmental restoration in any manner is regressive then its incidence on poor would be higher. This has to then be addressed if this fiscal measure has to be proposed for India. In all, the issue of implication of ecotaxes, i.e. the concern about fairness is of extreme importance to developing countries vis-à-vis that of its developed counterparts. Another related question that requires analytical observation is the issue of competitiveness which could also be subsumed under the notion of fairness associated with ecotaxes. The question that needs to be asked is, ‘does the levy of these taxes reduce competitiveness of the sectors on which the taxes are imposed?’ and if yes, then, ‘how can this be overcome so as to reap the double dividend from such a levy?’ While suggesting the aforementioned questions, by no means, we have proposed it to be an exhaustive list, but certainly interrogating these issues will lead to an enhanced understanding of ecotaxes.

1.5 Approaching to Ecotax Application The questions posed regarding the design and implication issues of ecotaxes gives a comprehensive framework for initiating a study so as to comprehend ecotaxes not only through its theoretical scaffoldings but also through the issues associated with its application. Given this framework, one must lay down the major objectives of this study. These objectives can be broadly classified into two major categories, first the design related aspects which will need a holistic understanding of the experiences of levying environmentally related taxes17 and also other fiscal instruments levied in the countries where it first emerged and so also the countries where these fiscal instruments are extensively used. However, while exploring these experiences, one must also examine the contextual background under which these fiscal instruments have been levied. Such an analysis will help in bringing out the differences in levying these instruments in the context of India, which could be starkly different 17 OECD/EEA database terms the ecotaxes in the wider umbrella of environmentally related taxes. An extensive discussion regarding this could be traced in chapter II.

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1 Introduction

from that of the developed world. The examination of these fiscal instruments is indispensable because most of these fiscal levies have been imposed under various headings and objectives. When an examination of all these instruments is conducted, this will help in analysing the issues in the implementation of the taxes and thus will guide us towards the documentation of the conceptual framework of these taxes under the wider umbrella of Environmental Fiscal Instruments (EFIs). Further, we need to delve deeper into defining these taxes comprehensively which will provide a basis for examining whether the existing taxes in India which are pro-environment can be regarded as pollution taxes in its true sense. Thereafter, it is necessary to identify various polluting sectors for a potential levy of ecotaxes in India. This will aid us in identifying the polluting tax bases. The second category of objectives is to gauge the implementation aspects related to these fiscal instruments. For this, it is imperative to deduce the base and the optimal rates, if any, of ecotaxation which forms the basis of approaching towards equity issues pertaining to these taxes, i.e. incidence and competitiveness issues. The tax base and rates will fundamentally provide the framework for computing the incidence of ecotaxes and will lead us in identifying the fairness quotient of these instruments. Further, the issue of competitiveness must also be addressed by identifying the leading industries and other stake holders, primarily the workers, who will get impacted due to a potential levy of ecotaxes. Thus, testing the notion of double-dividend hypothesis is a must which will also provide an additional parameter to compute the implications of these taxes.

1.6 Need for Understanding The wider prevalence and successful implementation of these fiscal instruments and the failure of CAC policies in curbing environmental degradation in India raises a pertinent question in the Indian perspective, ‘how can these instruments be levied to majorly arrest the environmental degradation and let India follow the path of sustainability by not trading off its growth trajectory?’. Attempting to answer this question would require an in-depth understanding of ecotaxes followed by gauging the issues related to the implementation of such a levy. In an attempt to answer the first part of the aforementioned question, one must attempt to critically examine the fundamental understanding of these instruments which begins from an introspection of the definition of these instruments. Arriving at a comprehensive definition provides a framework for understanding these taxes and therefore is indispensable for conducting a detailed study. Further, a successful implementation of these taxes would require an understanding of the appropriate tax bases in the Indian context and the relevance of optimal tax rates. This will be essential for answering the equity concerns related to any fiscal instrument and thus will also be important for comprehending ecotaxes. The second part of the question posed above requires an understanding of the implication issues which does not restrict to only equity concerns but also extends to the possibility of reaping double dividend in the case of ecotaxes while examining

1.6 Need for Understanding

33

the effect on export competitiveness. It is important to comprehend the relevance of the double-dividend hypothesis especially in the Indian context. It is clear that any additional levy would raise the prices of not only the good on which it is levied but also of other goods of the industries which rely on the taxed good as an input to their production. This will then lead to a multiplier effect which will necessitate that the growth would be compromised. India still being the developing country cannot afford to trade-off its growth trajectory and therefore the possibility of channelling the revenue generated (i.e. testing the double-dividend hypothesis) from the levy of such taxes in a manner that necessitates technological innovation or any other feasible transfers will be an imperative issue to delve into. Thus, this study would not only examine the design and implementation issues but will also scrutinise the possibilities of achieving maximum gains and minimising the trade-offs, if any.

1.7 Methodology and Scope 1.7.1 Data and Methodology The methodology followed in this study is comprehensive as compared to the other studies in the Indian context as a holistic understanding of ecotaxes is given by not only reviewing the international experiences but also by quantitatively analysing the effect of proposed ecotaxes at the union level. The aforementioned objectives have been achieved in the following manner. First, for documenting conceptual framework in developing countries, various issues of ecotaxes were analysed by adopting a theoretical framework of ecotaxes which was discussed in Sect. 1.2. Relative international experiences have been explored by identifying a mix of developed and developing countries where ecotaxes or to say environmentally related taxes are already in use. The study does not confine to the use of only ecotaxes but the utilization of the other kind of fiscal instruments such as environmental subsidies and environmental tax expenditures have also been explored by mapping the status of Environmental Fiscal Instruments (EFIs) in these countries using the OECD/EEA database in Chap. 2. Thereafter, in Chap. 3, a comprehensive definition of ecotaxes has been proposed which was utilised for conceptualising ecotaxes. This definition was then used for understanding the adequacy and relevance of the current situation of ecotaxes in India. Subsequently, a definition of environment from the Environment (Protection) Act, 1986, has been adopted. This helped in narrowing down the polluting sectors and goods that pose a threat to the environment in India which aided us to identify the potential polluting tax bases. For meeting the second major category of the objective, i.e. of deducing optimal rates of taxation an attempt was made to update the only existing Environmentally Extended Social Accounting Matrix (E-SAM) for India 2006–07 in Chap. 4. Thereafter, an E-SAM analysis was used for deducing the optimal rates of taxation and thus examining the incidence (Chap. 5), existence of double dividend and competitiveness issues related to these taxes (Chap. 6).

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1 Introduction

The data sources used for the aforementioned mentioned methods was the OECD/EEA database which was utilised for analysing the international experiences in various developed and developing countries. The revenue details for most of the levied ecotaxes were also available in the database. The input–output matrix and the Social Accounting Matrix (SAM) of 2007–08 for India were used from the Centre for Statistical Organisation (CSO) and from the study by Pradhan et al. (2013), respectively. The only existing E-SAM for India for 2006–07 by Pal et al. (2015) was also used. A critical examination of the experiences of the EFIs in the developed and developing countries highlighted the limitations and superiority of ecotaxes over other fiscal instruments such as subsidies and tax expenditure. Further, the status and adequacy of environmental taxes in the Indian context could have been analysed by constructing a definition for ecotaxes and various polluting sectors and sources were identified for India which further helped in identifying various tax bases for the levy of ecotaxation. The resultant of the implications of these taxes was that we could theoretically deduce the redundancy of the optimal rates of ecotaxes. Thereafter, the incidence of the potential levy of these taxes in the linear general equilibrium framework (E-SAM) was modelled for the nine categories of households, five for rural and four for urban households. The existence of double-dividend hypothesis in the Indian context was also proved and the effect on the competitiveness of the sectors on which the ecotaxes was modelled, could have been also computed.

1.7.2 Scope of the Book The major focus of this study is to analyse the structure of ecotaxes in India so as to seek its rationale, application and incidence on emerging environmental problems. Since the concept of ecotax is still emerging in India and is plagued with large empirical difficulties, it is imperative to understand the complexities in the design and implementation of ecotaxes at the union level. The proposed study is limited only to the level of Union Government of India because the input–output data is not available for the Indian states which is essential for analysing the implications of levying ecotaxes in a linear general equilibrium framework. Moreover, according to Ahmad and Stern (2007), ecotaxes like carbon tax are administered better at the federal level as there would be no issues of differential rate structures between the various states in India and hence would not lead to any tax evasions. With the advent of Goods and Services Tax (GST), regime in India, examination of these taxes from the viewpoint of federal government becomes all the more relevant. Additionally, the Goods and Services Tax Council of India ensures that all the aspects related to the GST are democratically determined and therefore, examining the application of ecotaxes in the GST regime will automatically address the administrative issues of these taxes at the state governments’ level as well. Through this study, a debate at the policy level could be steered so that ecotaxes could be considered as an important fiscal tool to answer some of the problems of

1.7 Methodology and Scope

35

natural resource management. It also attempts to add to the existing literature on the Pigouvian taxation by revisiting the critical issues, including the most pertinent issue of optimal tax rates, with the implementation of ecotaxes particularly in developing countries such as India.

1.7.3 Scheme of Chapters The study is spread over seven chapters wherein the first chapter is the introduction that details the issues and gaps in the literature concerning ecotaxes and thus formulates the objectives and approach of this study. Chapter two includes discussion to understand ecotaxes in the wider perspective of Environmental Fiscal Instruments (EFIs) and thereby document these instruments for eleven OECD countries and four Emerging countries which also includes India. OECD/EEA database has been used for this analysis. This is followed by the status of environmental regulations in India in the third chapter, where the status of ecotaxes in India have been examined by constructing a holistic definition and further the role of legislative, executive and judiciary has been critically examined in the context of environmental preservation in India. In chapter four, various issues in designing ecotaxes in India have been explored and therefore the Environmentally Extended Social Accounting Matrix (E-SAM) for India for the year 2007–08 is deliberated upon. E-SAM also identifies several tax bases for a potential levy of these taxes and theoretically deduces the redundancy of optimal rates for such taxes. The issue about the ‘incidence of ecotaxes’ in India has been modelled in an E-SAM framework in the chapter five. This is followed by an examination of the ‘double-dividend hypothesis’ and effect on ‘export competitiveness’ of the sectors for which a potential levy of ecotaxes have been modelled, before summarising the entire study and providing concluding remarks along with some policy implications in chapter seven.

References Ahmad, E., & Stern, N. (2007). Effective carbon taxes and public policy options: Insights from India and Pakistan. LSE Asia Research Center Working Paper(28). Bannock, G., Baxter, R. E., & Davis, E. (1998). The Penguin dictionary of economics. New Delhi: Penguin Group. Barik, S. (2003). In the tax bracket again. Retrieved May 25, 2014, from Down To Earth: http:// www.downtoearth.org.in/node/13501?quicktabs_1=0 Bernow, S., Costanza, R., Daly, H. E., DeGennaro, R., Erlandson, D., Ferris, D., et al. (1998). Ecological tax reform. BioScience, 48, 193–196. Bovenberg, A. L., & Goulder, L. H. (2001). Environmental taxation and regulation. Cambridge: National Bureau of Economic Research Working Paper-8548. Bovenberg, L., & Cnossen, S. (1995). Public economics and the environment in an imperfect world. Kluwer Academic.

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1 Introduction

Brannlund, R., & Lundgren, T. (2009). Environmental policy without costs? A review of the porter hypothesis. International Review of Environmental and Resource Economics, 3(2), 75–117. CAG. (2014). Retrieved May 29, 2014, from http://saiindia.gov.in/english/home/Our_Products/ state_account/state_account.html Chauhan, P. (2007). Govt shelves = Green tax‘ proposal. Retrieved May 23, 2014, from http://www. tribuneindia.com/2007/20070130/himachal.htm Chelliah, R. J., Appasamy, P. P., Sankar, U., & Pandey, R. (2007). Ecotaxes on polluting inputs and outputs. New Delhi: Academic Foundation-MSE. Datta, A. (2010, September). The incidence of fuel taxation in India. Energy Economics, 32(Supplement 1), S26–S33. Eurostat. (2001). Environmental statistics: A statistical guide. Office for Official Publications of the European Communities. Accessed from: https://ec.europa.eu/eurostat/documents/3859598/ 5854253/KS-39-01-077-EN.PDF.pdf/5c97b328-6539-4290-9bca-97dea7b882bd?t=141478034 7000 Felder, S., & Schleiniger, R. (1995). Domestic environmental policy and international factor mobility: A general equilibrium analysis. Swiss Journal of Economics and Statistics, 547–558. Folmer, H. (2000). The porter hypothesis: Some empirical evidence from dutch dairy farms. Retrieved April 25, 2014, from Faculty of Social, Economic and Political Sciences: http://www. soc.uoc.gr/calendar/2000EAERE/papers/PDF/G1-Folmer.pdf Fullerton, D., Leicester, A., & Smith, S. (2008). Environmental taxes. Cambridge: National Bureau of Economic Research Working Paper Series. Gabel, L. H., & Sinclair-Desgagné, B. (1998). The firm, its routines and the environment. In T. Tietenberg, & H. Folmer (Eds.), The International Yearbook of Environmental and Resource Economics 1998/1999. Cheltenham: Edward Elgar. Gangan, S. (2010). DNA. Retrieved April 22, 2014, from http://www.dnaindia.com/mumbai/reportpollution-maharashtra-sees-red-okays-green-tax-1419016 Glover, D. (1994). Research issues in environmental tax reform. EEPSEA Special Paper. Goulder, L. (1995). Environmental taxes and the double dividend: A reader’s guide. International Tax and Public Finance, 2, 157–183. Government of Gujarat. (2011). Gujarat Geen Cess Act. Government of India. (2015). India’s intended nationally determined contribution: Working towards climate justice. New Delhi: Government of India. Government of India. (2018). Central Board of Indiect Taxes and Customs. Retrieved February 28, 2021, from Central Board of Indiect Taxes and Customs: https://cbic-gst.gov.in/pdf/compensat ion/notification-acts-subsumed-into-GST.pdf Government of India. (2019). Central Board of Indirect Taxes and Customs. Retrieved February 28, 2021, from Central Board of Indirect Taxes and Customs: https://www.cbic.gov.in/resour ces//htdocs-cbec/customs/cs-instructions/cs-instructions-2019/cs-ins-04-2019.pdf;jsessionid= C07D2A10EE6B9DE0DABAE9DEC98ED502 Government of Karnataka. (2009). The Karnataka Forest Act, 1963. Government of Kerala. (1986). The Kerala Forest (Amendment) Act, 1986. Government of Madhya Pradesh. (2009). The Madhya Pradesh Karadhan (Amendment) Act, 2009: Act 18 of 2009. Bhopal: Government of Madhya Pradesh. Government of Maharashtra. (1983). Maharashtra Forest Development (Tax on Sale of Forest Produce). Government of Sikkim. (2005). Sikkim Ecology Fund and Environment Cess Act. Gupta, S. (2002). Environmental benefits and cost savings through market based instruments: An application using state level data from India. Bangalore. Harikumar, B. (2011, March 30). Gujarat introduces Green Cess. Retrieved 25 May, 2014, from http://www.kseboa.org/news/gujarat-introduces-greencess-of-re-002-per-unit-of-ele ctricity-generated-30031547.html IEA. (2010). CO2 emissions from fuel combustion highlights. IEA.

References

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Karpagam, M., Thiyagarajan, S., & Jaikumar, G. (2012). An appraisal of India’s policy to control industrial water pollution. International Journal of Environment and Development, 9(1), 45–61. Kolstad, C. D. (2010). Environmental economics (2nd ed.). Oxford University Press. Kunwar, D. (2009, September 23). Preserving greenery. Retrieved April 12, 2014, from Times of India: http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Sou rce=Pa Mandal, K., Rangarajan, R., & Bandopadhyay, C. (2013). Fiscal instruments for environment and climate change: Experience from Indian States. Ministry of Finance. (2014). Notification No. 20/2014-Central Excise. New Delhi: Government of India. Ministry of Finance. (2015). Notification No. 1/2015-Clean Energy Cess. New Delhi: Government of India. MoEF. (2009). State of Environment Report India. Government of India. Norregaard, J., & Reppelin-Hill, V. (2000). Taxes and tradable permits as instruments for controlling pollution: Theory and practice. IMF Working Paper(WP/00/13). Oates, W. E. (1991). Pollution charges as a source of public revenues. Department of Economics Working Paper No. 91-22. Oates, W. E. (1994). Green taxes: Can we protect the environment and improve the tax system at the same time? Southern Economic Journal, 61, 915–922. Palmer, K., Oates, W. E., & Portney, P. R. (1995). Tightening environmental standards: The benefitcost or the no-cost paradigm? Journal of Economic Perspectives, 9, 119–132. Pandey, R. (2005). Estimating sectoral and geographical industrial pollution inventories in India: Implications for using effluent Charge vs. Regulation. Journal of Development Studies, 33–61. Pearce, D. (1991). The role of carbon taxes in adjusting to global warming. The Economic Journal, 101(407), 938–948. Pigou, A. C. (1920). The economics of welfare. Macmillan and Company Limited. Pitrone, F. (2015). Defining “Environmental Taxes”: Input from the Court of Justice of the European Union. Bulletin for International Taxation Journal. Planning Commission. (2012). Environment, Forestry and Wildlife. New Delhi: Government of India. Planning Commission. (2007). Environment and environmental regulatory mechanisms. New Delhi: Government of India. Porter, M. (1991). America’s green strategy. In Scientific American (p. 168). Sahu, G. (2007). Environmental Governance and Role of Judiciary in India. Sandmo, A. (1975). Optimal taxation in the presence of externalities. Swedish Journal of Economics, 77, 86–98. Sandmo, A. (2009). The scale and scope of environmental taxation. Norwegian School of Economics and Business Administration. Schlegelmilch, K. ( 2002). Overview and recent experiences with ecological tax reforms in Europe. Schob, R. (1996). Evaluating tax reforms in the presence of externalities. Oxford Economic Papers, 48, 537–555. Shivadekar, S. (2010). Times of India. Retrieved Apri; 20, 2014, from https://timesofindia.indiat imes.com/city/mumbai/State-govt-to-levy-green-tax-on-greying-vehicles/articleshow/625872 1.cms Srivastava, D. K., & Kumar, K. K. (2014). Environment and fiscal reforms in India. New Delhi: SAGE. Srivastava, D. K., Kumar, K. K., Rao, C. B., & Purohit, B. C. (2011). Coping with pollution: Ecotaxes in a GST regime. Chennai: MSE. Steinbach, N., Palm, V., Cederlund, M., Georgescu, A., & Hass, J. (2009). Revision of SEEA 2003: Outcome Paper: Environmental Taxes. Retrieved March 25, 2011, Accessed from: http://unstats. un.org/unsd/envaccounting/londongroup/meeting14/LG14_18a.pdf Taylor, T., Fredotovic, M., Povh, D., & Markandya, A. (2010). Sustainable tourism and economic instruments: The case of Hvar, Croatia.

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The Hindu. (2011). Retrieved May 25, 2014, from http://www.thehindu.com/business/Economy/ article1498700.ece Verma, R. (2016). Ecotaxes: A comparative study of India and China. ISEC Working Paper Series, WP353. Vlist, A. V., Withagen, C., & Folmer, H. (2005). Testing Porter’s hypothesis: A stochastic frontier panel data analysis of Dutch horticulture. The Future of Rural Europe in the Global Agri-Food System. Copenhagen, Denmark. World Bank, Ministry of Environment and Forest, & Confederation of Indian Industry. (2002). International Workshop on Economic Instruments for Industrial Pollution Prevention and Control in India. Proceedings. New Delhi. Zimmermann, K. W., & Gaynor, J. D. (1999). The double dividend: Miracle or Fata Morgana? Public Choice, 101, 39–58.

Chapter 2

International Experiences of Ecotaxes: A Few Lessons

2.1 Understanding Environmental Fiscal Instruments (EFIs) Market failures typically plague any computation pertaining to environmental goods.1 Externalities play an important role in these. Coase (1960) brought out that environmental goods—including lakes, forest resources, atmosphere, etc.—are public goods, and therefore, property rights are not well defined which causes their over-exploitation. The environmental goods have this impact but that affects biota that is organically linked. The generation of negative externalities advances deterioration in the entire ecosystem both in quality and in quantum. Market failures also occur where a positive externality is generated in the environmental situation such as in the case of innovations in eco-friendly technologies pertaining to electricity through solar, wind or tidal energy. Here, we confront a possibility of under-investment owing to the high costs of such technologies as the private benefits to investors are usually less than their possible social benefits, thus leading to a sub-optimal level of output. Here, an attempt is made to decipher the role of Environmental Fiscal Instruments (EFIs) in addressing the issues of market failure specific to India. In this chapter, efforts are made to review the use of a few fiscal instruments across environmentally active nations and other concerned. This will help to clarify India’s status vis-à-vis the other nations and to get to a few lessons wherever possible. Such review can be used as the fact that several European countries have already experienced positive impact of the green fiscal instruments (Table 2.1). This chapter draws from the author’s co-authored work originally published in Margin—The Journal of Applied Economic Research, Vol. 12, Issue 3. Copyright © 2018 National Council of Applied Economic Research, New Delhi. All rights reserved. Reproduced with the permission of the copyright holders and the publishers, SAGE Publications India Pvt. Ltd, New Delhi. 1 Market

failure can be defined simply as a condition where a sub-optimal (inefficient) level of output is produced. Therefore, it does not necessarily imply that market for a good does not exist it simply means that the provisioning of the good in market is sub-optimal; i.e., it does not maximise total surplus. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 39 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8_2

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2 International Experiences of Ecotaxes: A Few Lessons

Table 2.1 Impact of a green shift in taxation: selected international evidence Country and tax

Period evaluated

Impact

Finland: Energy and carbon taxes

1990–2005

CO2 emissions 7% lower than would have otherwise been; a shift from carbon tax to output tax on electricity in 1997 may have lessened the impact

Norway: Carbon and sulphur dioxide taxes

1991–2007

21% reduction in CO2 from power plants by 1995; 14% national reduction in CO2 in the 1990s; 2% attributed to carbon tax; 12% reduction in CO2 emissions per unit of GDP

Denmark: Energy and carbon taxes

1992

CO2 emissions in affected sectors down by 6%, economic growth up by 20% between 1988 and 1997 and a 5% reduction in emission in one year in response to tax increase; in the 1990s, a 23% reduction in CO2 from the usual trend and energy efficiency increased by 26%; subsidy to renewables may have accounted for a greater proportion of emissions reductions than the tax

Sweden: Energy and carbon taxes

1990–2007

Emissions reductions of 0.5 million tons per annum; emissions would have been 20% higher than 1990 levels without tax

The Netherlands: Energy tax

1999–2007

Emissions 3.5% lower than would have otherwise been; low tax rates may have limited impact

Germany: Environmental tax reform, taxes on transport, fuels and electricity

1999–2005

CO2 reduced by fifteen per cent between 1990 and 1999 and 1% between 1999 and 2005; CO2 emissions 2–3% lower by 2005 than they would have been without tax; German re-unification an important factor in reductions

UK: Industrial energy tax

2001–10

UK CO2 emissions reduced by 2% in 2002 and 2.25% in 2003 and cumulative savings of 16.5 million tons of carbon up to 2005; reduction in UK energy demand of 2.9% estimated by 2010

Source Green Fiscal Commission (2009) as cited in Srivastava and Kumar (2014)

2.1 Understanding Environmental Fiscal Instruments (EFIs)

41

Table 2.2 Details of a few environmentally related taxes in OECD countries Countries

Name of tax

Specific tax base

Rate

Australia

Oil recycling levy

Petroleum-based oils and greases and their synthetic equivalents

0.0384e per litre (liquids) or per kg (greases)

Canada

Denmark

Finland

Product stewardship oil Lubricant oil levy

0.0396e per litre

Motive fuel taxes

Diesel fuel

0.0658e per litre

Hydrocarbon duty

Coke used in steel production

0.0095e per kg

Duty on CO2

Coal

59.5243e per tonne

Duty on nitrogen

Nitrogen used by households

0.6702e per kg

Excise on fuels and electricity

A energy tax—40 coal

54.5400e per tonne

Strategic stockpile fee 40 coal (security of supply fee) Germany

Iceland

Netherlands Norway

Sweden

1.1800e per tonne

Duty on electricity

Electricity consumption 0.0552e per kWh exceeding 4000 kWh per year in all-year dwellings that are heated by electricity

Nuclear fuel tax

Use of nuclear fuels

145.0000e per gram plutonium 239, plutonium 241, uranium 233 or uranium 235 used in nuclear fuel rods

Carbon tax

Diesel

0.0354e per litre

General excise on petrol

Unleaded petrol

0.1508e per litre

Duty on petrol

Leaded petrol

0.6529e per litre

Fuel tax (tax on coal)

Coal

12.5600e per 1000 kg

Basic tax on mineral oil Heavy fuel oil

0.1995e per litre

CO2 -tax on mineral products

Diesel

0.0794e per litre

Energy tax on electricity

Electricity consumption—in some remote areas

0.0216e per kWh

Tax on nuclear power

Thermal installation in nuclear power stations

1462.2980e per MW and month

Electricity production

0.7% of the price

United Kingdom Non-fossil fuel obligation levy

(continued)

42

2 International Experiences of Ecotaxes: A Few Lessons

Table 2.2 (continued) Countries

United States

Name of tax

Specific tax base

Climate change levy

Coal #N/A consumption—ordinary rate

Rate

Compressed natural gas Compressed natural gas 0.0364e per litre tax Aviation fuel tax

Kerosene for use in aviation, LUST tax

0.0002e per litre

Source OECD-EEA database

EFIs are the fiscal instruments that help in environmental protection, and these have been taken as providing subsidies to the initiatives that are environment friendly like solar projects or imposing tax on polluting sectors, etc. These instruments are expected to lead to overall environmental improvement by utilising both positive externalities and internalising negative externalities. They can be broadly divided into two groups: instruments that address positive externalities include environmental subsidies and environmental tax expenditures, and instruments that target negative externalities include environmental taxes and charges (Fig. 2.1). The foregoing analyses categorise and use these instruments in a different manner when compared with what is done in the literature on environmental policy (please refer to Kosonen and Nicodeme, 2012); literature normally does not identify environmental tax expenditure as a separate instrument while classifying the first group (Fig. 2.1). Further, the explicit links of EFIs with market failures have been identified while categorising them, which also addresses a gap in the literature.

Environmental Fiscal Instruments

Addressing Positive Exter-

Environmental Subsidy

Environmental Tax Expenditure

Internalising Negative Exter-

Environmental Taxes/Charges

Energy Taxes, Transport Taxes, Resource Taxes, Pollution Taxes and Other (Eurostat, 2001) Fig. 2.1 Categorisation of Environmental Fiscal Instruments. Source Author’s representation

2.1 Understanding Environmental Fiscal Instruments (EFIs)

43

The EFIs in the literature are classified under the taxes/charges and subsidies because these fiscal instruments emerge from public finance discipline that has been conventionally defined as a subject that, ‘is concerned with the income and expenditure of public authorities…’ (Dalton, 1922). Defined this way, taxes/charges are considered as income for the government and thus address negative externalities through levy of a fee, and subsidies are the share of government’s direct expenditure and thus address the positive externality through incentives. These arguments justify the general categorisation of EFIs. Thus, taxes and subsidies become two components of EFIs. However, this study considers tax expenditure to be different from subsidies for addressing positive externalities because tax expenditures could be defined as the revenue foregone by the government on account of tax concessions. This is shown in Fig. 2.1. The tax expenditures could occur in the form of reduced tax rates, or there could be a complete exemption that is used for promoting R&D in environmentally acceptable projects. Such concessions relate to revenue foregone by the government, whereas subsidies are direct payments used to encourage consumption or production of a commodity. Here, therefore, tax expenditures are treated as a separate category in contrast to the categorisation of tax concessions as a form of subsidies by Kosonen & Nicodeme (2009) which is akin to Goulder (2005) who considered tax credits as an added fiscal instrument for environmental protection. This framework forms the base to attain the objective of documenting ecotaxes in the overall perspective of EFIs and in analysing the revenue from them. Environmental Fiscal Reforms (EFR)2 is a policy option for the government which uses EFIs as its tool to achieve broader developmental objectives such as poverty eradication, while also addressing the environmental targets (Schlegelmilch et al., 2009). This is made possible as the revenue is generated by the means of environmental taxation and through a reduction/removal of subsidies on products that are considered to be harmful to the environment which would lead to savings in total expenditure. For example, removal of subsidies to the energy products such as kerosene, electricity, etc., would also be essential for adopting a holistic policy for preserving the environment. Even though, the revoking of subsidies to the environmentally harmful activities was not explicitly mentioned while detailing about the components of environmental subsidies but it would be an integral part of this because this policy would entail savings in the government’s expenditure, thus being a vital fiscal instrument for the government to achieve environmental objective by curtailing its budget deficits.

2 ‘Environmental

fiscal reform (EFR) refers to a range of taxation and pricing measures which can raise fiscal revenues while furthering environmental goals. This includes taxes on natural resource exploitation or on pollution. EFR can directly address environmental problems that threaten the livelihoods and health of the poor. EFR can also free up economic resources or generate revenues that can help to finance access of the poor to water, sanitation and electricity services’ (OECD, 2005) as cited in Schlegelmilch et al. (2009).

44

2 International Experiences of Ecotaxes: A Few Lessons

Environmental tax reform3 is another policy option which focuses on the aspect of revenue neutrality while levying environmental taxes. This can be done by withdrawing the existing distortionary taxes in a phased manner and replacing them with environmental taxes. The revenue loss to the government could be met by the revenue generated from the ecotaxes, thus attempting revenue neutrality. This is essentially the argument explaining the double-dividend hypothesis, i.e. to reap environmental gains and other welfare effects, from the reduction in the distortions, simultaneously (European Environment Agency, 2005). In contrast to EFR, an environmental tax reform only uses environmental taxes as its fiscal tool, whereas the major commonality between them is that both focus upon resource or fund mobilisation, but an EFR uses these funds for reducing poverty, whereas an environmental tax reform reduces distortions from other taxes such as income tax, VAT etc. (Schlegelmilch et al., 2009). Given the Indian context wherein fiscal deficit is a pressing issue, EFR would normally be a better policy option than ETR because financing poverty alleviation programmes through the revenue from a levy of ecotax would always be a priority over reducing distortions in the existing tax system.

2.2 Approach Towards EFIs The discussion on EFIs has been contextualized using the only comprehensive database available, i.e. the OECD-EEA database.4 It gives extensive information about various EFIs used across several countries and also information on the revenues. A set of fifteen countries was chosen to provide good database for a sound policy platform. For the purpose of meaningful analysis, these countries have been chosen from the list of OECD and emerging economies. Since the fiscal policy options examined here relate to the preservation of environment, the choice of countries from the OECD list has been based on the nations which have successfully utilized these fiscal instruments. The emerging nations have been chosen carefully so as to have some similar levels of comparisons across the countries which use the EFIs to conserve environment. Also, these fifteen countries are a part of the Annexure-II and Non-Annexure I nations of the UNFCCC. The former group of countries are responsible for not only giving financial and technical assistance to the emerging nations, but will also assist in developing and transferring environmentally friendly technologies (UNFCCC, 2014). The development of these technologies would also require the adoption of certain EFIs such as tax exemptions, reduced taxes and tax 3 “Environmental tax reform (ETR) is a reform of the national tax system where there is a shift of the

burden of taxation from conventional taxes, for example on labour, to environmentally damaging activities, such as resource use or pollution. The burden of taxes should fall more on ‘bads’ than ‘goods’ so that appropriate signals are given to consumers and producers and the tax burdens across the economy are better distributed from a sustainable development perspective” (European Environment Agency, 2005 as cited in Schlegelmilch et al., 2010). 4 http://www2.oecd.org/ecoinst/queries/.

2.2 Approach Towards EFIs

45

credits by both OECD and emerging economies, thus justifying their use. Such a choice would also ensure a rich mix of developed and developing countries. Among the 37 OECD countries, 11 countries are selected of which 5 are Nordic countries—Denmark, Finland, Iceland, Norway and Sweden—and the rest are Australia, Canada, Netherlands, Germany, United Kingdom (UK) and United States of America (US/USA). The Nordic countries were included because they are considered as environmentally conscious countries worldwide and also the pioneers in levying environmental taxes (OECD, 2002; OECD, 2006 as cited in Barde & Godard, 2012). The other European countries were selected as they are also environmentally active (Szigeti, 2005); Australia, Canada and the US were chosen because among the non-European OECD members they recently have been pro-active on environmental improvement. Among the emerging countries, the BRICS nations have been included so as to analyse the development of ecotaxes among developing countries which are comparable to India in terms of their macroeconomic structure. However, it was not possible to include Russia due to the unavailability of data on EFIs and also as it is a part of the OECD countries. Therefore, comparison could be undertaken across the remaining four countries, i.e. Brazil, India, China and South Africa. Analysing the revenue from ecotaxes in a comparative perspective of the fifteen countries selected above from the OECD-EEA database was stated in the objectives. The financial cost of subsidies and tax expenditures would have been the optimum measure to examine the cost to the exchequer associated with these measures, but such analysis could not be attempted owing to the unavailability of data. However, analysing the revenue generated from these taxes is essential, because it is the byproduct of these levies and can be used for various environmental and developmental purposes. These also include financing of environmental subsidies. Further, provided the condition of environmental situation in India, as depicted by severe deteriorating air quality, water bodies, etc., highlighted by World Bank (2014), an important policy question would then be, how best to utilise the revenue from these instruments. While undertaking the comparison across the countries, absolute revenue details were converted into relative ratios of their respective GDP and total tax revenue for the OECD countries, whereas GDP and total net indirect taxes were used to normalize the ecotax revenues from the four emerging economies. This was done because the data on total tax revenue for the emerging economies is not available easily. Data on their net indirect taxes was obtained from the World Bank database. GDP figures for these countries were also taken from the World Bank database. The GDP figures for the selected OECD countries are at current prices and current exchange rates, while GDP for emerging economies is at current prices. The data on total tax/net indirect tax revenue is also in nominal values. These procedures would not affect the analysis; as the parameter used here is that of ratios and not absolute values, hence if both the numerator and denominator are in nominal or real values, the ratios will not be affected. The time period for the entire analysis is from 1994 to 2010.

46

2 International Experiences of Ecotaxes: A Few Lessons

2.3 Status of EFIs in Selected OECD and Emerging Economies The status of the countries under consideration provides a good ground in understanding the application of environmentally related taxes5 in varying circumstances. Initially, it is necessary to look into the taxes that are environmentally related, and then, the analyses move towards understanding the subsidy regime.

2.3.1 Status of Environmentally Related Taxes/Charges The taxes in the foregoing analyses are been classified into six categories: energy taxes, transport taxes, pollution taxes, resource taxes, fees/charges and others. The first four categories are adopted from Eurostat (2001),6 as also done by Steinbach et al. (2009), whereas the ‘Others’ category included environmentally related taxes which could not be classified under the first four categories. Fees and charges have been kept separate to differentiate them from taxes and are categorised for the OECD and emerging economies.

2.3.1.1 i.

5 The

OECD Countries

Energy Taxes: In the eleven OECD countries, energy taxes are the most common form of environmental levies7 and a few of these have been described in Table 2.2. These include 27% of the total environmental levies in these countries. The UK and South Africa rely most upon energy taxes (38% of the total environmental levies comprise energy taxes), besides Australia the least (only 9% comprise energy taxes). The tax base of the energy taxes in these countries

OECD-EEA database refers these taxes as ‘Environmentally Related Taxes’ and not environmental taxes. The name itself widens the scope of green taxes, but it also limits the effect of these taxes in curbing pollution. A more detailed explanation of this issue has been addressed in Sect. 3.2 of Chap. 3. 6 Eurostat (2001), as also cited in Steinbach et al. (2009), has the following definitions: ‘Energy taxes are taxes on energy products like petrol, diesel, electricity, coal, etc., which are used for transportation and stationary purposes, as well as a tax on CO2 . ‘Transport taxes are those which are confined to the ownership and the usage of vehicles, including taxes on the aviation industry’.. ‘Pollution taxes are those levied on activities which pollute water and air and those which create noise pollution and solid waste. These are targeted by measuring the emission levels from these activities. A tax on sulphur dioxide also comes under this category’. ‘Resource taxes are taxes on activities which deplete natural resources such as water and forests’. In the Netherlands, there is a tax on groundwater extraction which fits in this category, and in India, certain states levy a ‘forest development tax’ which would also come under this category. This has been detailed in Sect. 1.1.2. 7 Environmental levies imply five categories of environmentally related taxes and fee/charge.

2.3 Status of EFIs in Selected OECD and Emerging Economies

ii.

iii.

iv.

v.

vi.

47

is petroleum products and electricity. Further, all countries levy some form of energy taxes. But, the range in the proportion of use of energy taxes across the list of these countries is 29% points which is surely on a higher side. Transport Taxes: These are another important form of environmental tax in the OECD countries. These together constitute 14% of the total environmental levies in these countries. Iceland relies the most (30%) and Germany the least (9%) on these types of taxes. The variation across countries is low compared to that in energy taxes but is still large at 21% points. The tax base is mostly vehicles, and the tax is levied both in the form of ad valorem and in the form of per-unit tax. The tax rate is progressive as it differentiates on various bases such as seating capacity, weight of the vehicle and fuel used. Pollution Taxes: A general understanding is that the pollution taxes are levied on emissions only. Four of the 11 countries do not charge any tax that could be categorised under this heading. The total proportion of this tax is only 5%, which indicates that this is not so much a preferred tax, due to the difficulties in administration of the tax. One can understand the difficulty in monitoring emissions from the polluting source, which is the reason behind not using that as tax base in Canada, Germany, UK and Iceland. In this category, the proportion of these taxes is the highest for Australia (17%), followed by Netherlands (16%) and Norway (15%). Australia and Netherlands are the only countries that levy a pollution tax on noise generated from airplanes. Also, Australia’s pollution taxes cover all the types of pollution as mentioned in the classification above, i.e. air, water, solid waste and noise. Resource Tax: This kind of tax is not very common among the selected OECD countries. Only 7% of the total taxes amount to resource taxes. Finland, Germany, Iceland, Norway and UK do not levy any form of resource taxes. United States of America is the highest in this category with 12% of its total levies as resource taxes. The rest of the countries’ share ranges between 2 and 5%. The US has 30 such levies which can be categorised as: severance tax, mining tax/licence and timber tax, with the other levies being some variant of these. The tax bases for the other countries are similar to that of US. Fee/Charges: The environmental levies in this category are the second most used in the OECD countries, and its total share is around 25%. Germany stands highest with the share of fees and charges in its total environmental levies above 73% of its environmental levies. These are in the form of a fee or a charge. For the US, this share is only 5%. Of the 16 charges levied in Germany, 11 are on water extraction. Other countries also levy charges on water extraction, hunting, sewage and waste management, etc. (please refer to Table 2.2). Others: This category forms the third largest of the defined classes. That also hints that the Eurostat (2001) classification is not holistic and leaves out a few. All those taxes that could not be classified under the above classes were put under this category. Twenty-three percentage of the total environmental levies could be treated as ‘others’. The maximum share of environmental taxes is in US, Iceland and Norway, and a whopping 30% of the taxes in these countries could not be classified under the Eurostat categories. Germany being

48

2 International Experiences of Ecotaxes: A Few Lessons

the only exception, where all the levies could be classified under the Eurostat’s definition. The taxes in this category are levied on hazardous chemicals and lead batteries, waste and sewerage and fees/charges on fishing, hunting, etc. 2.3.1.2

Emerging Economies

While analysing the data for the emerging economies, problems were faced in categorising several taxes because of insufficient information. Thus, for those levies, an additional category was created, ‘data unavailable’. i.

ii.

iii.

8 This

Energy Taxes: About 30% of the total environmental levies in the selected emerging economies are classified under energy taxes. Unlike the OECD countries, a major proportion of the taxes are not in the form of energy taxes. Brazil had the largest share in non-OECD nations levying 40% of its total levies in the form of energy taxes. India is second, with 35%. China, in contrast, does not have any levy which could be strictly termed an energy tax as per the Eurostat’s definition; it levies a domestic consumption tax on fuel and cars which could come under both energy and transport taxes. The energy taxes in Brazil are charged as a tax on electricity and fuel, whereas in India almost all of the states have a tax on electricity which accounts for the major share of energy taxes. South Africa levies three different kinds of energy taxes with the tax base being electricity, fuel and road accidents. A tax to generate a fund for road accidents is levied on diesel and petrol and is thus classified under energy tax. Transport Taxes: These taxes form the largest category in terms of its share in total levies. About 35% of the total levies are in the form of transportation taxes in the OECD countries. This is the only category in which all four countries have some form of taxes. India and Brazil have the largest share of about 40%. In India, a large share of this is constituted by the motor vehicles tax, but there are also taxes on old vehicles to discourage their use. Six Indian states have this form of tax, but not all the states are listed in the database (Verma, 2016).8 It can be reiterated that there are other taxes as well missing from the OECD-EEA database. South Africa has the smallest share in this category, which amounts to only 12% of its total levies. These are: ad valorem customs and excise duty and an airport passenger departure tax. Pollution Taxes: China has the maximum share of 10% in the pollution tax category. The situation in this category is similar to that of OECD countries, because this form of tax is not prevalent in emerging economies such as India and Brazil. Possibly, the difficulty in monitoring emissions, especially from a non-point source, such as motor vehicles makes these taxes difficult to implement. On the contrary, China’s pollutant charge system is one of the oldest emissions’ systems across the globe. It was established in 1982 and was reformed in 2003 (Xu, 2012). South Africa levies a CO2 vehicle emissions is one of our earlier analyses of ecotaxes in India and China.

2.3 Status of EFIs in Selected OECD and Emerging Economies

iv.

v.

vi.

vii.

49

tax which was introduced only in 2010. It just has two differential tax rates which would be levied after crossing a threshold limit. Resource Taxes: The situation in this category is similar to that of pollution taxes, and taxes in these categories have the lowest shares in terms of environmental levies in emerging economies, which amount to only 2%. The only major difference here is that among pollution taxes category, China and South Africa have a share, but in the resource taxes classification, only China has a high share of about 20%. None of the other three countries have any levies which could be classified under this category. China’s resource tax was introduced in 1993, and it has over 63 categories under which various rates are charged. These categories consist of various minerals and the tax is levied on the extraction of their ores. Fee/Charges: Only 9% of the total levies are termed as fees/charges in the four emerging nations. Only South Africa and China have these charges among others. Most of the South African levies are in the form of fees/charges, whereas these are only 20% in China. This is again a major difference between the OECD and emerging economies. About 25% of their total levies are fee/charges. China and South Africa have levied charges on water usage as also the OECD countries. South Africa, in addition, also levies charges on electricity and airport activities. Others: Only 3% of the environmental levies in these countries are grouped under not classified as per the Eurostat classification, and these are included here. The share of these levies is minimal and far less than in OECD countries. China and South Africa practice these types of environmental levies which could not be classified under any of the above categories. These are: farmland for non-agricultural use tax and urban land-use tax for China and an incandescent light bulb levy and plastic shopping bags levy in South Africa. Data Unavailable: There are a few levies for which data is not available and the share for these levies is 20%. Out of these, 25% data are in the case of India, 20% is for Brazil and 6% for South Africa. In the case of India, data was insufficient for only one tax, i.e. the tax on goods and passengers levied in 21 states of the country. This is why 25% of the environmental levies in India could not be classified under any of the categories. Tax base or tax rate for this tax are not specified, and only revenue data is given over the period. Therefore, it could not be classified into any category. In Brazil, there is no information on tax rates and bases for the taxes named as ‘contributions for interventions in the economic domain’, which is also the case for the road licensing fees in South Africa (Table 2.3).

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2 International Experiences of Ecotaxes: A Few Lessons

Table 2.3 Some environmentally related taxes in emerging economies Country

Name of instrument

Specific tax base

Tax rate (in Euros)

Brazil

Tax on the circulation of goods and services—electricity

Electricity

#N/A

Tax on the circulation of goods and services—fuels

Diesel

#N/A

Green tax on motor vehicles

Old vehicles

Various rates depending upon the state in which it is levied and type of vehicle: rates levied are: 3.056, 3.82, 7.64 15.28, 76.41

Additional tax on electrical energy (green cess)

All plants/generating companies in the state of Gujarat producing electrical energy

0.0003 per kW unit of energy

Pollutant charge

Discharge of Class I water pollutants

0.07 e

Urban land-use tax

Land use in county, town 0.07–1.37 per m2 and mining areas

Electricity levy

Electricity generated from non-renewable sources

0.0027

Carbon dioxide vehicle emissions tax

Double cabs- CO2 emissions above a threshold of 175 gCO2 /km

7.7991

India

China

South Africa

Source OECD-EEA database

2.3.2 Environmentally Motivated Subsidies and Tax Expenditures There are other two types of EFIs mentioned earlier, i.e. environmentally motivated subsidies and tax expenditures, in the selected OECD and Emerging economies (Tables 2.4 and 2.5). Even though the database classifies these under the broad class of subsidies, and further into grants, soft loans, tax reductions and other, here these are classified simply under subsidies and tax expenditure by following the fundamentals of public finance. This data for the emerging economies is available only for India and China, and thus, we were not able to analyse these EFIs for Brazil and South Africa. EFIs for which the classification was not clear were put under ‘Other’ category, which was further divided it into three sub-groups: ‘Other’ (Combination), ‘Other’ (Insufficient Information) and ‘Other’ (None).

2.3 Status of EFIs in Selected OECD and Emerging Economies

51

Table 2.4 Details of a few environmentally motivated subsidies in OECD countries Country

Name of Instrument

Details

Australia

Biodiversity and natural icons

“Aims to increase the area of native habitat and vegetation that is managed to reduce critical threats to biodiversity and to enhance the condition, connectivity and resilience of habitats and landscapes and also aims to reduce the impact of invasive species”

Low emissions energy development fund

“LEED funding support of around AUD30 million has been invested in a range of projects, including: wave, geothermal and solar thermal power generation; biomass projects including a mallee harvester, biofuel from algae and biomass pyrolysis and power generation from commercial and agricultural waste streams; LNG methane and carbon dioxide recovery”

Subsidy for conservation of soil and water courses

#N/A

Residential energy efficiency programme

Households with an income of $30,000 or less that use either home-heating fuel or electricity as the primary heating source will be eligible for a grant of up to $200 for furnace testing and tune-ups, a $1000 grant to top-up financial assistance for energy-saving renovations available through the federal EnerGuide for Low-Income Households programme (limited to houses built before 1980), real-time power metres and energy-efficiency training courses for homeowners

Grants for environmentally friendly agriculture

To improve the use of environmentally friendly practises in the agricultural sector. Half of the financing is supplied by the European Union

# – General subsidy for integrated product policy

Cleaner products—refunds from the CO2 tax: this is an extension of the other sub-scheme, where some of the revenues from the CO2 tax are used specifically for subsidising the manufacturing industry

Canada

Denmark

(continued)

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2 International Experiences of Ecotaxes: A Few Lessons

Table 2.4 (continued) Country

Name of Instrument

Details

Finland

Subsidy for the sanitation/wastewater sector

Grant, max. 50% of costs

Electricity conservation check

Electricity conservation assistants visit low-income households to check where they can save on electricity expenses

Support programme for hybrid buses in public transport

Investment into hybrid motors: the maximum grant amount for solo buses is EUR150,000; articulated buses receive up to EUR250,000

Municipal directive for the support of climate protection projects

Development of climate protection concepts

Germany

Iceland

Netherlands

Norway

Sweden

# – Subsidy for maintenance of forests Income and corporate tax exemptions on the incomes of forestry owners Energy investment allowance

Tax relief for investing in sustainable energy and certain types of energy-saving assets, providing an extra deduction in profit before tax of 44% of the total amount of qualifying energy investments in a calendar year. The energy investment deduction is available if a separate qualifying corporate asset costs at least EUR 450 and the total amount of energy investments per calendar year exceeds EUR 2100

General support for environmental projects and activities

Companies, households, municipalities and civil organisations can apply

Subsidies for sustainable electricity generation

Electricity generation based on landfill gas: a grant is given per unit of electricity produced, at the following rates: 1.1.2004: 0.0; 1.7.2004: 0.006e; 1.1.2005: 0.021e per kWh

VAT exemption for electrical vehicles

Electric vehicles are exempt from value added taxation

Return of taxes on fertilisers and pesticides

N/A

Eco car subsidy

2.5-year programme where SEK10,000 was paid to the buyers of an ‘eco car’ (continued)

2.3 Status of EFIs in Selected OECD and Emerging Economies

53

Table 2.4 (continued) Country

United Kingdom

United States

Name of Instrument

Details

Environmental support in agriculture

The aim is to reduce the pressure on the environment from agriculture, for example, by preservation of certain types of valuable land in the agricultural landscape, keep the landscape open, restoring and preserving the environment of sensitive areas, and organic production

Boiler scrappage scheme

Rebate for new boilers: households can apply for a grant of GBP400 to replace a working G-rated boiler with an A-rated boiler

Green bus fund

Funding for low-carbon emissions buses: large subsidies paid to organisations to invest in fleets of electric or hybrid buses

Energy efficient home credit

Builders can receive USD2000 for houses built that uses at least 50% less energy for heating and cooling than a comparable dwelling, and USD1000 for a house that uses at least 30% less (but less than 50% less) energy on heating and cooling than a comparable dwelling

Grants for low-emission school buses

This enables districts to obtain less-polluting school buses and new pollution control equipment for their current fleets

Source OECD-EEA database

2.3.2.1 i.

OECD Countries

Environmentally Motivated Subsidies: Under this category, 569 EFI schemes have been analysed across the 11 countries which consists of 864 different parts. Of this, 395 schemes come under environmentally motivated subsidies, as per the classification adopted in this paper. Thus, it forms 46% of the total EFIs that are levied in the countries under consideration, which is also the largest proportion in this category. Further, all the EFIs levied in Denmark and Iceland are in the form of environmental subsidies. In the case of Sweden except for one EFI, all the others are in the form of subsidies. Norway is the only country which does not have any environmental subsidy. Various kinds of subsidies are provided in these countries, and most of them are for conserving biodiversity, forests and water, soft loans for green initiatives, energy efficiency programmes, renewable energy, etc. Besides these, many

54

2 International Experiences of Ecotaxes: A Few Lessons

Table 2.5 Details of some environment-related subsidies/tax expenditures in emerging economies Country

Name of instrument

Details

India

VAT exemption for plant and machinery used in the generation of electricity from renewables

The following are exempt from VAT: plant and machinery, including their parts, used in the generation of electricity from: (a) solar (b) wind power and energy; (c) biomass as defined under the policy for promoting electricity generation from biomass

VAT exemption for waste paper

To promote paper recycling waste paper (raddi) is exempted from VAT

Subsidies for energy-saving products to benefit the people programme

To accelerate the spread of high-efficient and energy-saving products and stimulate economic development: a certified recycler of e-waste will receive CNY35, 85 and 80 as subsidy from the government for each set of air-conditioners, personal computers and refrigerators they dispose off, respectively

National scheme for subsidising the recyclers of electronic and electrical waste

To promote the appropriate disposal of electronic and electrical waste a certified recycler of e-waste will receive CNY85 and 35 as subsidy from the government for each TV set and washing machine they dispose of, respectively

National scheme of favourable prices for electricity generated by coal-burning power plants with desulphurisation and denitrogenation facilities

To promote coal-burning power plants to establish desulpurisation and denitrogenation facilities and reduce the emission of SO2 and NOx: electricity generated by a coal-burning power plant with denitrogenation facilities will be offered a favourable price when it supplies electricity to the national grids. The cost will be transferred to consumers through price adjustments

China

Source OECD-EEA database

ii.

countries have their country specific subsidies such as for tyre recycling in Canada, ecological buildings in Denmark, soft loans for pollution control in Finland and the US, market incentive programmes in Germany, carbon credits in Netherlands and so on. Environmental Tax Expenditures: The tax expenditure scheme is widely used EFI in some countries as their total share is 41%, i.e. 352 in total. Norway has three EFIs, and all of these promote the use of electric vehicles through favourable income tax treatments and VAT exemptions, whereas Denmark, Germany and Iceland do not have any such tax expenditure schemes. After Norway, the share of EFIs in the form of tax expenditure is highest for Finland, i.e. 78%, which amounts to 25 such EFIs. These instruments are diverse which

2.3 Status of EFIs in Selected OECD and Emerging Economies

iii.

55

include subsidising vehicles using alternative fuels such as biofuel, methane, etc., to the use of renewable electricity, pollution-abatement methods, biogas, etc. The US also uses tax expenditures, and its share is 68% of the total EFIs used. The examples also include tax concessions or credits to agriculture water conservation system, renewable electricity generation, energy-efficient commercial buildings, pollution control activities, alternative fuel vehicles, biodiesel, ethanol, etc. Other: This category consists of those EFIs not classified under any category earlier, and these are divided into three: ‘Other’ (Combination), ‘Other’ (Insufficient Information) and ‘Other’ (None). The first group includes EFIs that use both subsidies and tax expenditures as policy tools in a particular scheme, second comprises EFIs which were not classified because of insufficient information, and the last includes EFIs which neither follow the definition of a subsidy nor that of tax expenditure. Canada uses both subsidies and tax expenditure under five schemes (4% of its total EFIs). Out of these, four schemes are for disposing off old vehicles. One operates at the federal level, and the rest are implemented at provincial levels in: British Columbia, Manitoba and Nova Scotia. The fifth scheme is for upgrading homes with efficient energy products.

Among the EFIs used in many countries, 3% come under ‘Other’ (Insufficient Information), and most of these are type of soft loans for which there is not much clarity on which government bears the cost or if the banks do so. In the UK, 7% of the last category of ‘Other’ (None) are grants offered by public or private companies. In Canada all 37% or 52 EFIs are implemented by public or private sector companies providing environmentally friendly products or services. Therefore, in a strict sense these cannot be considered as environmental subsidy since these could not be treated as fiscal instruments levied by governments. In total, 14% of the EFIs implemented by OECD countries are classified as ‘Other’, indicating the lacuna in the database.

2.3.2.2 i.

ii.

Emerging Economies

Environmentally Motivated Subsidies: Among the non-annexure countries, only China has some EFIs that could come under this category, as 5 of the 6 EFIs (83%) that are implemented are in the form of subsidies. All five promote the appropriate disposal of e-waste; i.e., they subsidise the recycling of airconditioners, computers, refrigerators, TVs and washing machines. Environmental Tax Expenditure: There are three major schemes that come under this category. Two of these are provided by the state of Rajasthan in India, enjoying the exemption of tax on plant and machinery used for generation of electricity through renewable resources, and on waste paper. In a little different way, China provides favourable prices to thermal power stations which have installed facilities for desulphurisation and denitrogenation of emissions.

56

2 International Experiences of Ecotaxes: A Few Lessons

Environmental Taxes & Charges Revenue to GDP Rao (in %)

6.00 5.00 4.00

Denmark

3.00

Finland

2.00

Netherlands

1.00

Sweden

0.00 1994 1996 1998 2000 2002 2004 2006 2008 2010

Fig. 2.2 Environmentally related taxes and charges revenue/GDP ratio for OECD countries (I). Source Author’s computation, based on basic data from the OECD/EEA database

2.4 Examining the Revenues and Financial Costs from EFIs Analysing revenue generated from EFIs, one needs to take it under a strict Pigouvian framework. The aim of an environmental tax would never be to maximise revenue but to design taxes so that the revenue accruing from them would decline over the years and the revenue would be used to turn into positive externality. Therefore, the revenue raised from these taxes shall be viewed as a by-product used to support other causes such as financing environmental projects through the provision of subsidies, tax expenditure, etc., or for reducing other distortionary taxes. The path of analyses followed here takes first analyses of revenue generated from environmentally related taxes/charges and second provides the details of data gaps in financial costs incurred by governments for providing subsidies and tax concessions.

2.4.1 Environmentally Motivated Taxes/Charges 2.4.1.1

OECD Countries

Eleven countries under this broad category were sub-grouped according to the pattern of their revenues, namely: (i) relatively stable, (ii) relatively gradually declining and (iii) steeply declining. The first group includes Denmark, Finland, Netherlands and Sweden; second includes Australia, Canada and the US; and the third group comprises Germany, Iceland, Norway and UK. Figures 2.2, 2.3 and 2.4 give the ratios of the revenue from environmental levies to GDP for the OECD countries. It can be seen from Fig. 2.2, the revenue from environmental taxes/charges9 as a proportion of GDP is clearly highest for Denmark throughout the analysed period, from 4% of GDP to a maximum of 5% in 1999. The ratio remained almost stable during 2000–2006 at a level of 4.6% before sliding 9 Environmental

taxes/charges are referred to as environmental levies from here on.

2.4 Examining the Revenues and Financial Costs from EFIs

57

Environmental Taxes & Charges Revenue to GDP Rao (in %)

2.50 2.00 1.50

Australia

1.00

Canada USA

0.50 0.00 1994 1996 1998 2000 2002 2004 2006 2008 2010

Environmental Taxes & Charges Revenue to GDP Rao (in %)

Fig. 2.3 Environmentally related taxes and charges revenue/GDP ratio for OECD countries (ii). Source Author’s computation, based on basic data from the OECD/EEA database

4.00 3.50 3.00 2.50

Germany

2.00

Iceland

1.50

Norway

1.00

UK

0.50 0.00 1994 1996 1998 2000 2002 2004 2006 2008 2010

Fig. 2.4 Environmentally related taxes and charges revenue/GDP ratio for OECD countries (iii). Source Author’s computation, based on basic data from the OECD/EEA database

down to around 4% in the subsequent periods. This downturn in the ratio after 2006 occurred because the rate of growth of GDP was more than the environmental tax revenue (ETR)10 (please refer to Table 2.6). Further, the steep decline of this ratio in 2008 could be attributed to the global recession which not only affected GDP but also the ETR for Denmark. This is also the case for all the other OECD countries, except that the decline for the US and Germany is not as steep as that for Denmark. This analysis was not possible for Australia and Canada because post-2007 and 2006, respectively, the data was discontinuous. The second category of countries (Australia, Canada and South Africa) experienced a steady decline, except for certain patches where there was an abrupt increase in revenue, such as 1997 and 2006 for Australia. This decline is relatively gradual when compared to the third category (Figs. 2.3 and 2.4): Iceland and UK show the 10 ETR

includes revenue from environmental fees/charges.

Countries

Australia

S. No

1

1. From 1998 on, a continuous decline in the share of environmental levies’ revenues in GDP and total tax revenue till 2005. 2. Rate of growth of ETR and GDP fluctuate a lot 3. In 2006, abrupt increase in both ratios

Behaviour

High fluctuation in the growth rate of ETRs is because of a discontinuity in data. Abrupt increase in 2006 is because the revenue of six environmental levies have been reported only since 2006 (OECD/EEA Database)

Explanation through data

Reasons

The rate of growth/decline in GDP is more/less than in ETRs between 1998 and 2005 leading to its decline

Mathematical explanation

Table 2.6 Pattern of environmental levies’ revenues in OECD countries revenues

The continuous decline in both the shares of ETRs could be attributed to the non-adoption of Environmental Tax Reform policy which ensures stability or an increase in the ratios

Policies of government Information Unavailable

Tax rate

(continued)

58 2 International Experiences of Ecotaxes: A Few Lessons

Countries

Canada

S. No

2

Table 2.6 (continued)

1. 1996 onwards continuous decline in the share of environmental levies’ revenues in GDP and total tax revenue till 2006 2. Abrupt decline in both the ratios in 2005

Behaviour

Reasons

Abrupt decline in the ratios is because the revenue for motor vehicle licences in British Columbia has not been reported since 2005, which led to a decline in the total ETR by around $2300 mn in 2005 (OECD/EEA Database)

Explanation through data The decline is primarily because the rate of growth in GDP is more than ETRs

Mathematical explanation The continuous decline in both the shares of ETR could be attributed to the non-adoption of environmental tax reform policy which ensures stability or increase in the ratios

Policies of government Information Unavailable

Tax rate

(continued)

2.4 Examining the Revenues and Financial Costs from EFIs 59

Countries

Denmark

S. No

3

Table 2.6 (continued) Reasons Explanation through data

Share of Data is properly reported environmental levies in GDP declined from 2006 till 2009 but its share in total tax revenue declined from 2007, with the decline in both ratios being most in 2008. Denmark has the highest environmental levies’ revenues share in GDP

Behaviour

Decline between 2006–09 could be attributed to a higher rate of growth in GDP than in ETRs

Mathematical explanation Information Unavailable

Policies of government

(continued)

Due to one of the highest energy and CO2 tax rates in the world the ETR to GDP ratio is the highest (Government of Denmark, 2004: 4–5 in Fujiwara et al., 2006)

Tax rate

60 2 International Experiences of Ecotaxes: A Few Lessons

Countries

Finland

S. No

4

Table 2.6 (continued)

Share of environmental levies’ revenues in GDP and total tax revenue increased till 1997 and declined in 2000 with a subsequent increase thereafter till 2004. There was an abrupt increase in 2004 after which a continuous decline till 2009

Behaviour

Reasons

1. Decline in 2000 can be attributed to a decline in ETRs for a few taxes related to fuels and water charges. 2. Increase in 2004 could be attributed to the above- mentioned taxes and a discontinuity in data

Explanation through data The decline after 2004 is because of a higher rate of growth in GDP than in ETRs

Mathematical explanation

Tax rate

Waste water and water charges Information Unavailable remained the same in 1999 and 2000, but water charges were increased from EUR/m3 0.77 to EUR/m3 0.86 in 2001, which could have led to an increase in total ETRs and hence in the ratios since 2002 (Hiltunen, 2004:16 accessed from: https://core.ac.uk/download/ pdf/16390346.pdf)

Policies of government

(continued)

2.4 Examining the Revenues and Financial Costs from EFIs 61

Countries

Germany

S. No

5

Table 2.6 (continued)

Movement in the share of environmental levies’ revenues in GDP and total tax revenue are similar. Both show a steep decline in 1995 and an increase between 1999 and 2003 further, there is an abrupt decline in 2009

Behaviour

Reasons

The abrupt decline after 2009 is because of a discontinuity in the data

Explanation through data The decline in 1995 because of the rate of growth of GDP is 17% and that of ETRs is only 13% and vice-versa between 1999 and 2003

Mathematical explanation

Tax rate

Environmental Tax Reform was Information Unavailable introduced in 1999 which not only led to the introduction of new taxes but the tax rates for several taxes were also increased, thus leading to an increase in the ratios between 1999 and 2003 (Government of Germany, 2003 in Fujiwara et al., 2006)

Policies of government

(continued)

62 2 International Experiences of Ecotaxes: A Few Lessons

Countries

Iceland

S. No

6

Table 2.6 (continued)

Share of environmental levies’ revenues in GDP declined from 2000 till 2009, except for a rise between 2003–05, though the share in total tax revenue started to decline since 1998. There was an abrupt increase in 2010

Behaviour

Reasons

1. Increase in ratio in 2010 is because of discontinuity in the data. 2. The increase between 2003–05 is because the ETR of the excise on motor vehicles and the special excise on petrol and diesel increased

Explanation through data The rate of growth in GDP and TTR was more than ETRs during 2000–09

Mathematical explanation

Tax rate

Overall the decline in the ratios Information Unavailable could be due to non-adoption of the environmental tax reform policy by the government, in contrast to the other Nordic countries which did adopt this policy (Andersen et al., 2007)

Policies of government

(continued)

2.4 Examining the Revenues and Financial Costs from EFIs 63

Countries

Netherlands

S. No

7

Table 2.6 (continued)

The share of environmental levies’ revenue in GDP and total tax revenues move in tandem, except between 1999 and 2001. Both ratios show a decline in 1995. There is an abrupt increase in the ratios in 1996. From 2007 on, its share in total tax revenue is highest among the 11 countries analysed

Behaviour

Reasons

In 1996 the ETRs from the duty on petrol and excise duties on mineral oil (other than petrol) increased substantially (OECD/EEA database)

Explanation through data

Policies of government

The decline in 1995 The abrupt increase in 1996 was was because the rate because of the introduction of the of growth of GDP was energy tax higher than ETRs. From 2007 on the share in total tax revenue for Netherlands declined less rapidly than in Denmark, thus, making Netherlands the country with the highest ratio

Mathematical explanation Information unavailable

Tax rate

(continued)

64 2 International Experiences of Ecotaxes: A Few Lessons

Countries

Norway

S. No

8

Table 2.6 (continued)

Both the shares depict a similar pattern of continuous decline from 1998 till 2009, except for 2001–04

Behaviour

Reasons

The increase in 2001 is primarily due to two taxes: electricity consumption and motor vehicle registration, but mostly to the latter which monotonically increased till 2007

Explanation through data The decline is because the rates of growth of GDP and TTR are more than ETRs

Mathematical explanation CO2 and sulphur tax on aviation were introduced in 1999 which could have led to an increase in the ratios between 2001–04 (European Environment Agency, 2000: 70 and Schlegelmilch, 2000: 10 as cited in Fujiwara et al., 2006). Overall the decline in ratios could be due to the non-adoption of the environmental tax reform policy by the government unlike the other Nordic countries which did adopt this policy (Andersen et al., 2007)

Policies of government

(continued)

The tax rate on sulphur in fuels was doubled in 2000 which could have led to a slight increase between 2001 and 2004 (European Environment Agency, 2000: 70 and Schlegelmilch, 2000: 10 as cited in Fujiwara et al., 2006)

Tax rate

2.4 Examining the Revenues and Financial Costs from EFIs 65

Sweden

UK

USA

9

10

11

Reasons

The increase in 1996 is highest in terms of ETRs and is primarily because of an increase in the shares of three taxes: energy taxes on fuel and electricity and the tax on CO2

Explanation through data

Both the shares declined in a similar manner throughout the period. Mostly there was a continuous decline in both ratios with a steep decline in 2004 and 2010

The major reason is the discontinuity in the dataset. In 2004, the ETR for motor vehicle registration licences is unavailable, causing a decline of $16,000 mn compared to 2003. In 2010, the data on the ETR for 47 taxes/charges are missing (OECD/EEA Database)

Both ratios increased ‘Duty on Hydrocarbon oils’ & in 1998 and declined ‘Air Passenger Duty’ are steeply since 2000 responsible for an increase in the ratios in 1998. The decline in the former environmental duty since 2000 led to the decline in total ETRs for 2000 and 2001

Both the shares depict stability since 1998 and an alternate decrease and increase between 1994 and 1998

Behaviour

Source Authors’ construction and as mentioned in the table

Countries

S. No

Table 2.6 (continued)

The rates of growth in GDP and TTR were higher than ETR for most of the period analysed which led to the continuous decline

The rate of decline in ETRs is more than that for GDP in 2000 which led to a decline in both ratios. This mismatch continues for the subsequent periods

The stability is because the rates of growth or decline in the GDP and TTR were in tandem with ETRs

Mathematical explanation

The continuous decline in both shares of ETR could be attributed to the non-adoption of the environmental tax reform policy which ensures stability an or increase in the ratios

Information Unavailable

The government introduced two environmental tax reform policies in the 1990s and 2001 which could be a reason for overall stability in the ETR (Withana et al., 2014)

Policies of government

Information Unavailable

The increase in the ETR in 1998 could be attributed to an increase in the tax rate on hydrocarbon oils from 8.2%-9.3% on July 1, 1997 to 9.2%-11.8% on March 17, 1998 (Seely, 2014). Further petrol prices were very low, $10/barrel ** In 2000, prices of crude oil soared to $28/barrel and further, the duty was also increasing, thus diminishing overall demand and hence the ETR (Bolton et al., 2000)

The ETR for taxes on CO2 increased because of an increase in the tax rate in 1996 (Withana et al., 2014). Also the energy tax on fuel was raised from EUR259.8 to EUR297.1 and EUR 429.7 to EUR488.6 on diesel and petrol, respectively (Speck, 2008)

Tax rate

66 2 International Experiences of Ecotaxes: A Few Lessons

2.4 Examining the Revenues and Financial Costs from EFIs

67

steepest decline in this group followed by Norway and Germany. Among these countries, the ratio ranges between 2 and 3%, except for Iceland where the ratio dropped below 2% after 2007. This sudden drop is largely because of a steep decline in the revenue from two taxes, namely: excise on motor vehicles and petrol and diesel. The contribution of the former tax in the decline is the largest, amounting to around USD97 mn. The analyses of the proportion of revenue from environmental levies to total tax revenue for these countries shows similar trend, except that the ratios are higher here.11 The ratio in Netherlands moves closer to Denmark and, in fact, crosses Denmark’s ratio in 2008 and stabilises at 9.39%. Further, while this ratio for Denmark declines to 8.37%. In case of Finland, this is around 8%, and for Sweden, it stabilises at around 6%. In the case of the second category, the pattern of decline is similar to that of Fig. 2.3, but the movement in the ratio for the US is more evident: it begins at around 4% and ends at around 2%. There is some steeper decline for almost all the countries in the third category, but the pattern of decline is similar to that shown in Fig. 2.3, and their ratios move along a bandwidth of 6 to 9% of their respective total tax revenue. Most of the countries’ proportion of tax revenue lies between 5 and 10% of their total tax revenue and between 2 and 4% of their GDPs; this indicates that environmental levies form a substantial part of their taxes and also their economies. Among the European countries, the dominance of the Nordic countries (Denmark, Finland, Iceland, Norway and Sweden) is clearly depicted in Figs. 2.2 and 2.4: their ETRs lay between 2 and 5% of their GDP. The only non-Nordic country whose proportion of ETR lies close to Nordic countries is the Netherlands. These findings reiterate the similar finding of the existing studies (OECD, 2002 and 2006 as cited in Barde & Godard, 2012; Szigeti, 2005 and Srivastava & Kumar, 2014). Detailed explanations for the patterns of ETR proportions depicted in the charts above have been provided in Table 2.6. The explanations for the computed revenues in the fifteen countries have been deduced from: the analyses of the data points, mathematical reasoning, policies adopted and the variances in the tax rates.

2.4.1.2

Emerging Economies

Revenues from environmental levies as a proportion of GDP for emerging economies are shown in Fig. 2.5. The figure does not include Brazil since it depicts irregular movements that will distort the understanding about the other three countries, and we have considered Brazil separately in Fig. 2.6. The analysis shows that the ratios for India and Brazil remained stable in the initial years, at around 0.2 and 3.4% of their respective GDPs, whereas the ratio for China stabilised only during 2004–08 at 0.8% of its GDP, after which there was an abrupt increase. The ratio for South Africa stabilised during 2003–06 was at 1.7% of its GDP, and it actually fluctuated 11 Since,

the patterns are almost similar, the graphs have not been included in the text.

2 International Experiences of Ecotaxes: A Few Lessons

2.5 2.0 1.5

India

1.0

China

0.5

South Africa

0.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Environmentally Related Taxes/Charges to GDP Rao (in %)

68

30.0 25.0 20.0 15.0 Brazil

10.0 5.0 0.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Environmentally Related Taxes/Charges to GDP Rao (in %)

Fig. 2.5 Environmentally related taxes and charges revenue/GDP ratios for emerging economies (excluding Brazil). Source Author’s construction based on basic data from the OECD/EEA Database

Fig. 2.6 Environmentally related taxes and charges revenue/GDP ratio for brazil. Source Author’s construction based on basic data from the OECD/EEA database

considerably. Figure 2.6 depicts a sudden increase for Brazil in 2002 and even more in 2006. The increase in 2006 is due to discontinuity of data relating to the taxes on electricity and cars. The revenue from these taxes was reported only since 2006; therefore, it indicates an increase of around $17,000 million, thereby distorting the analysis. Similarly, the increase in 2002 was because the ETRs from a tax called ‘Contributions for interventions in the economic domain’ which were reported only since 2002, thus indicating an increase of around $2500 mn in total ETRs in 2002. India has a similar situation in 2005 which depicts a drastic increase in its ETRs. This can be largely affiliated to the revenue from 16 of the 85 environmental levies which have been reported only since 2005. In case of China as well, both shares, i.e. the share of ETR in GDP and in total net indirect tax revenue, increased between 2000 and 2003 and in 2009. The first part of the increase is because the ETRs from the internal use tax on fuels and cars, and the vehicle purchase tax were reported only from 2000 and 2001, respectively; in 2009, the steep increase was again because of the domestic consumption tax on fuels and cars, but not due to a discontinuity in the data but due to an increase in tax rates in 2008 (Xu, 2012).

2.4 Examining the Revenues and Financial Costs from EFIs

69

South Africa did not have discontinuity in data and that has not affected the analysis. Actually, South Africa shows a lot of variations in both ratios and the patterns of these ratios are similar for the entire study period. For example, from 2001 on, both ratios declined till 2007, except for the share in GDP ratio which increased slightly after 2004 for two years (Fig. 2.5). The ratios also increased from 1996 to 2000. The decline in both ratios could be attributed to the ETR in 2001 which declined largely because of the reduction in revenues from the general fuel levy. From 2003 on, the decline in the rate of growth of revenues from environmental levies was greater than the total net indirect taxes (NIT) revenues because of which the share of ETR in NIT declined. A synoptic view of the analyses is presented succinctly in Table 2.7.

2.4.2 Financial Costs of Environmental Subsidies and Tax Expenditure Financial costs associated with environmentally motivated subsidies and environmental tax expenditure data is available only for a very few schemes adopted by the OECD countries. This restricts any detailed analysis for these fiscal instruments. Except for Iceland and Denmark, data is unavailable for more than 80% of such instruments. Iceland is an exception because it has only two such levies; therefore, there is no difficulty in obtaining the data. Denmark is the only country which has continuous time-series data for 90% of its total fiscal instruments. This highlights the lacuna in the OECD/EEA database in providing details on the financial costs of such fiscal instruments. The condition for emerging countries is worse, as the financial costs of environmentally motivated subsidies and tax expenditure were available only for two countries, i.e., India and China, and these too were incomplete.

2.5 Preparing Platform for Ecotaxes: Lessons of Interests We tried to track through the foregoing analyses the status of EFIs so as to explore relative international experiences of ecotaxes in the context of India and examined India’s specificities in these taxes in a wider perspective of the other fiscal measures. This was attempted by reviewing environmental levies and their revenues across fifteen countries that were categorised into OECD and emerging economies groups which were also a part of Annexure-II and Non-Annexure-I countries of the UNFCCC classification. EFIs were categorised into three groups: environmental taxes/charges, environmental subsidies and tax expenditure. From the analyses, it is clear that ecotaxes have a dominant advantage over the other two in terms of generation of revenue as a by-product, subsidies and tax expenditures are also used along with ecotaxes to achieve the environmental gains from ecotaxes since both EFIs work

India

2

Countries

Brazil

No

1

S.

1. Both ratios are stable till 2004 2. They show an abrupt increase in 2005 3. They exhibit a sharp decline in 2007 and a sharp increase in 2008

Share of environmental levies’ revenue in GDP and net indirect taxes revenue depicts a similar pattern, i.e. an abrupt increase in 2002 and 2006 and a sharp decline in 2008

Behaviour

The increase in 2005 is because the revenue from 16 of 85 environmental levies has been reported only since 2005. The decline in 2007 is because of under-reporting of data on ETRs from the sales tax on motor spirits and lubricants. The stability in the ratios could be due to the modest increase in the ETR from motor vehicles tax which is the only tax reported for India till 2004 (OECD/EEA Database)

The increase in 2006 is due to a discontinuity of data on taxes on electricity and cars, while in 2002, it is because ETRs for ‘Contributions for interventions in the economic domain’ (CIDE) is reported only from 2002 (OECD/EEA Database)

Explanation through data

Reasons

The stability is because the rate of growth or decline in the GDP and TTR behaved in the similar way as the growth in ETR

Information Unavailable

The decline is because the CIDE was introduced in rate of growth of GDP and 2000 thus leading to an NIT revenue is higher than increase in ETRs in 2002 the growth rate of ETR

Mathematical explanation Policies of government

Table 2.7 Analysing the pattern of environmental levies revenues in the emerging economies revenues Tax rate

(continued)

Information Unavailable

Information Unavailable

70 2 International Experiences of Ecotaxes: A Few Lessons

Reasons

The decline in the ETRs from the general fuel levy is the prime reason for the decline in both ratios in 2001

The increase in 2000 is because the ETRs for ‘Domestic Consumption Tax’ and ‘Vehicle Purchase Tax’ were reported only since 2000 and 2001, respectively

Explanation through data

Source Authors’ construction and as mentioned in the table

South Africa 1. From 2000 on, both ratios declined till 2007, except for the share in the GDP ratio which increased slightly after 2004 for two years. The ratios also increased between 1996 and 2000. 2. Both ratios increased in 2009, but the share of ETR in net indirect taxes rose from 2008

1. Both shares increased between 2000 and 2003 and stabilised thereafter till 2008. 2. Both shares increased sharply in 2009

Behaviour

4

Countries

China

No

3

S.

Table 2.7 (continued)

From 2003 on, the decline in the rate of growth of revenues from environmental levies is more than the NIT revenues and vice versa from 2008 onwards

Tax rate

The increase in 2009 is because the government introduced a levy on electricity that year (OECD/EEA Database)

In 2001, the levy on unleaded petrol and diesel was increased by 2.4 cent/lt. and 1.9 cent/lt., respectively. Further, world fuel prices were extremely high, thus leading to a decline in consumption and hence ETR (http:// www.energy.gov.za/files/ esources/petroleum/histor yprice2001.html). In 2009, fuel levies and road accident levies were also increased, which increased total ETR and hence the ratios (Speck, 2010)

The increase in 2009 is Information Unavailable because of the increase in the ETR of the Domestic Consumption Tax on fuels and cars. This is because the government revised the tax rates in 2008 (Xu, 2012)

Mathematical explanation Policies of government The increases in both shares is also because of the higher rate of growth in ETR than in the GDP and NIT

2.5 Preparing Platform for Ecotaxes: Lessons of Interests 71

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2 International Experiences of Ecotaxes: A Few Lessons

together, as one ‘dis-incentivises the polluting behaviour’ and other ‘incentivises positive environmental behaviour’. The environmental taxes have shown promising results in curtailing pollution in the Nordic countries and also UK as depicted by several studies which were highlighted in Table 2.1. Thus, ecotaxes could be understood as an indispensable initial and economically viable step for environmental preservation through the use of EFIs. Further, there were issues pertaining to categorisation as certain levies could not be classified under any of the four groups mentioned by Eurostat (2001). There are certain levies which are prevalent in India but were not classified by the database such as the forest development tax, the Sikkim ecological fund, etc. (Verma, 2016). We noted further that the most common taxes in the OECD countries are energy taxes, followed by transport taxes. For India, energy and transport taxes could prove to be vital types of ecotaxes as the country has committed to reducing its emissions intensity by 33–35% by 2030 (Government of India, 2015). Such taxes have proven to impact positively in several European countries such as Finland, Norway, Denmark by way of observed reductions in CO2 emissions in these countries in the range of 7 to 23% (please refer to Table 2.1). Pollution taxes would be difficult to levy in the Indian context, which is also the case for the other OECD countries, given costly technological and administrative requirements for such taxes. On the contrary, resource taxes would be an important member of ecotaxes that would be required because of severe environmental problems associated with mining and related activities in India (MoEF, 2009). In this context, India could take lessons from the US on levying ecotaxes on mining; however, there is no conclusive evidence on the effectiveness of this type of tax. Both subsidies and tax expenditure are prevalent across the OECD countries in various forms such as grants, soft loans, tax reductions and others. Some examples of these are: subsidies for conserving biodiversity, forests and wate, soft loans for green initiatives, etc. We could not ascertain the financial cost of the EFIs due to the paucity of data nevertheless we recognise the importance for countries using such instruments to track revenue losses from implementing uninformed policy decisions. The analysis of the revenue generated from the levy of environmental taxes/charges indicated that it accounted for a substantial part of the total tax revenue for all the OECD countries. It hovered between 5 and 10% of their respective total tax revenue and between 2 and 4% of their GDP, except for Canada and US. Emerging nations’ environmental tax revenue-to-GDP ratios ranged only between 0 and 1% of their GDP between 1 and 10% of their total net indirect tax revenue. This share, when compared with OECD countries, is low for emerging economies and could possibly be because of the relatively recent origin of these taxes in these countries (Verma, 2016).

References

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References Andersen, M. S., Barker, T., Christie, E., Ekins, P., Gerald, J. F., Jilkova, J., et al. (2007). Competitiveness Effects of Environmental Tax Reforms (COMETR): Final Report to the European Commission. DG Research and DG TAXUD: National Environmental Research Institute, University of Aarhus, Denmark. Barde, J. P., & Godard, O. (2012). Economic principles of environmental fiscal reform. In J. E. Milne, & M. S. Andersen, Handbook of Research on Environmental Taxation. Edward Elgar. Bolton, P., Seely, A., & Twigger, R. (2000). Road fuel prices and taxation (Research Paper No. 00/69). House of Commons Library, Government of United Kingdom. Retrieved from http://res earchbriefings.parliament.uk/ResearchBriefing/Summary/RP01-52. Coase, R. (1960). The problem of social cost. Journal of Law and Economics, 3, 1–44. Dalton, H. (1922). Principles of Public Finance. Allied Publishers Pvt. Eurostat. (2001). Environmental taxes: A statistical guide. Eurostat. Fujiwara, N., Ferrer, J. N., & Egenhofer, C. (2006). The political economy of environmental taxation in European countries (CEPS Working Document, No. 245). Retrieved from https://www.ceps. eu/publications/political-economy-environmental-taxation-europeancountries. Goulder, L. (1995). Environmental taxes and the double dividend: A reader’s guide. International Tax and Public Finance, 2, 157–183. Goulder, L. H. (2005). Fiscal instruments for pollution control: Attractions, limitations, and strategies. Stanford University. Paper presented at the International Forum on Tax and Fiscal Policies to Promote Clean Energy Development, 16 November, Beijing. Government of India. (2015). India’s intended nationally determined contribution: Working towards climate justice. New Delhi: Government of India. Green Fiscal Commission. (2009). The case for green fiscal reform: Final report of the UK green fiscal commission. Green Fiscal Commission. Hiltunen, M. (2004). Economic environmental policy instruments in Finland. Helsinki: Finnish Environment Institute. Kosonen, K. (2012). Regressivity of environmental taxation: Myth or reality? In J. E. Milne, & M. S. Andersen (Eds.), Handbook of research on environmental taxation. Edward Elgar. Kosonen, K., & Nicodeme, G. (2009). The role of fiscal instruments in environmental policy. Luxembourg. MoEF. (2009). State of environment report India. Government of India. OECD. (2002). Environmentally Related Taxes in OECD Countries: Issues and Strategies. OECD. OECD. (2005). Environmental fiscal reform for poverty reduction. Guidelines and Reference Series. OECD. (2006). The political economy of environmentally related taxes. OECD. OECD/EEA Database. (n.d.). Accessed on March 25, 2017 from, http://www.oecd.org/env/toolsevaluation/oecdeealaunchnewdatabaseoneconomicinstrumentsusedinenvironmentalpolicy.htm Schlegelmilch, K. (2000). Energy taxation in the EU-Recent process. Brussels Office: On behalf of the Heinrich-Böll-Foundation. Schlegelmilch, K., Maro, P., & Speck, S. (2009). Options for promoting environmental fiscal reform in EC Development Cooperation. Soges S.p.A. Seely, A. (2014). Taxation of road fuels (Standard Note: SN824). House of Commons Library, Government of United Kingdom. Retrieved from http://researchbriefings.parliament.uk/Resear chBriefing/Summary/SN00824. Speck, S. (2008). The design of carbon and broad-based energy taxes in European countries. Vermont Journal of Environmnetal Law, 10(1), 31–59. Speck, S. (2010). Options for promoting environmental fiscal reform in EC development cooperation: Country case study South Africa (Final report of the EC funded project). Srivastava, D. K., & Kumar, K. K. (2014). Environment and fiscal reforms in India. New Delhi: SAGE. Steinbach, N., Palm, V., Cederlund, M., Georgescu, A., & Hass, J. (2009). Revision of SEEA 2003: Outcome paper: Environmental taxes.

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Szigeti, C. (2005). Environmental tax revenue and environmental consciousness in the European union. Retrieved March 25, 2011, from http://ageconsearch.umn.edu/bitstream/54343/2/ Szigeti_2005_12(k)_37_40.pdf UNFCCC. (2014). Retrieved December 2014, from UNFCCC: http://unfccc.int/parties_and_obs ervers/items/2704.php Verma, R. (2016). Ecotaxes: a comparative study of India and China. ISEC Working Paper Series, WP353. Withana, S., Brink, P. T., Illes, A., Nanni, S., & Watkins, E. (2014). Environmental tax reform in Europe: Opportunities for the future (Final Report). World Bank. (2014). India: Green growth—Overcoming environment challenges to promote development. World Bank. Xu, Y. (2012). Environmental taxation in China: The greening of an emerging economy. In J. E. Milne, & M. S. Andersen, Handbook of research on environmental taxation. Edward Elgar.

Chapter 3

Environmental Regulations in India

3.1 Introduction Environmental regulation is normally perceived in the literature as a component of the command and control (CAC) policies which are administered by many governments to control environmental abuse and degradation (Perman et al., 1999). These policies constitute all the measures taken by the government authorities which could be enforced through legislations/rules laid by the government and therefore become a legal obligation on the firms/industries. Examples of these policies are specified technological requirements, designated height of chimneys, decided quality of inputs, etc. This categorisation of environmental regulation is somewhat problematic as regulation has a broader compass which should also include policies that are not directly governed by the government but are only initiated by the state. Examples of such polices are levying taxes on polluting sectors/activities, incentivising environment friendly activities such as corporate social responsibilities, provisioning of subsidies to green technologies, etc. Environmental regulation could then be broadly categorised into three groups: i. economic policies, ii. command and control policies and iii. social policies. All these policies require government interventions because environment is a typical example of a public good which suffers due to the market failures and thus either the markets do not exist for these goods or even if it do these would be inefficient.1 Economic policies consist of market-based instruments such as tradable permits and environmental taxes/subsidies. All these policies are referred to as market-based instruments in the literature, it treats these to be outside the ambit of environmental regulations, and these policies will require involvement of the government. For example, tradable permits require setting of specific institutions wherein the trade of permits can be managed. Similarly, Environmental Fiscal Instruments require legislations to be in place. In comparison to CAC measures, these policies (EFIs) require less monitoring and thus relatively minimise the role of the government. A critical analysis of the status of economic policies vis-à-vis 1 For

further clarity on the definition and understanding of market failure, please refer to Sect. 2.1 of Chap. 2. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 75 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8_3

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3 Environmental Regulations in India

CAC measures becomes therefore a prerequisite for understanding the relevance of applications of ecotaxes in India. Polluting sources/goods/activities also need to be identified from the existing literature in order to understand the potential place of levy of ecotaxes. An efficient regulation of the environment will require a combination of the regulatory policies as discussed above, and every measure has its limitations and superiority over the other. It is here that the context of the environmental problem that becomes important and would determine the choice of policy. For instance, CAC policies are considered to be costly because of two primary reasons: first, these policies do not consider firm-specific issues and are levied as one common policy for all the firms of an industry. Firms having smaller scale of operations may find these regulations to be costly as compared to larger firms. Second, such policies involve tremendous amount of monitoring cost which would also lead to corruption. Such policies, however, become indispensible for disposing of hazardous waste such as chemical compounds and nuclear waste. In such cases, economic instruments fail to preserve environment. The pertinent question then to be asked is how to regulate the environment rather than questioning the role of the government per se. In looking for the answers to this question, it is important to examine the ineffectiveness of the CAC policies vis-à-vis the economic policies in the context of CAC policies not yielding outcomes in preserving environment for over half a century in India (Karpagam et al., 2012; MoEF, 2009; Sahu, 2007).

3.2 Defining and Locating Space for Ecotaxation in India There are several economic instruments that are used for preserving environment. These have been categorised by Eftec (2010) into two broad groups: i. instruments that use existing markets and ii. those instruments creating new markets. A few examples of former are environmental taxes/charges, deposit-refund scheme, etc., whereas instruments such as tradable permits and rights, establishing property rights and voluntary approaches come under second group. Ecotaxes, as an economic policy have been examined in the Indian context in this section through constructing of a comprehensive definition; thereafter, this definition has been used to critically analyse the status of the existing forms of ecotaxes in India. Further, an attempt is made below to comprehend upon the relevance of these taxes in the Indian context.

3.2.1 Ecotaxation: Towards Clarity in Indian Situation The fundamental understanding behind levying ecotaxes is to increase the cost of production/consumption/extraction of polluting goods which leads to internalisation of the negative externality generated during the process of an activity which is deemed

3.2 Defining and Locating Space for Ecotaxation in India

77

to be environmentally harmful.2 The literature on ecotaxation3 does not seem to incorporate this concept of Pigou while defining these taxes, and this is the point of start for examining the adequacy of the taxes which are existing in the form of ecotaxes in India. It was further observed that the existing definitions of these taxes had following shortcomings; first, the primary question of where to levy the tax, i.e. what will be the tax base, has not been defined appropriately. Second, the equity aspect of the tax has also not been taken into consideration. Ecotaxes are levied for preserving environment; thus, it must levy a higher rate of taxation on goods/activities which are more polluting. Third, there is ambiguity in the literature whether the ecotax should also include the activity which causes environmental pollution or it should only be imposed on the polluting goods. One of our earlier works attempted to define ecotaxes comprehensively (Verma, 2016, p. 4): An ecotax is a tax4 whose tax base5 is designed so as to internalize the negative externality generated either from production/consumption/extraction behaviour in an economy

The above definition describes tax base comprehensively (mentioned in the footnote 5 below) which includes all the three possible economic behaviours through which pollution could be generated, thus ensuring that there is no ambiguity. The progressivity of the ecotaxes has also been included while defining tax base; this incorporates the equity aspect of these taxes. The importance of progressivity in the context of such levies could also be understood from Fig. 1.1 depicted in Sect. 1.2 of Chapter 1, which brings out the effect of the negative externality to the society and that would increase as the extent of pollution increases and thus the tax rate may also increase. One another shortcoming of the existing definitions that were reviewed in the Sect. 1.1.1 (chapter one) was that none of them incorporated the theoretical and practical aspects of the ecotax simultaneously. One need to look at the gap in the definitions as the fundamentals of Pigouvian taxation have been incorporated in the proposed definition, and only two criteria need to be satisfied by a tax to be deemed as an ecotax: first, the tax base should either be polluting factor of production/other inputs/by-products and second, progressivity is necessary so as to make the tax equitable. Identifying these taxes on the basis of these two parameters should be attempted. Further, the definition needs to incorporate the motivation behind levying an environmental tax. This is evident from the first part of the definition where it is mentioned that ‘tax base is defined so as to internalise the negative externality’. Here internalising negative externality becomes the major purpose for levying an ecotax. 2 This

notion of Pigouvian taxation was discussed in detail in Sect. 1.2 of Chap. 1. to Sect. 1.1.1 for a detailed understanding of existing definitions of ecotaxes. 4 A tax is defined as, “Any compulsory, unrequited payment to general government-central, state or district level-depending upon the fiscal structure of the economy” (OECD 2006). 5 A tax base in the Pigouvian context could be defined broadly as, “any polluting factor of production/other inputs/outputs/by products on which if a tax is imposed would increase the cost of production/consumption/extraction of either the produced/consumed/or the extracted natural resource in proportion to the externality generated”. 3 Refer

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3 Environmental Regulations in India

OECD-EEA database and Eurostat’s definition6 do not focus upon this fundamental aspect, and thus, the former titles it as environmentally related taxes, whereas the latter terms it as environmental tax, but this is done merely for convenience as the word environmental tax, according to Eurostat (2001), ‘is in common use’. Thus, according to Steinbach et al. (2009), OECD and Eurostat adopt a ‘softer approach’ towards Pigouvian taxes. The motivation behind levying a tax could be identified easily from the earmarking of its revenue. For example, in India the revenue earned from the tax levied by the states on petrol and diesel is generally used for the construction of roads. Therefore, this example suggests that even though the tax base is of environmental relevance, the motivation behind the tax is not to conserve the environment but to raise funds for financing the infrastructural requirements. Here, a word of caution is that earmarking of the revenue from an environmental tax is not a necessary condition for it to be deemed as an environmental tax because earmarking has no role in increasing the cost of production for a producer/consumer which was at the heart of the Pigouvian notion of ecotaxation. Eurostat (2001) categorises these taxes as: energy, transport, pollution and resources taxes. Some problems are faced here during categorising of certain taxes using Eurostat’s classification, for example a tax on GHGs such as CO2 will be classified under energy taxes because it would be difficult to differentiate between these and energy taxes as they are levied jointly (Verma, 2016). An example of this could be, higher the carbon content in a mineral oil higher would be the tax, mineral oil tax would be categorised under energy tax, whereas the parameter defining the tax is actually the carbon content. Thus, even though a tax on CO2 should fall under emission and effluent-based taxes (i.e. under the Pollution taxes category), the analysts consider this under the energy taxes (Verma, 2016). Hence, this example clearly depicts the issue with the classification provided by the Eurostat. Milne and Anderson (2012) categorised these taxes in a better manner: i. emission and effluent taxes, ii. product taxes and iii. natural resource taxes. First category comprises of those taxes whose tax base is emissions and thus is a form of direct pollution tax. Product taxes encompass indirect form of environmental taxes as the tax base is the polluting inputs and outputs and not the pollutant. Extraction of natural resource will come under the third category. This type of classification is more closely related to tax base and is also broad in terms of its coverage (Verma, 2016). Further, it fits well with the definition of ecotaxes as proposed in this chapter. It may be argued, though, that there might be some ambiguity while classifying mineral oils under this framework as these belong to the category of product as well as natural resource taxes, but these should be categorised under product taxes as mineral oils cause pollution when these are used as an input for production. Unlike water or forest resources, the extinction of mineral oils per se will not affect the environment, as some other resource (either in short run or long run) may be developed as an alternative fuel. On the contrary, the extinction of mineral oil would rather reduce the pollution. This ambiguity is also noted in the classification put forth by OECD/Eurostat as mineral oils could either

6 Please

refer to Sect. 1.1.1 for further details on this definition.

3.2 Defining and Locating Space for Ecotaxation in India

79

be categorised under energy taxes or resource taxes. Therefore, we will be following the categorisation of Milne and Anderson (2012).

3.2.2 Analysing Status of Ecotaxation: A New Approach The discussion on the definition provides a basis for reviewing the design of these taxes levied in India. Such an attempt gives a better understanding of the status of these taxes in India and can aid in providing a critical analysis of the adequacy of the design of the existing levies in the Indian context. Further, a comparison with the OECD/EEA database’s definition helps in bringing out the issues in the definition provided by the database. Therefore, it is necessary to highlight the issues involved with the database by taking leads from earlier chapter which identified some taxes in the Indian context using the information provided by the database. For example, taxes such as Forest Development Tax, Sikkim Ecological Fund were missing from the database. Further, the database lists the taxes in India only on four major accounts: i. taxes on motor vehicles, ii. taxes on the sales of lubricants, iii. taxes on goods and passengers and iv. taxes on electricity. This provides the base for getting to the analysis of existing taxes related to environment in Indian context. A list of ecotaxes for India has been compiled in Table 3.1 by extensively reviewing the literature by using two fundamental aspects, i.e. first, the base of the levy that should be deemed as polluting and second the rate structure should be progressive. This is done so as to examine the taxes that were regarded as environmentally related taxes by the database, under the strict Pigouvian sense could it still be deemed as environmental taxes. Earmarking of the revenues from these taxes has also been listed which would help in understanding the purpose behind the levy of these taxes. This will help in overcoming the definitional issues in identifying a tax as an ecotax. Table 3.1 clearly list the taxes which could be deemed to be ecotaxes by comparing between OECD/EEA database7 and proposed definition. These taxes have also been categorised as per Milne and Anderson (2012), and finally, there is only one tax that could be categorised under the natural resource taxes category, Forest Development Tax, which is presently levied in five states. The table also provides reasons for justifying a tax as environmentally related taxes, as per the database and ecotaxes, as per the proposed definition. The first seven taxes in the table have been brought in from various literatures, and only two of these taxes, Gujarat Green Cess and vehicles tax (on old automobiles), have also been listed by the database. The vehicles tax (on old automobiles) in Bihar and Maharashtra has not being included in the database; on the other hand, the green tax on motor vehicles in Goa is included. This tax is similar to that of vehicles tax (on old automobiles) and is therefore classified under this category. The taxes mentioned from serial number 8–15 in Table 3.1 have been listed by the OECD/EEA database. These taxes are referred as environmentally related taxes by the database. 7 OECD/EEA

database and database have been used interchangeably.

Product tax

Product tax

Product tax

1

2

3

Vehicle entry Himachal tax Pradesh: Manali, Rohtang, Solang and Shimla

Car: Rs. 200/entry Two Wheelers: Rs. 100/entry SUV: Rs. 300/entry Bus/Truck: Rs. 500/entry

Rs. 0.02/unit of electricity generated through non-renewable sources

Gujarat

a Gujarat Green Cess

Tax rate

Rs. 400/metric tonne on coal, peat, lignite

Location

Clean India Environment Cess

Sl Category List of ecotax No of ecotax

Electricity produced from non-renewable source

Coal

Tax base

Table 3.1 Classification of ecotaxes in India as per author’s definition

Yes

Yes

Major part for Yes tourism and beautification, some revenue will be spent on renewable power sources

Creation of Green Energy Fund

Creation of ‘National Clean Energy and Environment Fund’

Author’s definition

Tax base is of Yes environmental relevance and the payment is unrequited

Tax base is of No environmental relevance and the payment is unrequited

Tax base is of No environmental relevance and the payment is unrequited

Earmarking OECD-EEA Reason of the revenue database’s definition

1. Government of Gujarat (2011), cited in Mandal et al. (2011)

(Department of Expenditure 2018) a Paliwal and Goyal (2013)

References

(continued)

Tax rate is Chauhan (2007) progressive, and tax base is appropriate as additional vehicular load due to surge in tourism causes pollution

Tax rate is not progressive

Tax rate is not progressive

Reason

80 3 Environmental Regulations in India

4

Product tax

Product tax

a Vehicles tax (on old automobiles)

Sl Category List of ecotax No of ecotax

Table 3.1 (continued)

Tax rate

Andhra Pradesh

Tax base

Private vehicles Vehicle older than 15 years: 1. Motorcycles: Rs. 1000 2. Other Vehicles: Rs. 5000 Commercial vehicles older than seven-eight years.: 1. Other vehicles: 5000

Uttarakhand Cars/Jeeps: Rs. Mussoorie 30/entry Two Wheelers: Rs. 5/entry Heavy Vehicles: Rs. 100/entry

Location

Yes

Yes

Author’s definition

Tax base is of Yes environmental relevance and the payment is unrequited

Tax base is of Yes environmental relevance and the payment is unrequited

Earmarking OECD-EEA Reason of the revenue database’s definition

References

Tax rate is progressive because it charges more to commercial vehicles which tend to be more inefficient, and tax base is appropriate as old vehicles are inefficient

(continued)

1. CAG (2007) 2. Mandal et al. (2013)

Tax rate is Kunwar (2009) progressive, and tax base is appropriate as additional vehicular load due to surge in tourism causes pollution

Reason

3.2 Defining and Locating Space for Ecotaxation in India 81

Product tax

Sl Category List of ecotax No of ecotax

Table 3.1 (continued)

Tamil Nadu

Location

Tax base

Private vehicles Vehicle older than 15 years: 1. Motorcycles: Rs. 500 2. Other vehicles: Rs. 1000 Commercial vehicles older than seven-eight years.: 1. Other vehicles: Rs.500 2. Autorickshaw: Rs.200

Tax rate

Yes

Author’s definition

Tax base is of Yes environmental relevance and the payment is unrequited

Earmarking OECD-EEA Reason of the revenue database’s definition Tax rate is progressive because it charges more to commercial vehicles which tend to be more inefficient, and tax base is appropriate as old vehicles are inefficient

Reason

(continued)

1. Govt. of Tamil Nadu (2013) as cited by Mandal et al. (2013) 2. Mandal et al. (2013)

References

82 3 Environmental Regulations in India

Rajasthan

Karnataka

Product tax

Location

Product tax

Sl Category List of ecotax No of ecotax

Table 3.1 (continued) Tax base

Private vehicles Vehicle older than 15 years: 1. Motorcycles: Rs. 250 2. Other vehicles: Rs. 500 Commercial vehicles older than seven-eight years.: 1. Other vehicles: 200

Private vehicles Vehicle older than 15 years: 1. Motorcycles: Rs. 250 2. Other vehicles: Rs. 500 Commercial vehicles older than seven-eight years.: 1. Other vehicles: 200

Tax rate

Yes

Yes

Author’s definition

Tax base is of Yes environmental relevance and the payment is unrequited

Tax base is of Yes environmental relevance and the payment is unrequited

Earmarking OECD-EEA Reason of the revenue database’s definition

Tax rate is progressive as it charges more to commercial vehicles which tend to be more inefficient and tax base is appropriate as old vehicles are inefficient

Tax rate is progressive because it charges more to commercial vehicles which tend to be more inefficient, and tax base is appropriate as old vehicles are inefficient

Reason

(continued)

1. Govt. of Karnataka (2002) as cited by Mandal et al. (2013) 2. Mandal et al. (2013)

Mandal et al. (2013)

References

3.2 Defining and Locating Space for Ecotaxation in India 83

b Green

tax on motor vehicles

Vehicles tax (on old automobiles)

Product tax

Product tax

Sl Category List of ecotax No of ecotax

Table 3.1 (continued)

Bihar

Goa

Location

Tax base

All commercial Vehicle vehicles (except three wheelers, tractors, and trailers) older than 12 years: 10% of the vehicle tax

Private vehicles Vehicles older older than than 15 years 15 years: 1. Motorcycles: Rs. 250 2. Other vehicles: Rs. 500 Commercial vehicles older than 15 years.: 1000 All the taxes payable only once in five years

Tax rate

Yes

Yes

Yes

Author’s definition

Tax base is of No environmental relevance and the payment is unrequited

According to the definition of the database

Earmarking OECD-EEA Reason of the revenue database’s definition

Tax rate is flat, also it doesn’t charge private vehicles which are equally important source of air pollution

Tax rate is progressive because it charges more to commercial vehicles which tend to be more inefficient and tax base is appropriate as old vehicles are inefficient

Reason

(continued)

1. Mandal et al. (2013)

References

84 3 Environmental Regulations in India

Two and four Vehicle wheelers vehicles older than 15 years: 10% of the first time registration charges

Uttar Pradesh: Kanpur

Tax base

Product tax

Tax rate

Maharashtra Vehicles older than Vehicle 15 years: 1. Petrol engine: Rs. 3000 (4-wheeler) and Rs. 2000 (2-wheeler) 2. Diesel engine: Rs. 3500 3. Commercial vehicles are charged acc. to their capacity and weight

Location

Product tax

Sl Category List of ecotax No of ecotax

Table 3.1 (continued)

Yes

Yes

Author’s definition

Tax base is of No environmental relevance and the payment is unrequited

Tax base is of Yes environmental relevance and the payment is unrequited

Earmarking OECD-EEA Reason of the revenue database’s definition

Tax rate is flat, also it does not charge commercial vehicles which are equally important source of air pollution

Tax rate is progressive as it charges more to commercial vehicles which tend to be more inefficient and tax base is appropriate as old vehicles are inefficient

Reason

(continued)

Mandal et al. (2013)

Shivadekar (2010) a Mandal et al. (2013) CAG (2011)

References

3.2 Defining and Locating Space for Ecotaxation in India 85

Product tax

Product tax

5

6

Location

Green Cess

Goa

Ecology Sikkim Fund and Environment Cess

Sl Category List of ecotax No of ecotax

Table 3.1 (continued)

There are total 49 non-biodegradable materials that are listed

Tax base

Not exceeding 2% All the polluting of the sales value of products that harm the product environment in any manner

1. Everyone that brings nonbiodegradable materials in the state: 1% of total turnover from the sale of nonbiodegradable materials 2. Hotels, lodges, motels and resorts: 5% of their turnover

Tax rate

Consolidated fund will be created to reduce carbon footprint

Yes

For improving Yes the quality of environment and ecology

Author’s definition

Tax base is of No environmental relevance and the payment is unrequited

Tax base is of No environmental relevance and the payment is unrequited

Earmarking OECD-EEA Reason of the revenue database’s definition

References

Tax rate is not progressive

(continued)

Mandal et al. (2013)

Even though 1. Govt. of rate is Sikkim (2005) progressive, cited in it should Mandal, et al. charge more (2013) for more polluting good. Purpose seems to be revenue driven behind charging more to hotels

Reason

86 3 Environmental Regulations in India

7

Natural resource tax

Natural resource tax

Location

Tax @ 8% and 12% on forest produce

Tax rate

Maharashtra Tax @ 5% on sale of forest produce

Forest Karnataka Development Tax

Sl Category List of ecotax No of ecotax

Table 3.1 (continued) Tax base

Development of forest in Maharashtra and development of poor people’s dwellings in forest areas

Creation of forest development fund

Yes

Yes

Author’s definition

Tax base is of No environmental relevance and the payment is unrequited

Tax base is of No environmental relevance and the payment is unrequited

Earmarking OECD-EEA Reason of the revenue database’s definition

Tax rate is not progressive

Even though there is differential tax rate, the rate differential is not for conserving a scarce forest resource

Reason

(continued)

Govt. of Maharashtra (1983)

Govt. of Karnataka (2009) a b Nihal (13) URL: http://adr india.org/sites/def ault/files/EPW_ Mining_Article. pdf

References

3.2 Defining and Locating Space for Ecotaxation in India 87

Orissa

Kerala

Madhya Pradesh

Natural Resource Tax

Natural resource tax

Location

Natural resource tax

Sl Category List of ecotax No of ecotax

Table 3.1 (continued)

Tax @ 5% on sale and supply of timber log

Tax @ 5% on sale of forest produce except charcoal, timber, cane, bamboo and firewood

Tax @ 16% on Tendu leaves 4% on timber 1% on bamboo. In 2014, tax on Tendu leaves reduced to 2%

Tax rate

Tax base

Yes

Yes

Yes

Author’s definition

Tax base is of No environmental relevance and the payment is unrequited

Tax base is of No environmental relevance and the payment is unrequited

Tax base is of No environmental relevance and the payment is unrequited

Earmarking OECD-EEA Reason of the revenue database’s definition

References

Tax rate is not progressive

Tax rate is not progressive

(continued)

Govt. of Madhya Pradesh (2009)

Govt. of Kerala (1986)

Even though Barik (2003) there is differential rate structure, the purpose of the tax is to raise revenue as obtained from the literature

Reason

88 3 Environmental Regulations in India

Product tax

Product tax

Product tax

9

10

11

Taxes and duties on electricity

Taxes on goods and passengers

Sales tax on motor spirit and lubricants

Quite a few states

Most of the states

Quite a few states

Most of the states

Product tax

8

Motor vehicles tax

Location

Sl Category List of ecotax No of ecotax

Table 3.1 (continued)

Information not available

Information not available

Information not available

Is progressive wherein progression is generally based upon the size of the vehicle based upon the seating capacity

Tax rate

Information not available

Information not available

Information not available

Registration of vehicles based upon their seating capacity

Tax base

Yes

Yes

Yes

Yes

According to the definition of the database

According to the definition of the database

According to the definition of the database

According to the definition of the database

Earmarking OECD-EEA Reason of the revenue database’s definition

Insufficient information

Insufficient information

Insufficient information

No

Author’s definition

References

(continued)

OECD-EEA Database (undated)

OECD-EEA Database (undated)

OECD-EEA Database (undated)

Even though OECD-EEA the tax rate Database is (undated) progressive and tax base is polluting but motor vehicle’s tax purpose is generally to raise revenue

Reason

3.2 Defining and Locating Space for Ecotaxation in India 89

Between 200–4800 per vehicle. Vehicles are taxed every year

Between 80 and 2000 per vehicle. Frequency of tax depends upon type of vehicle

Mizoram

Road tax

Bihar

Product tax

12

Tax rate

Location

Sl Category List of ecotax No of ecotax

Table 3.1 (continued)

Vehicle

Vehicle

Tax base

Yes

Yes

According to the definition of the database

According to the definition of the database

Earmarking OECD-EEA Reason of the revenue database’s definition

No

No

Author’s definition

References

(continued)

As the name OECD-EEA of the tax Database suggests the (undated) purpose of the tax appears to raise revenue for maintenance or/and development of the roads

As the name OECD-EEA of the tax Database suggests the (undated) purpose of the tax appears to raise revenue for maintenance or/and development of the roads

Reason

90 3 Environmental Regulations in India

Product tax

Product tax

13

14

Motor vehicle registration fee

Dealer tax on motor vehicle

Road safety tax

Sl Category List of ecotax No of ecotax

Table 3.1 (continued)

Between 250–2000 per vehicle. It is a lifetime tax

Tax rate

Bihar

Between 30–300 per vehicle. It is a lifetime tax

West Bengal Between 200–3000 per vehicle. It is a lifetime tax

Tamil Nadu

Location

Vehicle

Vehicle

Vehicle

Tax base

Yes

Yes

Yes

According to the definition of the database

According to the definition of the database

According to the definition of the database

Earmarking OECD-EEA Reason of the revenue database’s definition

No

No

No

Author’s definition

References

(continued)

Even though OECD-EEA the tax rate Database is (undated) progressive and tax base is polluting, vehicle registration fee’s purpose is generally to raise revenue

Even though OECD-EEA the tax rate Database is (undated) progressive and tax base is polluting, here the aim of tax appears to raise revenue

The purpose OECD-EEA of the tax, as Database mentioned (undated) in database, is to implement measures for road safety

Reason

3.2 Defining and Locating Space for Ecotaxation in India 91

Karnataka

11% of the basic rate of the motor vehicle tax. It is a lifetime tax

Tax rate

Source As mentioned in the table and Verma (2016)

Additional motor vehicle cess

15

Product tax

Location

Sl Category List of ecotax No of ecotax

Table 3.1 (continued)

Vehicle

Tax base

Yes

According to the definition of the database

Earmarking OECD-EEA Reason of the revenue database’s definition No

Author’s definition Tax rate is not progressive

Reason

OECD-EEA database (undated)

References

92 3 Environmental Regulations in India

3.2 Defining and Locating Space for Ecotaxation in India

93

It can be seen that only two out of fifteen environmentally related taxes could be called as ecotaxes in India. These are: vehicles entry tax and vehicles tax (on old automobiles). Except for Bihar and Kanpur, the vehicles tax (on old automobiles) in other six states can be deemed as ecotax. The tax rate for this levy in these two areas is not progressive. Most of the other taxes in India did not have a progressive rate structure even though some of them had environmentally relevant tax base. For instance, Ecology Fund and Environment Cess (Sikkim), Clean Environment Cess (India), Gujarat Green Cess, etc. are environmentally related taxes, but in strict sense they cannot be termed as ecotaxes (Verma, 2016). The relevance of a progressive rate structure for an ecotax could be understood with an example. If the ‘Clean Environment Cess’ in India would have had a progressive rate structure, i.e. tax rate in proportion to the carbon content of the coal, then it would serve as an appropriate disincentives to the firms for not using coal that has high carbon content. Our earlier work also points the following argument regarding the progressive rate structure: Also, it is important to note that the progressive rate structure should appropriately reflect the relationship between the various types of polluting products and their effects on the environment. For example in the case of ‘Forest Development Tax’ of Karnataka, even though the tax rate is progressive but it bears no relation to the scarcity of the forest products. Instead the Government should have charged highly to those forest produce which are scarce such as sandalwood etc. (Verma 2016, p. 4)

The vehicle tax (on old automobiles) can be justified as an ecotax based on our proposed definition because the conditions of polluting tax base and progressive tax rate are satisfied (Verma, 2016). Fuel efficiency of the old vehicles is compromised, and therefore when compared with new vehicles, the aged vehicles should be taxed more. This along with charging the commercial vehicles more, again on the grounds of relative low fuel efficiency has been incorporated in the design of the vehicle tax (on old automobiles) thus justifying is as an ecotax. In addition, the initial time given for the commercial vehicles after which these vehicles will be taxed is also lower when compared to private vehicles. After 7–8 years, commercial vehicles are levied with this tax, vis-à-vis 15 years for privately used vehicles. Vehicle entry tax is also considered to be ecotax on similar lines, but the only shortcoming is that the rate is too low which then could be compared to a toll tax which may not deter the entry of outside state vehicles (Verma, 2016). Table 3.2 compiles all the taxes prevailing in India as per OECD/EEA database and the definition proposed in this chapter. This table shows a succinct synthesis of the discussion of this section and is thus helpful in comparisons. All the taxes are categorised into Product and Natural Resource taxes categories which further makes the comparison useful. It is observed that only two of the 15 environmentally related taxes could be deemed as ecotaxes and OECD/EEA database does not account for several such taxes.

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Table 3.2 Snapshot of the comparison between environmentally related taxes and environmental taxes Category

OECD/EEA database (environmentally related taxes)

Author’s definition (environmental taxes)

Product taxes

1. Clean Environment Cess (India)

1. Vehicle entry tax (Himachal Pradesh and Uttarakhand)

2. Gujarat Green Cess

2. Vehicles tax (on old automobiles)—Andhra Pradesh, Tamil Nadu, Rajasthan, Karnataka, Maharashtra and Goa (Bihar is excluded)

3. Vehicle entry tax (Himachal Pradesh and Uttarakhand) 4. Ecology Fund and Environment Cess (Sikkim) 5. Green cess (Goa) 6. Vehicles tax (on old automobiles)—Andhra Pradesh, Tamil Nadu, Rajasthan, Karnataka, Bihar, Maharashtra and Goa 7. Motor vehicles tax 8. Sales tax on motor spirit and lubricants 9. Taxes on goods and passengers 10. Taxes and duties on electricity 11. Road tax 12. Dealer tax on motor vehicle 13. Motor vehicle registration fee 14. Additional motor vehicle cess Natural resource tax 1. Forest Development Tax— Maharashtra, Kerala, Orissa, Karnataka and Madhya Pradesh Source Author’s Representation

3.2.3 Specificities and Adequacy of Ecotaxes The core objective of an environmental tax is to conserve the environment. Thus, it is important to analyse the performance of these taxes on several parameters (Verma, 2016): first, the environmental benefits achieved; second, incidence of ecotaxes on people (especially poor), firms and the economy and third, utilisation of the revenue generated from the taxes. Unfortunately, we do not have many studies in the literature that have analysed the effects of ecotaxes in India because environmental taxes being

3.2 Defining and Locating Space for Ecotaxation in India

95

a recent concept, not many examples of such taxes exist amenable to analysis (Verma, 2016). We have noted that only 15 types of environmentally related taxes in India exists of which most of the taxes were levied only after the year 2002.8 In addition, only two of these could be called as ecotaxes as per strict Pigouvian definition. Thus, there is a severe paucity confronted in the literature that we could identify for analysing the performance of ecotaxes (Verma, 2016). Despite the paucity of literature analysing the implications of ecotaxes in India, there are certain studies that have analysed the manner in which the funds have been utilised (please refer to Table 3.3). The details regarding the issues in collection and utilisation of revenues from the levy of Clean Environment Cess, Forest Development Tax of Karnataka and Ecology Fund and Environment Cess of Sikkim are provided in Table 3.3. Paliwal and Goyal (2013) identified several issues in management of the funds raised from the levy of Clean Environment Cess. The proceeds collected from this cess forms a part of ‘national clean energy and environment fund’ (NCEEF) which is utilised by the Government of India for various environmental purposes such as cleaning of rivers, afforestation, research and development. They highlighted four major shortcomings in the process of releasing of the funds: first, there is no welldefined eligibility criteria; second, the selection of the green projects, for which the fund has been created, lacks transparency; third, sanctioning of these projects also lacks proper technical expertise; and fourth, there is hardly any monitoring mechanism in place which can scrutinise the sanctioned projects (Verma, 2016). This clearly shows the deficiency in the management of the funds which could otherwise be beneficial for restoring the environmental quality through several initiatives. Table 3.4 brings out the mismatch between the amount of cess collected from the levy, amount transferred to the fund and actual utilisation of the money thus collected. The money transferred to the NCEEF is only around 34% of the proceeds collected from the cess and of this only around 50% is utilised for various environmental projects. This shows the poor status of the NCEEF and severe lacunae in managing the funds by the government (Department of Expenditure 2018). Further, due to advent of GST the funds generated from all types of cesses will be utilised by the central government to compensate for the loss of revenue to the states (Department of Expenditure, 2018). In the case of Karnataka, the Forest Development Fund (FDF) created by levying Forest Development Tax also has serious loopholes. CAG (2014) points out two major shortcomings: first, the collection of the Forest Development Tax, since its inception in 2009, is not properly managed and second, on an average only 7.3% of the fund has been utilised, thus leaving the corpus of about Rs. 964.02 crores absolutely unutilised (Verma, 2016). Further, Nihal (2013) also points out that the cases of bribery have been reported in the collection of Forest Development Tax (Verma, 2016). The Ecology Fund and Environment Cess levied by the Government 8 “Forest Development Taxes levied by Maharashtra and Kerala were introduced in 1983 and 1986, respectively” (Verma 2016). The database does not mention the date of introduction for its four major forms of taxes: motor vehicles tax, sales tax on motor spirit and lubricants, taxes on goods and passengers and taxes and duties on electricity. But as we examined in the last section that these cannot be deemed as ecotaxes, so also the other taxes listed in the database, thus the exclusion.

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Table 3.3 Issues in collection and utilisation of revenue from taxes similar to ecotaxes in India S.

Type of tax

Location

Implications

References

Clean Environment Cess

India

a Lack

Govt. of India (2010) a Paliwal and Goyal (2013), Down to Earth

No 1

of good governance is evident as most of the fund is unutilised. It lacks:

1. Proper eligibility criteria 2. Transparency on project selection 3. Technical expertise in sanctioning the projects 4. Monitoring mechanism 2

Forest Development Tax (FDT)

Karnataka

a 1.

FDT was not collected properly between 2009–12 and whatever was collected was not remitted to the government account

a 2.

The fund is not utilised effectively as Rs. 964.02 crore was the corpus between 2009 and 12. The average utilisation of the fund was only 7.3%

Govt. of Karnataka (2009) a CAG (2013) b Nihal (13) URL: http://adrindia.org/ sites/default/files/ EPW_Mining_Article. pdf

b 3.

The cases of bribery amounting 2.46 crores to officials which also included non-payment of FDT

3

Forest Development Tax

Maharashtra 1. No computerised CAG (2011) arrangement was made for the collection of the tax payments till 2011 which led to an outstanding recovery of Rs. 3.79 cr for six offices of Nagpur region (continued)

3.2 Defining and Locating Space for Ecotaxation in India

97

Table 3.3 (continued) S.

Type of tax

Location

Implications

References

No 4

Sikkim Ecology Fund Sikkim and Environment Cess

1. Various Mandal et al. (2013) environmental activities were funded, but till December 2012–13, only 20.5% of the fund was utilised

Source As Mentioned in the Table

Table 3.4 Details of fund position in NCEEF (Rs. Cr.) Year

Coal cess collected

Amount transferred to NCEEF

Amounts financed from NCEEF for projects

2010–2011

1,066.46

0.00

2011–2012

2,579.55

1,066.46

2012–2013

3,053.19

1,500.00

246.43

2013–2014

3,471.98

1,650.00

1,218.78

2014–2015

5,393.46

4,700.00

2,087.99

0.00 220.75

2015–2016

12,675.60

5,123.09

5,234.80

2016–2017 (RE)

28,500

6,902.74

6,902.74

2017–2018 (BE)

29,700

8703

Total

86,440.21

29,645.29

– 15,911.49

Source Borrowed from Department of Expenditure, 2018

of Sikkim, on the other hand, is the only exception in the case of utilisation of funds. A study by Mandal et al. (2013) found that around 20.5% of the total fund generated between 2007 till December 2012 have been utilised in funding several environmental activities by the Government of Sikkim (please refer to Table 3.5) (Verma, 2016). Authors, however, believe that there is a need to evaluate the effectiveness of expenditure and its appropriateness, whereas in the case of Forest Development Tax in Maharashtra, the CAG (2011) points out that no computerised arrangements were made for the collection of the tax payments till 2011 which led to an outstanding recovery of Rs. 3.79 crores for six offices in the Nagpur region. All the above studies point out lacunae in the collection as well as utilisation of the proceeds from these three taxes.

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Table 3.5 Activities undertaken by Department of Forest, Environment and Wildlife Management, Govt. of Sikkim Division

Activities undertaken

Silviculture/research division

Creation of sample plots of rare and endangered species, strip plantation, the creation of biodiversity conservation and ecodevelopment research, herbarium up-gradation, providing vegetation fencing with hedge posts at vulnerable points

Land use and environment cell, west division

Perennial water source development, two-tier plantation, support for various NGOs

Land use and environment cell, south division

Development of perennial water source, development of parks, improvement of religious sites

Himalayan zoological Park

Printing of zoo brochures and tickets, printing of vehicle passes and conservation slogans, making of boards, signage, guide map and directional boards, construction of resting sheds and resting benches

Land use and environment cell, east division

Maintenance of nurseries, improvement of perennial water source/spring water, intensive and quality plantation, two-tier plantation and barbed wire fencing, improvement of ornamental plantation and fencing of selected sites

Land use and environment cell, north division

Creation of ecopark, improvement of conifer forest, dry stone wall fencing, water source development

Social forestry cell, east division

Fodder plantation, improvement of tree on agriculture land, awareness generation camps

Wildlife cell, east division

Biodiversity conservation, protection and conservation of wildlife, training and capacity building

Source Borrowed from Mandal et al. (2013)

3.3 Identifying the Polluting Sectors/Goods A prerequisite for identifying polluting sectors/goods is to adopt a definition for the environment so as to identify its base. The Environment Protection Act (EPA), 1986, provides pointer to identify the possible components of environment for the purpose of this study. The act defines environment and other terms related to pollution as (Government of India, 1986, p. 2): environment includes water, air and land and the inter-relationship which exists among and between water, air and land, and human being, other living creatures, plants, micro-organism and property

3.3 Identifying the Polluting Sectors/Goods

99

environmental pollutant” means any solid, liquid or gaseous substance present in such concentration as may be, or tend to be, injurious to environment environmental pollution means the presence in the environment of any environmental pollutant

According to the EPA, the environment basically consists of three components: water, air and land, and further, it also identifies the interrelationship among these components and between these components with all living beings. It not only identifies the physical components of the environment but also the interaction as an important element of environment which comes close to the definition of ecology. This definition of environment is very broad as it not only encompasses three major components but also include interrelationships as its essential part which is extremely difficult to incorporate in economic terms. On the other hand, the definition of environmental pollutants is limited in its scope as it restricts these pollutants only to ‘solid, liquid or gaseous substances’ thus, not considering the activities which tend to deplete and degrade the environment in one form or the other (Rosencranz et al., 1991). For example, in the case of shifting cultivation, overextraction of groundwater, etc., it is the activity which severely degrades the natural resources. An attempt has been made to address this shortcoming by identifying the activities which contribute towards the pollution of water, air and land. In Table 3.6, the sectors which are responsible for polluting the environment are shown followed by the key polluting goods/activities that eventually lead to pollution. Agriculture is the only sector which causes many types of pollution thus claiming the dominant source of environmental contamination. One of the reasons for this could be the traditional practices such as agricultural waste burning, applications of fertilisers, manures, pesticides, shifting cultivation which are still prevalent in this sector. MoEF (2009) identifies three major sectors that are responsible for water pollution: agriculture, industries and the household sector. This report by Ministry of Environment and Forest (MoEF) further cites World Resources Institute (2000) according to which the agricultural sector dominates the demand for water in India as it amounts to 92% of the total demand for water. This is followed by households and industries that demand only 5% and 3%, respectively. Therefore, various agricultural activities are also the major sources of water pollution, followed by industries and households. Indiscriminate use of pesticides and fertilisers is the major cause for water pollution in agriculture as hazardous chemicals such as DDT, HCH, endosulfan, methyl, malathion, dimethoate and ethion that gravely pollute the environment are found in the Ganges (World Bank, 1999). According to Cook et al. (n.d.), leaching and mixing of chemicals from the agricultural fields contribute more than 50% of the pollution of the steams and the rivers. This is followed by the municipal sources which amount to around 12%. The three ways in which pesticides pollute the environment are: direct run-off from the agricultural fields, penetration of chemicals into the groundwater and evaporation into the clouds and then back to the surface through rain water (Agrawal et al., 2010). Industries and households are the other two sources of water pollution which are equally important. According to Pandey (2005) and Gupta (2002), iron and steel

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Table 3.6 Major polluting sectors/goods in India Natural resource

Polluting sectors

Key polluting source/goods/activities

I. Water

(i) Agriculture

b (a)

(ii) Industries

(a) Wastewater disposal-Toxic organic and inorganic substances (b) Metal contamination-Thermal power, tannery and mining activities

(iii) Household sector

(a) Untreated wastewater disposal caused due to: Sewage discharge (faecal coliform bacteria) and solid waste

(i) Agriculture

(a) Shifting cultivation, (b) excessive chemical usage, (c) agricultural waste burning, (d) incorrect planning and management of irrigation scheme and (e) overabstraction of groundwater (saline intrusion)

(ii) Mining

(a) Open cast mining-land degradation (b) underground mining- land subsidence

II. Land

Pesticides and fertilisers-Hazardous chemicals such as DDT, HCH, endosulfan, methyl, malathion, dimethoate and ethion

(iii) Developmental sector (a) Deforestation done for: Urbanisation, developmental purposes and other economic activities, (b) road construction and (c) change in land use pattern III. Air Outdoor air pollution (i) Transport sector

Indoor air pollution

(a) Vehicular pollution: Following pollutants SO2, NO2, CO, hydrocarbon lead, ozone, benzene

(ii) Industrial sector

a Most

(iii) Power sector

(a) Coal, (b) industrial boilers and (c) radioactive emissions

(iv) Agriculture

(a) Agricultural waste burning emits: SPM, CH4, CO, NO2, SO2

(i) Household

(a) Burning of solid fuels- fuel wood, dung, crop residue

polluting industries: (a) Iron and steel, (b) oil refinery, (c) fertiliser, (d) sugar and (e) cement

Source MoEF (2009), a Pandey (2005) and Gupta (2002), b World Bank (1999)

industry contributes around 87.5% of the total pollution load in India by the 16 major polluting industries, followed by pulp and paper and aluminium industries which contribute 4.6% and 2.5%, respectively (please refer to Table 3.7). In the case of the households, the untreated sewage discharge and solid wastes are the major causes of water pollution (MoEF, 2009). In India, large share of the population defecates in open; thus, water sources are polluted directly through the discharge of human waste; also the faulty septic tanks and pit latrines through which the waste seeps into

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Table 3.7 Contribution of industries in various forms of pollution Type of Industry

Air pollution (%)

Water pollution (%) Toxic pollutants (%)

Metal pollutants (%)

Iron and steel

32

87.4

39

71

Oil refinery 7.4

0.18

7.83

5.34

Fertiliser

N.A

0.04

1.09

N.A

Sugar

7.07

1.55

1.2

15.8

Cement industry

34

N.A

N.A

N.A

Pesticide

1.49

0.13

5.81

0.14

Other industries

Pulp and paper—6.62%

Pulp and paper—4.6% and aluminium—2.5%

Leather-14%, caustic soda—1.29%, IRS, leather, petrochemical and oil refinery—70%

Aluminium—16%

Source Based on Pandey (2005) and Gupta (2002) as cited in Srivastava and Kumar (2014) Note Numbers give in the table provide the proportion of various industries in the total pollution load of specific category of 16 industries in India; Caustic Soda industry implies Industrial Chemicals except fertiliser

groundwater is one of the leading causes of water pollution in India (Census, 2011; MoEF, 2009). According to Blaikie and Brookfield (1987), land degradation is ‘a reduction in the capability of the land to support a particular use’. In India, approximately 45% of the land is degraded in some form or the other (MoEF, 2009). The report further cites six major reasons for the degradation of land along with their extent of degradation, as mentioned in Table 3.8. Water erosion accounts for 64% of the total degradation in India followed by soil acidity and water logging (MoEF, 2009). The factors which are responsible for all the six reasons for land degradation have been classified under the three sectors: agriculture, mining and developmental sector, as mentioned in Table 3.6. Agricultural practices such as shifting cultivation, agricultural waste burning, indiscriminate use of fertilisers, overextraction of groundwater are the leading causes of degradation of soil, groundwater and in some cases even making the land infertile (MoEF, 2009). Thus, these practices need to be regulated in order to reduce land degradation. Thereafter, open cast and underground mining lead to clearing of vegetation and deforestation which results in soil erosion. Mining also causes water logging which is the third major cause of land degradation in India (MoEF, 2009). Deforestation, road construction and change in land use pattern for various developmental purposes are yet other reasons for land degradation in India (MoEF, 2009). MoEF (2009) points out the worsening situation of air quality in India which results in highest amount of premature deaths when compared globally. The report

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Table 3.8 Extent of land degradation Reason for land degradation Extent of land degradation (%) Activities/products eventually responsible for degradation Water erosion

64

(a) vegetation clearance and (b) Road Construction ©Deforestation (d) Urbanisation (e) deforestation (f) Mining

Wind erosion

6

(a) Deforestation (b) Change in land use © Urbanisation (d)Mining

Water logging

10

(a) Inadequate irrigation management without adequate provisions of drainage (b) Mining

Salinity/alkalinity

4

(a) Incorrect planning and management of irrigational schemes (b) Overabstraction of groundwater-saline intrusion

Soil acidity

11

(a) Incorrect fertiliser use

Complex problem

5

(a) Mining (b) Change in land use pattern

Source MoEF (2009)

further classifies air pollution into indoor and outdoor, and the major causes of these two types of air pollution have been listed in Table 3.6. There are four major sectors that cause outdoor air pollution, namely transport, industrial, power and agricultural sectors. There had been a number of studies which analyse the level of emissions from the transport sector in India, but most of these only confine to a few cities. Thus, it was difficult to find a study in the literature that gave the proportion of the vehicular emissions in total air pollution in India. We have confined to the study by CPCB (2010) that extensively analyses six cities in India that are considered to be the most polluting: Bangalore, Chennai, Delhi, Kanpur, Mumbai and Pune. Central Pollution Control Board (CPCB) mainly focuses on the three major air pollutants: PM10 , NOx and SO2 . The three figures below (Figs. 3.1, 3.2 and 3.3) show the proportion of four major sources of air pollution, vehicle, industries, road dust and area source, in the total air emissions of the six cities mentioned above. Figures 3.2 and 3.3 have only three sources because road dust does not emit NOx or SO2 . In the case of PM10 road dust is the leading cause in Delhi, Pune and Chennai, whereas area source is the major cause of emissions of PM10 in the cities of Kanpur and Mumbai. The dominating cause of these particulates in Bangalore is, however, vehicles which lead to around 40% of the total emissions of PM10 . In the emissions of NOx , vehicles are the major source of these gases in four of the six cities examined by the study, of which in three cities, Bangalore, Pune and Chennai, vehicles’ share in total emissions of NOx is

3.3 Identifying the Polluting Sectors/Goods

Fig. 3.1 Percentage contribution in PM10 . Source CPCB (2010)

Fig. 3.2 Percentage contribution in NOx . Source CPCB (2010)

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Fig. 3.3 Percentage contribution in SO2 . Source CPCB (2010)

more than 65%. For the other two cities, Delhi and Mumbai, industries are the major source of these gases, whereas the major cause for SO2 emissions from industries is identified in all the cities except for Chennai where vehicles and area source are almost equally the cause. CPCB (2010) also gives the contribution of different vehicle types in the emissions of PM10 and NOx . The various vehicle types have been regrouped into five major categories: bus and truck (heavy commercial vehicles), light commercial vehicle (LCV), three wheelers, two wheelers and cars (private mode of transport) and others (please see Figs. 3.4 and 3.5). These categories will help in understanding the share 70 60 50

Bus & Truck

40

LCV

30

3 Wheeler

20

Cars & 2 Wheelers Others

10 0 Bangalore

Chennai

Delhi

Kanpur

Mumbai

Pune

Fig. 3.4 Percentage contribution of different vehicle types in PM10 emissions in six cities. Source Author’s Construction after taking the basic data from CPCB (2010)

3.3 Identifying the Polluting Sectors/Goods

105

80 70 60 Bus & Truck

50

LCV

40

3 Wheeler

30

Cars & 2 Wheelers 20 Others 10 0 Bangalore

Chennai

Delhi

Kanpur

Mumbai

Pune

Fig. 3.5 Percentage contribution of different vehicle types in NOx emissions in six cities. Source Author’s Construction after taking the basic data from CPCB (2010)

of these categories in vehicular air pollution. As is evident from Figs. 3.4 and 3.5, heavy commercial vehicles, i.e. bus and truck, dominate in the six cities in the share of both PM10 and NOx , except in Kanpur where three wheelers contribute more in PM10 emissions. This is followed by the contribution of cars and two wheelers in NOx emissions for all the six cities. For other categories of vehicles, there is no common trend as the contribution to pollution depends upon the proportion of the type of vehicle in the respective cities. Pandey (2005) and Gupta (2002) study the share of several industries in the total industrial pollution load for air pollution in India. The share of cement industry in the total industrial pollution load of air pollution is the highest and amounts to 34% (please refer to Table 3.7) which is closely followed by iron and steel industry whose share amounts to 32%. Table 3.9 further gives the five major polluting industries in India along with their locations. Table 3.9 Five largest polluting industries in India

Industry

States

Iron and steel

Bihar and Madhya Pradesh

Oil refinery

Maharashtra and Tamil Nadu

Fertiliser

Gujarat, Maharashtra and Uttar Pradesh

Sugar

Uttar Pradesh and Maharashtra

Cement industry

Madhya Pradesh and Andhra Pradesh

Source Pandey (2005) and Gupta (2002) as cited in Srivastava and Kumar (2014)

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3.4 Environmental Regulations in India CAC policies in any economy operate through three branches of the government: legislative, executive (or administrative) and judicial. The legislative is responsible for enacting laws for the preservation of environment which legally bounds the polluters but these laws have to be executed through various environmental agencies such as CPCB, State Pollution Control Board (SPCB), etc. If the executive arm of the government is not strong enough, then the laws will have no importance, and to ensure that all the stakeholders of the economy get justice in the matters of disagreement between the government and producers or consumers, an impartial judiciary is indispensible. Thus, it is the strong interrelationship of all the three which is required for any successful implementation of CAC policies, and it is because of the reliance of CAC policies on these three different branches of the government, successfully enacting these policies becomes difficult. In order to critically examine these policies for preserving the environment, it then becomes important to examine the role of all the three arms of the government.

3.4.1 Environmental Regulations in India: The Role of Legislative, Executive and Judiciary A.

Legislative: Status of Environmental Laws

In India, both the union and the state governments are responsible for enacting the laws for the protection of the environment. The Article 246 of the Constitution of India, in this regard, has divided the role of the union and the states by constructing three lists, i.e. Union List, State List and Concurrent List. Both the governments have the power to enact the laws in the Concurrent List, but according to the Article 251 and 254, a law enacted by the union on any subject in the Concurrent List generally prevails over a law passed by a state government on the same subject. Thus, the union government has more powers than the state governments. Sankar (1998) divides the enactment of environmental laws in India into four phases: first, preindependence period to 1947, second, from independence to the Stockholm Conference (1947–1972), third, from the Stockholm Conference to Bhopal disaster (1972–1984) and fourth, Bhopal Tragedy to 1998. The fourth phase could be extended till 2010 and thereon marks the beginning of the fifth phase which would last till the present. The division of the second and the third phase seems apt as it was only after the Stockholm Conference that the Government of India decided to strengthen the environmental laws under the leadership of the then Prime Minister Mrs. Indira Gandhi. New laws were enacted, and institutions such as Central Pollution Control Board (CPCB) and State Pollution Control Board (SPCB) were put in place as the arms of CAC. Further, the Bhopal Gas Tragedy in 1984 could also be seen as a reference point in the history of environmental laws in India because after

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this tragedy certain strict laws and rules were formulated for the use of hazardous substances and also for providing compensation to the victims of such tragedies. The Environmental Protection Act, 1986 which is considered as an ‘umbrella legislation’ (Rosencranz et al., 1991) was also enacted in this phase. This phase could be extended till the year 2010 because it was only then a specialised tribunal was set up for exclusively dealing with the environmental jurisprudence under the National Green Tribunal Act. This marked the beginning of a fair and consistent environmental justice in India which is considered to have ‘exponentially strengthened the environmental protection regime in the country’ (Rosencranz & Sahu, 2014, p. 191). A list of major environmental laws/acts in India is given in Appendix A. The categorisation and the focus of these laws/acts have been majorly adopted from TERI (undated), and other information has been gathered from various sources. TERI (undated) categorises these legislations on the basis of four environmental areas: general, forest and wildlife, water and air. Forest and wildlife has not been covered in this study because the focus was more towards the other environmental categories, i.e. land, air and water; as adapted from EPA, which has been discussed earlier. The limitations in these legislations have been analysed on two fronts: shortcomings in the design and limitations in execution of these laws. However, the constraining deficiencies need to be traced. i.

General: This category includes five major environmental laws/acts of which three acts focuses on the creation of institutional bodies so as to provide environmental justice, whereas the other two focus on two different aspects of environment; one ensures that the victims of environmental accident occurring from handling any hazardous substance is insured and the other is considered to be an overarching legislation which deals with most of the environmental problems. The National Environment Tribunal Act (NETA) and National Environment Appellate Authority Act (NEAA) were first attempts by the Government of India to create separate institutional bodies for hearing pleas regarding the compensation provided for an environmental accident and location of the industries. The NETA, however, was never implemented (Rosencranz et al., 2009 as also cited in Rosencranz & Sahu, 2009) and NEAA had restricted authority to look into the matters of only environmental clearances given to an industry, thus not giving any opportunity to the industries for approaching the Court if environmental clearances are not given (Divan & Rosencranz, 2001). Divan and Rosencranz, further criticise the time limit of 30 days which is certainly inadequate to grant the environmental clearance, within which an appeal has to be filed in NEAA against the clearance order. There is no mandatory requirement for publishing the information regarding the environmental clearances provided by MoEF/Various State Departments of Environment. This limits the knowledge to stakeholders regarding the environmental clearance provided to an industry. Rosencranz et al. (2009) further point out two specific problems in the execution of the NEAA: first, Chairperson and the Vice-Chairperson have not been appointed since 2000 and 2005, respectively which violated rules, according to which a retired Supreme Court judge or a High Court Chief Justice is given

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the charge as Chairperson of NEAA. Second, no technical member has been designated as a member of NEAA due to which there is a lack of technical expertise in the judgement. Further, all these shortcomings in the NETA and NEAA were overcome by the enactment of National Green Tribunal (NGT) Act in 2010. The requirement of at least ten members’ interdisciplinary expert committee ensures that the technical requirements for dealing with any complex environmental issues are appropriately addressed. The NGT Act could be analysed in detail using eight parameters of which five have been classified under design parameters and two are classified under execution parameters and one under both design and execution parameters (please see Appendix B). A few of these parameters have been taken from Rosencranz and Sahu (2009), but these have also been classified under the categorisation of design and execution parameters. Based on these eight parameters, the NGT is functioning satisfactorily under six of these except for its underperformance in the enforcement of the orders passed by the tribunal and limitation of the resources available with the tribunal. There have been cases where the order given by the tribunal has not being enforced by the government authorities. One such case is that of D. B. Nevatia versus State of Maharashtra, wherein, the tribunal ordered the guidelines for sirens and multi-tone horns to be framed at the earliest but the initial meeting by the Maharashtra Pollution Control Board for framing the guidelines was delayed by an year (The Times of India, 2014). In the Chapter IV and section 26 of the NGT Act, the tribunal has been given the power to levy penalty on ‘whoever’ does not comply with the ruling of the tribunal. This clearly indicates ineffectiveness of the tribunal as there is laxity in implementation. Given the wide and varied powers of the tribunal under various laws relating to the environment, the resources however are inadequate for expeditiously examining the petitions and efficiently disposing them off (Rosencranz & Sahu, 2014). The authors further point out the superiority of the tribunal over the Supreme Court. According to them, the tribunal’s interdisciplinary expert members’ panel ensure objectivity and technical issues been undertaken in the decisions. Further, its wide powers of jurisdiction ensures acceptance of the cases regarding the infrastructure projects which were mostly rejected by the Supreme Court on various grounds (Sahu, 2008). The tribunal has also surpassed the Supreme Court in giving its verdict on time, as stipulated by the NGT Act (Gill, 2014; Rosencranz & Sahu, 2014). This analysis of the NGT Act does prove the efficacy of the tribunal in successfully fulfilling its role and surpassing its former institutional bodies and even the Honourable Supreme Court of India. Thus, the facts listed above ensure that a new era of environmental jurisprudence had begun in India after the enactment of the NGT Act in 2010, which specialises only in environmental hearings (Rosencranz & Sahu, 2014). The Environmental Protection Act (EPA) 1986 is considered as an overarching legislation which was enacted after the Bhopal Gas Tragedy of 1984. This act fundamentally focuses on preservation of the environmental quality, control of pollution and location of the industries. The Act has some shortcomings

3.4 Environmental Regulations in India

ii.

9 This

109

which have been categorised under the design issues in the appendix A. Rosencranz et al. (1991) point out four issues with the EPA: first, there is not much difference between the Water Act, Air Act and the EPA as pollution prevention is only possible through laying down the standards and imposing fines in the cases of non-compliance. Thus, it does not give the government any new tool for preservation of environment. Also, the powers given to the union government are broadly similar to that of the CPCB as given under the Water and the Air Act. Second, the Environmental (Protection) Rules of 1986 do not have any rule that would make the polluters keep open the information regarding their pollution levels. Making this mandatory would help in controlling pollution as the polluters could be held responsible in the case of under reporting and would also reduce the cost of monitoring for the SPCBs. Further, the information dissemination would make the consumers aware, and thus, this could act as an informal regulation which could reduce the demand of products by the consumer from more polluting units (Kathuria, 2004). The author proves this in the case of industrial estates in Gujarat. Third, the Schedule III of the Environmental (Protection) Rules (EPR) provides the standards for noise pollution in the ‘silence zone’ which are 50 and 40 dB levels in the day and night time, respectively. This is contradictory as in the silence zone, the usage of vehicular horns, loudspeakers and crackers is prohibited. Fourth, the public, under the Rule 5 of the EPR, can only challenge the industries’ location in the case where the industries are situated in the ‘notified’ areas but not otherwise. Thus, this limits the power of the citizens to access their right to clean air. In addition to the above-mentioned shortcomings, Divan and Rosencranz (2001) point out that even though EPA levies higher penalties than under the other environment acts, the Section 24 of the EPA nullifies this power. It says, in the cases of other acts also levying penalties under the same offence, the fine has to be levied in accordance with the other acts. Thus, this adds to the above-mentioned issues in the design of the EPA. The Public Liability Insurance Act, 1991 was enacted to financially insure the workers from any accident that might occur from handling hazardous substances. This act was an attempt to provide immediate relief to the workers and also to make the owner liable for providing compensation to the victims by compulsorily issuing insurance policies and also to contribute towards the creation of the Environmental Relief Fund. According to TERI (undated), this fund could also be extended for restoring the damages caused to the environment due to the environmental accident. This would then ensure that the owner is not only responsible for the harm caused to the victim but also to the harm caused to the environment. Water: There are two major environmental laws under this category. The National Water Framework Bill, 2016 is a draft act which is yet to be passed by the parliament of India9 ! The Water (Prevention and Control of Pollution)

Bill was circulated to the States/UTs for their comments in only 2018 i.e. two years after its draft, yet this Bill has not been enacted as a Law (Ministry of Jal Shakti 2020).

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Act, 1974, like other environmental acts, focuses upon the creation of institutional structures for reducing and preventing water pollution in India. Under this act, Central Pollution Control Board (CPCB) and State Pollution Control Board (SPCB) were established (Water (Prevention and Control of Pollution) Act 1974. It confers the power to the CPCB and also to the SPCB for monitoring the polluting industries, and they can also randomly check these industries for the compliance of the rules and regulations. This act on the one hand created an institutional framework for ensuring the checks and balances of various polluting industries but on the other hand also created a licencing system which instigated lobbying and corruption. CAG (2011) points out two shortcomings in the design of this Act: first, the Act concerns only with reduction in pollution of water bodies and not with their restoration. Second, the maximum financial penalty levied under this act is only ten thousand rupees which does not deter the polluters. TERI (undated) points out that even though there is a provision for the public to approach the Court under the section 49 of the Act, but its access to the public is debatable. The power lies in the hands of respective SPCBs to deny the accessibility of the reports (concerning pollution statements of various industries) to the complaining citizens in case it believes that such disclosure would be against the interest of the public at large. The Water (Prevention and Control of Pollution) Cess Act, 1977 has been enacted to levy a fee on industries and local authorities using water. The collected fee is utilised for funding the SPCBs. There are several lacunae in this act, as mentioned by Murty and Kumar (2011): first, the major purpose of enacting this law is to raise revenue for funding the SPCBs than to control the consumption of industrial water. This is evident from the fact that the revenue generated is earmarked only for funding the SPCBs. Second, the cess is limited in its scope as it is levied only upon the consumption of water by industrial units and local authorities. It does not include agricultural sector which consumes around 92% of the water in India (World Resources Institute, 2000). Third, the prevailing tax rate is way below the optimum level for various pollutants (Murty & Kumar, 2004; Gupta et al., 1989 in Murty & Kumar, 2011). Also, as in the case of the Water Act, the CAG (2011) points out that the penalty levied under this act is non-deterrent for the offenders. The maximum penalty levied for violation is only one thousand rupees. Further, the report also points out that both the Water Act and the Water Cess Act are not effectively enforced by the states. B.

Executive: Institutional Framework for Enforcement

The environmental regulation is both a Union and a State subject which necessitates that the institutional bodies, for enforcement of the laws, exist at both the levels. At the Union level, the Ministry of Environment, Forest and Climate Change (MoEFCC),10 which was constituted in 1985, is the supreme authority to monitor, enforce and regulate the various environmental legislations enacted in India. The 10 This

was earlier called as Ministry of Environment and Forest.

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environmental programs in India are also directed and implemented by the MoEFCC. CPCB, under the guidance of MoEFCC, lays down standards and conducts various programs for pollution control, besides directing to SPCBs. The responsibility of the SPCB is similar to that of the CPCB but is confined to their respective states. Both pollution control boards advise the governments in their jurisdiction about the issues related to pollution (CPCB n.d.). SPCBs advise their respective State Department of Environment. Industries in India are classified into four categories, i.e. Red, Orange, Green and White. The classification is based on the quantum of pollution they emit (MoEFCC, 2016). Red signifies that the industry is among the most polluting industries; Orange implies industries which are less polluting than Red, i.e. generating moderate pollution level; Green category consists of industries which are least polluting and White comprises of industries which are totally non-polluting. The MoEFCC has further identified 17 most polluting industries: aluminium, cement, chlor-alkali, copper, dyes and dye intermediates, fertiliser, iron and steel, pesticide, petrochemical, pharmaceutical, paper and pulp, sugar and zinc segments, tanneries, thermal power plants, distilleries and oil refineries. Apart from these three types of institutional bodies, there are five other (CPCB, undated): • The Central Ground Water Authority - Aqua Culture Authority • Dahanu Taluka Environment (Protection) Authority • Environment Pollution (Prevention and Control) Authority for National Capital Region of Delhi • Loss of Ecology (Prevention and Payment of Compensation) Authority for State of Tamil Nadu. • National Environment Appellate Authority, 1997. There are extensive norms and institutions framework for enforcing of various environmental laws, but the situation of environmental quality remains dismal. There have been several studies (Sankar, 1998; Rangarajan, 2009; IIM-L, 2010; CSE, 2014) that deal with the analysis of the reasons for the underperformance of the CPCB/SPCBs. A few shortcomings pointed out by these studies are: first, there is a shortage of trained staff in various regional centres of CPCB, which is also the situation for several SPCBs. One of the reasons for this is high percentage of vacant posts, for some states such as Andhra Pradesh this percentage of vacancies is as high as 61% and for states like Kerala and Gujarat it is 48% and 34%, respectively. Second, both CPCB and SPCBs are financially dependent on MoEFCC and their respective State Department of Environment which causes hindrance in the independent functioning of these boards. Financial independence is essential not only for appropriate monitoring of the polluting industries but also for enhancing the infrastructural requirements of the board over time. Third, there is no standard protocol followed by SPCBs for providing consent for operation of industries in their states which leads to corruption in granting clearance. Further, the officials do not even have any checklist for inspection because of which the official reports vary greatly between the officers. Fourth, the amount of training provided to the officials for compliance and enforcement is limited which affects the quality

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of inspection. Fifth, the amount of laboratories for testing the samples is inadequate and since online monitoring stations are unavailable therefore pollution cannot be tracked on a continuous basis. This delays the action that is required to be taken urgently against the polluting industry. Sixth, the weakness in the administration of the CPCB/SPCBs is visible from the fact that the qualified technical officials leave the board in short span of time which increases the problem of the shortage of technical staff. The overall picture indicates inability of these established institutions to deal with the problem of pollution due to systematic constraints. The problem in enforcing the laws is not only visible from the degrading environmental situation of India, but is also evident from the active role played by the judiciary in protecting the environment. This shows lack of legislative and executive roles in fulfilling their duties (Sahu, 2007). C.

Judiciary: Enforcement of Environmental Legislations

The institutional intervention by the Government of India clearly shows underperformance in regulating the environment. This is also evident from the present status of the Indian cities which are among the most polluted cities in the world. WHO (2016) indicated that of the 20 most polluted cities in the world 13 are in India and New Delhi being the most polluted in the world. This therefore leaves no option for the Supreme Court of India but to use its power granted under the Article 32 of the Constitution of India and to intervene for the protection of the fundamental rights of the citizens of India, i.e. the Right to Life. This pro-active role played by the Supreme Court of India has been termed in the literature as the ‘Judicial Activism’. Sahu (2008) explains the role that the Supreme Court has played for the protection of environment apart from its two fundamental responsibilities of interpreting and adjudication of the law. These innovative methods11 are (as termed by Ramesh, 2002 and cited in Sahu, 2008): first, laying down of new principles for environmental protection; second, reinterpretation of environmental laws; third, creation of new institutions and fourth, conferring additional powers on the preexisting laws and rules. According to Sahu (2008), all these four methods could be classified under two categories: procedural innovations and substantive innovations, but this categorisation might not be mutually exclusive. Procedural innovations have been simply defined by the author as the expansion of existing procedures of environmental jurisprudence. For example, acceptance of Public Interest Litigations (PILs), visiting the place of contention by the judges and understanding the environmental issues (known as spot visit), appointing of expert committees, etc, whereas substantive innovations have been defined as the ‘decisions in which the Court creates, defines, or rejects policy and governance structure for environmental protection and determines how its directions should be implemented’ (Sahu, 2008, p. 4). A few examples of this category are extension of fundamental rights, creation of new structures such as Central Empowered Committee (CEC), etc. The Supreme Court apart from adopting innovative methods for environmental jurisprudence also adopted the international principles of pollution control and 11 All

these innovative methods are a part of judicial activism.

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prevention (Gill, 2014; Sahu, 2008). The fundamental principle of sustainable development along with the principles of polluter pay, precautionary approach and intergenerational equity12 has been adopted by the Court, and this is evident from its various judgements. For example, in the recent case of illegal mining in Goa13 the Supreme Court ordered for conducting an Environmental Impact Assessment (EIA) study by an expert committee and commanded to propose an annual ceiling level on the iron ore excavation in the state (please refer to Table 3.10). The Court further ordered the committee to take into consideration the principles of sustainable development, i.e. intergenerational equity and carrying capacity of the environment while proposing the ceiling level. The state government was made to create a Goan Iron Ore Permanent Fund for meeting the requirements of sustainable development. The owners of the iron ore mines in Goa will be contributing 10% of their sales towards the Fund, thus fulfilling the principle of ‘polluter pay’. There are other such judgements given by the Court of which some date back to late 1990s, in which these principles have been mentioned as the basis for the environmental justice. Enviro-Legal Action versus Union of India, Vellore Citizens’ Welfare Forum versus Union of India, M. C. Mehta versus Union of India, A.P. Pollution Control Board versus M. V. Nayudu are a few examples of such judgements (Sahu, 2008). It is thus important to understand the effects of the judicial intervention undertaken by the Supreme Court of India. These effects could be classified into two categories: impact on environmental quality and on the society as a whole. On the environmental front, Rosencranz et al. (2007) list out quite a few inadequacies in several verdicts of the Supreme Court: first, the Court did not undertake the issues in the implementation of its orders. For example, in 1996, the Court allowed resumption of the timber extraction process on the condition that the states shall submit their working plan to the MoEF, but this order was delayed by several years by most of the states. According to Down to Earth (2002), only 14% of the working plans were completed between 1997 and 2002. Thus, one can hesitantly say that the Supreme Court orders could not plug the shortcomings in the governance structures of various states. Second, the blanket ban on the timber industries’ operations in the North Eastern states overlooked the rights of the people who were employed under this industry i.e. right to livelihood. This not only had an impact on the people but also on the economy of these states and that of the India as well. Arunachal Pradesh’s state revenue declined by 84% from 1995–96 to 2000–01, whereas for Manipur the revenue from forest produce declined by about 79% from 1996–97 to 1999–2000 (Down to Earth, 2003). Third, the Supreme Court established Central Empowered Committee (CEC) on May 9, 2002 so as to address the grievances of the public against the actions taken by the Union or state government in compliance with the Supreme Court’s order under

12 Polluter

Pay implies that the polluter is responsible for the pollution and the negative externality generated. Thus, the polluter should pay for the damage caused. Precautionary principle is meant for all the industrialist for taking appropriate preventive measures to safeguard the environment against their process of production. 13 Writ Petition (Civil) No. 435 OF 2012 https://indiankanoon.org/doc/193275439/.

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Table 3.10 Some important judgements by the Supreme Court of India on environmental interventions S. No Title

Judgement

1

Rural Litigations and Entitlement Kendra Closure of mining operations though versus State of Uttar Pradesh blasting in the Doon Valley affected areas to be reclaimed and afforestation and soil conservation programmes to be taken up so as to provide employment opportunities to the affected workers

2

M.C. Mehta versus Union of India

Stopping of the working of tanneries which were discharging effluents in River Ganga and which did not set up primary effluent treatment plants

3

Vellore Citizens Welfare Forum versus Union of India and Others

1. It endorsed the concept of sustainable development and endorsed ‘the precautionary principle’ and ‘the polluter pays principle’. It directed the central government to constitute an authority under section 3(3) of the Environment (Protection) Act, 1986 to implement the two principles 2. Imposed a fine of Rs.10,000 on each of the 700 tanneries in Tamil Nadu and asked them to instal individual effluent treatment plants (IETPs) or become members of CETPs

4

Other Rulings

1. Closure of 69 foundries in Howrah for their failure to install pollution control devices 2. Shifting of 513 industries out of Delhi for having damaged the health of Delhi’s citizens 3. Closure of 39,000 illegal industrial units operating in residential areas in Delhi 4. Closure of aquaculture farms within 500 m of the coast along India’s 6000 km, coastline by March 31, 1997, and payment of six years compensation to the employees in lieu of loss of employment 5. Shifting of 550 tanneries located in east Calcutta by September 30, 1977, and setting up of environmental pollution fund, with each unit paying Rs.10000 as fine, to be used for restoring the pollutant—riddled Hooghly (continued)

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Table 3.10 (continued) S. No Title

Judgement

5

Goa Foundations versus Union of India and Others (2014)

Supreme Court ordered for conducting an EIA study by the expert committee and commanded them to propose an annual ceiling level on the iron ore excavation in the state. Principles of sustainable development, i.e. intergenerational equity and carrying capacity of the environment, should be taken into consideration while proposing the ceiling level. 20 mn tons/annum to be fixed as annual excavation of iron ore in Goa and 10% of sale proceeds to be appropriated towards the Goan Iron Ore Permanent Fund

6

Lafarge Umiam Mining Private Limited versus Union of India and Ors. [(2011) 7 SCC 338]

Under section 3(3) of the EPA 1986, the Central Government should appoint a National Regulator for appraising projects, enforcing environmental conditions for approvals and to impose penalties on polluters

7

UT of Lakshadweep and Ors. versus Seashells Beach Resort and Ors (2012)

Appointed a committee of six members constituting an expert from various fields for solving a dispute on the issues related to the construction of tourists resorts in the Lakshadweep Island

8

Sterlite Industries (India) Ltd. Etc. versus A compensation of Rs. 100 crores should be Union of India etc. (2013) given for polluting the environment and for operating the plant without a renewal of the consents by TNPCB. This amount will be deposited with Collector of Thoothukudi District who will invest it in a Fixed Deposit for a period of 5 years. The interest from the deposit will be spent for improving the environment

Source Sankar (1998)

the Godavarman case.14 CEC was constituted because the MoEF failed to fulfil this obligatory requirement since 1980 as per its own circular FP (2). This thus created a parallel system which conflicts with the functioning of the MoEF and at times also with the Court’s orders, even though it is mandated to follow the orders of the Court. Fourth, the Court’s orders have also interfered with the functioning of the MoEF and other environmental executive bodies such as CPCB and SPCB. This is not only evident from the Godavarman case but also from several other cases. The Court did not take into consideration the available resources with these executive bodies and thus, the pragmatism of implementing the verdict could not be undertaken before an 14 W

P (Civil) No 202 of 1995, T N Godavarman Thirumulpad vs Union of India, Supreme Court of India.

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3 Environmental Regulations in India

order is passed. Therefore, if an order is not implemented, it evades its usefulness. An example put forward by the authors in this regard is that of the forest lands being encroached by the people who are depended upon these resources. This implies that the poor people were not taken into consideration while the judgement was given. Apart from the above listed issues, Sahu (2008) further points out two other shortcomings in the Godavarman case. First, the fundamental problem with the Court’s order is the ‘centralization of power over the country’s forest lands in the hands of the same bureaucracy against whose mismanagement the original PIL was filed’ (p. 16). Second, the rights of the tribals have been ignored by the Supreme Court itself even though their rights have been guaranteed under the Schedule V and VI. The judiciary is also plagued with the issues of delay in the judgements. This not only increases the cost of attaining the justice but also amounts to loosing of trust among the citizens for the judiciary (Gill, 2014). The judicial solution to the issues seems to be not so effective, as expected, for which failure in the implementation of orders is the main cause.

3.5 Environmental Compliance in India Analysing the status of CAC policies in India would be incomplete without examining the compliance of polluting industries because it would help in understanding the possible failures in execution of environmental laws. These issues have been examined with the help of Table 3.11 wherein, twelve case studies related to environmental compliance in India have been discussed. These case studies could be classified into three categories: first, the reports prepared by CAG, second the studies conducted by various authors on the performance evaluation of common effluent treatment plants (CETPs) and third, the comprehensive study of Sterlite Industries situated in Tuticorin, Tamil Nadu, performed by Kalpavriksh Environmental Action Group along with Corporate Accountability Desk. Eight of the twelve studies show that there is no compliance either by the industries/sectors or by the various State Pollution Control Boards (SPCBs) or both. On the other hand, all the studies analysing the performance of the CETPs in Maharashtra, Tamil Nadu and Delhi depict that the treatment plants comply for the five major indicators of water pollution, i.e. biological oxygen demand (BOD), chemical oxygen demand (COD), pH value, total suspended solids (TSS) and total dissolved solids (TDS). The first category of the studies by CAG span over diverse areas such as, role of Karnataka State Pollution Control Board (KSPCB), CETP in Kolkata, role of Maharashtra Pollution Control Board (MPCB), non-compliance by healthcare establishments (HCEs) in Gujarat, sewage treatment plants (STPs) in Delhi, environmental management of Indian Railways and non-compliance of mining activities in Karnataka. This gives a wide coverage of the status of environmental compliance across various states and polluting industries/activities in India. Table 3.11 further gives the details of compliance with the environmental laws for every case study. All the seven case studies undertaken in the CAG report non-compliance with one or

2005–10

CAG (2011a)

CAG (2010)

1

2

1995–2010

Period of study

S. No Author/references

Area

To study why there Kolkata was a delay of 12 years in constructing CETP at Bantala, Kolkata

To examine the Bangalore enactment of the laws related to water, air and construction

Focus

Table 3.11 Select cases in environmental compliance in India

No

No

Compliance

Violation of environmental laws

Ch. III and IV of the Air Act, 1981; Ch. IV and V of the Water Act, 1974

1. A few tanneries were directly realising effluents into water and CETP was not functioning properly

4. 73% of registered vehicles didn’t have PUCs

(continued)

Section 7 of EPA, 1986

Rule 115 (7)—Central Motor Vehicle Rules, 1989

3. Several units did – not install polluting control units

2. Inventory of polluting sources was not maintained appropriately by the KSPCB

1. Pollutants Section 7 of EPA, exceeded the limit 1986 in groundwater due to inadequate sewage treatment network

Details

3.5 Environmental Compliance in India 117

2006/07–2010/11

3

CAG (2011a)

Period of study

S. No Author/references

Table 3.11 (continued)

To study the role of Maharashtra Pollution Control Board (MPCB) in preventing water pollution

Focus

The headquarters office and 6 of 12 regional offices of MPCB

Area

No

Compliance –

2. Common Chrome Recovery System didn’t start operations even after 2 years of installation

12th Schedule of Article 243 W of the Constitution of India and section 17 (1) (f) of WPA, 1974

2. No treatment of the sewage was done before disposal for 18 ULBs

(continued)

Section 17 (1) (a) of WPA, 1974

1. No database for pollutants, their sources and pollution loads were drafted

3. Levels of various Section 7 of EPA, kinds of Chromium 1986 compounds were not meeting the standards

Violation of environmental laws

Details

118 3 Environmental Regulations in India

2007–12

CAG (2012b)

CAG (2013b)

4

5

2007/08–2011/12

Period of study

S. No Author/references

Table 3.11 (continued)

To analyse the sewage management in Delhi

To analyse the management of the biomedical waste in the government hospitals of Gujarat

Focus

Compliance

7 STPs and SPSs and 8 sewage maintenance divisions

No

Gujarat; 80 Health No Care Establishments (HCEs)

Area

Violation of environmental laws

Section 26 and 21 of WPA, 1974 and APA, 1981 respectively

1. None of the STPs met the prescribed standards

–

(continued)

1. 60% of the HCEs BMWR, 1998 under disposed the waste EPA, 1986 by burning and 70% of the HCEs didn’t segregate the waste as per the requirement

4. Treated effluents from CETPs and ETPs didn’t meet the standards of COD and BOD

3. Around 2% of the Section 33(1) of industries had no WPA, 1974 ETPs and 12% had only partial ETPs. No legal action had been taken against these industries

Details

3.5 Environmental Compliance in India 119

2011–12

CAG (2013a)

CAG (2012a)

6

7

2006/07–2010/11

Period of study

S. No Author/references

Table 3.11 (continued)

To analyse the controls and systems for sustainable mining in Karnataka

To analyse the environmental management in Indian railways

Focus

Karnataka

Indian Railways

Area

No

No

Compliance –

2. 60% of the digesters were not working in the sampled STPs which led to poisonous gases been emitted

1. Statutory clearances were not taken from the MoEF/KSPCB for the mining operations

2. Half of the sidings tests failed to comply with the provisions

(continued)

Mines and Minerals (Development and Regulation) (MMDR) Act, 1957

APA, 1981

1. No guidelines have – been drafted for handling and transportation of pollution intensive commodities

Violation of environmental laws

Details

120 3 Environmental Regulations in India

8

Kalpavriksh Environmental Action Group and CAD (undated)

S. No Author/references

Table 3.11 (continued)

Period of study

To study the compliance and monitoring of environment clearance conditions of Sterlite industries

Focus

Sterlite Industries India Limited, Tuticorin

Area

No

Compliance

2. Several irregularities on the MoEF’s and TNPCB’s part in granting clearance even after the industry not meeting the required standards and no action been taken against the industry

1. Clearance for expansion of the industry sought after construction

–

(continued)

Violation of environmental laws

2. KSPCB didn’t – monitor the rehabilitation work of the mined area which led to around 281 ha and 321 ha of land not being afforested and safety zone area not being restored, respectively

Details

3.5 Environmental Compliance in India 121

2014

Salunke et al. (2014)

Govindasamy et al. (2006)

Desai and Kore (2011)

Ashfaq et al. (2010)

9

10

11

12

Source As Mentioned in the Table

2010

2011

2006

Period of study

S. No Author/references

Table 3.11 (continued)

Performance evaluation of CETP in Delhi

Performance evaluation of the Kolhapur ETP in Maharashtra

Performance evaluation of the Pallavaram CETP in Tamil Nadu

Performance evaluation of the CETP at Dombivali in Maharashtra

Focus

CETP in Delhi

Kolhapur ETP for Textile industries, Maharashtra

Pallavaram CETP for Tanneries, Tamil Nadu

Dombivali in Maharashtra

Area

Yes

Yes

Yes

Yes

Compliance HWR, 1989 under EPA, 1986

3. Continuous violations of the norms of dumping hazardous wastes such as Arsenic

Nil

1. The effluents of Nil BOD, COD, pH, TDS and TSS were within the limit of the PCB

1. Most of the Nil effluents were within the prescribed range of MPCB

1. The effluents of BOD, COD, pH were within the limit of TNPCB

1. The CETP was Nil functioning appropriately as the emissions of BOD, COD, pH, TSS and TDS met the requirements of MPCB and CPCB

Violation of environmental laws

Details

122 3 Environmental Regulations in India

3.5 Environmental Compliance in India

123

the other environmental laws, such as The Water (Prevention and Control of Pollution) Act (WPA), 1974; The Air (Prevention and Control of Pollution) Act (APA), 1981; The Environment (Protection) Act (EPA), 1986; Hazardous Wastes (Management and Handling) Rules (HWR), 1989; Bio-Medical Waste (Management and Handling) Rules (BMWR), 1998 and Mines and Minerals (Development and Regulation) (MMDR) Act, 1957. Five of the seven studies bring out non-compliance because they did not meet the standards laid under various environmental laws mentioned above. Three studies depict the ill-functioning of their respective State Pollution Control Boards. The CETP studies conducted by various authors depict compliance with all the five indicators of water pollution as mentioned above, except for the CETP situated Table 3.12 Compliance status of CETPs in India States

Number of CETPs studied by CPCB

CETPs complying pH, BOD, COD, TSS and TDS standards

CETPs complying pH, BOD, COD and TSS but not complying TDS standard

Number

Number

Name

Name

AP

2

0

Delhi

10

3

0

Gujarat

15

0

Haryana

1

1a

Karnataka

2

0

1

Pai and Pai

Maharashtra

9

0

3

Thane-Belapur, Ambernath, Patalganga

MP

1

0

Punjab

1

1

Rajasthan

5

0

1

Jodhpurb

Tamil Nadu

29

0

2

Thiruvai Karurc , TALCO Ambur Thuthipet

UP

3

0

0

Total

78

5 (6.4%)

15 (19.2%)

Mayapuri, GTK, Badli

Kundli-I

6

Wazirpur, Mangolpuri, Jhilmil, SMA, Nangaloi, Okhla I. A

2

Ankleshwar, Sachin (0.5 MLD)

0

0 Phillore

0

Source Borrowed from CPCB (2005) a TDS not determined but likely to be within limits. b CETP was under trial; TDS not determined but CI exceeded. c TSS not determined.

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3 Environmental Regulations in India

in Pallavaram, Tamil Nadu (please see Table 3.11). The overall picture of the compliance status of the CETPs in India with the five major indicators is observed by the study conducted by CPCB (2005) as mentioned in Table 3.12. The study includes analyses of 78 CETPs across 11 states in India which depict contrasting results when compared with the four individual cases. Only 6.4% of the CETPs comply with all the five indicators of water pollution, and only 19.2% of the 78 CETPs comply with all indicators but the TDS. This analysis clearly brings out the problems with the enforcement of the regulation in context of the CETPs which thus leads to degradation of water bodies in India. A similar study again conducted by CPCB (2005) examined the compliance of the 115 sewage treatment plants (STPs) with the general standards for water pollution, i.e. BOD, COD and TSS, across 15 states in India. The results in this case are at least better than the study on CETPs; around 61% of the STPs comply with the general standards but still around 39% do not meet the standards. Thus, these studies depict the fragile situation of the compliance to the existing institutional norms and advisories in India.

3.6 Conclusions A critical examination of the status of environmental regulations in India was attempted under the larger framework of economic, command and control and social policies. Economic policies focused on the adequacy and specificities of ecotaxes indicated quite a few intricate issues. CAC measures were analysed through an examination of the role of legislative, executive and judiciary in regulating the environmental policies in India and that showed unsatisfactory compliance. Levying of ecotaxes would require an identification of polluting sources/goods/activities this was done by examining the existing literature. Ecotaxes are defined as the economic instruments which raises the cost of production/consumption/extraction so as to internalise the unavoidable negative externality. This definition when used for examining the status of existing environmentally related taxes in India resulted in only two of the fifteen such taxes which could be called strictly as ecotaxes in India. These are: vehicles entry tax and vehicles tax (on old automobiles). Except in Bihar and Kanpur, the vehicles tax (on old automobiles) in other six states can be called as ecotax. Most of the other taxes in India did not have a progressive rate structure even though some of them had environmentally relevant tax bases, for example Clean Environment Cess, Sikkim Ecology Fund and Environment Cess. Our analysis also showed the shortcomings with the OECD/EEA database, i.e. the database lists the taxes only on four categories in India: taxes on motor vehicles, taxes on the sales of lubricants, taxes on goods and passengers and taxes on electricity and most of these taxes do not satisfy the definition of ecotaxes in its true Pigouvian sense. In addition, the database also does not report a few ecotaxes such as Sikkim Ecology Fund and Environment Cess, the vehicles tax of Bihar and Kanpur, etc.

3.6 Conclusions

125

Analysing the adequacy of the ecotaxes in India was limited only to the studies which have analysed the utilisation of the funds generated through the levy of Clean Environment Cess, Forest Development Tax of Karnataka and the environment cess of Sikkim because of the paucity of such studies in the Indian context. The literature points out to a total lack of good governance in managing the funds generated from Clean Environment Cess. The Forest Development Fund was not appropriately collected, and further the fund so collected was not used effectively which led to an accumulation of a corpus of Rs. 964.02 crore, between 2009 and 2012. Certain cases of bribery were also reported. Sikkim Ecology Fund was the only exception among the three ecotaxes reviewed, as 20.5% of the total fund generated between 2007 till December 2012 were utilised for several environmental purposes, even though substantial improvement is yet possible even in the utilisation of funds in this cess. The three components constituting environment, namely water, land and air (Government of India, 1986). Five most polluting industries in India were identified as: iron and steel, oil refinery, fertiliser, sugar and cement industries. A comprehensive study by CPCB (2010) covering large geographical region pointed to the causes of air pollution in six cities in India: Bangalore, Chennai, Delhi, Kanpur, Mumbai and Pune. This study compared the sources of particulate matter (PM10 ), NOx and SO2 . Road dust was the major reason for PM10 , vehicular pollution was largely responsible for the emissions of NOx gases and SO2 was emitted majorly from the industries. Further, the share of five categories of vehicles was also studied which indicated bus and truck as the major source of vehicular pollution in all the cities, except for Kanpur where three wheelers and tempos are the major sources increasing PM10 . Cars and two wheelers were identified as causing high emissions of NOx in all the cities. The situation could not be controlled through various Acts passed by the states. In total there are 14 environmental acts in India which further have several rules, notifications and amendments which commands the CAC policies in India. The most comprehensive among these is the Environment (Protection) Act of 1986. This act lays the rules for water, air and noise pollution and further also has rules governing pollution from hazardous substances and vehicles. The major institutions in India for enforcing the standards laid by this law are CPCB and SPCB. These institutions have the power to lay the standards for water, air and noise pollution under the various sections of Water, Air and Environment (Protection) Act. Sankar (1998) identifies four major problems with these institutions namely: i. information asymmetry, ii. lack of technical expertise and iii. budget constraint, fines not acting as deterrent and iv. financial dependence on the respective state governments. Judiciary has played a significant role in protecting the environment in India which is evident from the strict verdict given against the polluters by the Supreme Court. The judiciary, however, is also plagued with delays in the judgements and is constrained with the lack of technical expertise in several environmental pleas because of which the judgements are not pragmatic. The implementation of the judicial guidelines is also quite slack across the states. The functioning of the pollution control boards is quite problematic and ineffective. Finally, the status of environmental compliance in India was also examined. Eight of the twelve studies show no compliance with

126

3 Environmental Regulations in India

various environmental laws which clearly depicts that the environmental laws are not enforced adequately in India. Environmental regulations in India have been brought in with significant deliberations. The institutional regulations and norms have remained ineffective due to inadequate staff and resources. The interventions by judiciary certainly held forth a great promise and created strong awareness. The guidelines and the judgement provided some boost in curbing the levels of pollution but that was confined to sporadic instances. The major problems of ecodegradation remained out of ambit, and many times the judicial recommendations failed at the threshold of implementation due to tardy and slack implementation.

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Srivastava, D. K., & Kumar, K. K. (2014). Environment and fiscal reforms in India. SAGE. Srivastava, D. K., Kumar, K. K., Rao, C. B., & Purohit, B. C. (2011). Coping with pollution: Ecotaxes in a GST regime. MSE. Steinbach, N., Palm, V., Cederlund, M., Georgescu, A., & Hass, J. (2009). Revision of SEEA 2003: Outcome Paper: Environmental Taxes. TERI. (n.d.). Environmental Laws. Retrieved June 25, 2018, from EduGreen: http://edugreen.teri. res.in/ Times of India. (2014). Maharashtra warns all vehicles to lower honking volume by at least 87%. Retrieved MAy 10, 2015, from https://timesofindia.indiatimes.com/city/mumbai/Maharashtrawarns-all-vehicles-to-lower-honking-volume-by-at-least-87/articleshow/41027228.cms Verma, R. (2016). Ecotaxes: A Comparative Study of India and China. ISEC Working Paper Series, WP353. WHO. (2016). Ambient air pollution: A global assessment of exposure and burden of disease. WHO. World Bank. (1999). Annual Report. World Bank. World Resources Institute. (2000). A guide to world resources 2000–2001: People and ecosystems: The fraying web of life. World Resources Institute.

Chapter 4

Designing Ecotaxes in India: An Environmentally Extended Social Accounting Matrix (E-SAM)

4.1 Introduction Designing ecotaxes requires a careful scrutiny and understanding of the intertwining relations between sectoral activities that generate pollution in the environment. This relationship could be understood to a certain extent through the secondary data. However, depicting such relationship through obtaining a detailed data set for environment is difficult for India, despite the presence of several environment-specific institutions in the country for several decades. Thus, getting a comprehensive data at an aggregated level which can show the interrelationship between the economic activities and the environment is even more challenging. Such a database is not only imperative for understanding the complexities but is also required to analyse the implications of degrading the environment beyond its carrying capacity. Theoretically, the environment is said to provide three1 crucial services/functions to the mankind: amenity services, resource base (also known as flow of resources) and assimilative function, besides its life supporting function (Perman et al., 1999). It is difficult to quantify these services/functions to its actual level, and therefore, economists attempt to account for the second and third functions of the environment through an accounting framework which is established in the literature as Environmentally Extended Social Accounting Matrix (E-SAM). E-SAM could be defined simply as an accounting matrix which gives the interactions between various sectors of production, institutions & environmental sectors of an economy in an accounting year. In this chapter, an attempt has been made to update and utilise the E-SAM of 2006–07 for India initially constructed by Pal et al. (2015). This matrix is extended by including two other environmental components, i.e. water and land so as to analyse their interactions with other sectors of the economy. Apart from a comprehensive dataset for designing ecotaxes, attempt has been made to arrive at potential tax bases 1 The updated list of categorisation of the ecosystem functions is given by the Millennium Ecosystem

Assessment Report which classifies it into provisioning, regulating, cultural and supporting services. This could be referred from: https://www.millenniumassessment.org/documents/document.300. aspx.pdf © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 131 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8_4

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4 Designing Ecotaxes in India: An Environmentally Extended …

and a theoretical deduction for the optimal rates of these taxes, thereby addressing the design issues related to these taxes.

4.1.1 Designing Ecotaxes Answers to four fundamental questions are indispensible while levying any form of tax in any country. These are: i. What is the purpose of the tax? ii. Where the tax should be levied? iii. What should be the rate/s of taxation? and iv. Is the tax economically viable? While answering the first question in relation to environmental taxes, it is important to understand that these taxes, unlike other forms of taxes, are meant for reducing the degradation of environment. Hence, ecotaxes should not be treated simply as revenue raising fiscal instruments for the government, and the present study is in line with this premise. Identifying the point of the levy of a tax is indispensible, and this is referred in the literature of public finance as identifying the ‘tax base’. Closely associated with this question is the understanding of the economic viability of the proposed tax, because if the tax base for levying an ecotax is identified as emissions from the polluting product/activity then it becomes extremely difficult to monitor the data on emissions directly. This was also observed while reviewing the Environmental Fiscal Instruments (EFIs) earlier (please refer to chapter two), and it was noted that the proportion of pollution taxes in the emerging economies is extremely limited. Thus, the tax base should be chosen so as to minimise the costs associated with the administering of a tax and also not to overlook the purpose of the levy. While choosing a proxy for emissions as a tax base, the alternative choice should still be able to provide a disincentive for the polluting activity. Output generated from such an activity could be a possible economically viable proxy for the emissions generated. The final question is regarding the rate of taxation which should ideally be optimal, but mostly, it is difficult to practically arrive and implement such rates, and thus, the common practice is to reduce the difference between the actual and optimal rates. The arguments in the foregoing analyses begin with establishing the necessity of using E-SAM for designing ecotaxes. A critical review of the existing E-SAMs is taken so as to understand the difference in their structures. Based on this review, a conceptual framework of the E-SAM 2007–08 is developed and also derivation of the E-SAM multipliers is arrived at theoretically, which are essential in understanding the fundamentals of any E-SAM modelling. The details of the methods and the data sources used for updating the E-SAM 2006–07 for India have been described, and identification of potential tax bases for a proposed levy of ecotax is essential component of this exercise. Theoretical deduction of the optimal rates for ecotaxes and how to implement ecotaxes in a Goods and Services Tax (GST) regime have been attempted, before concluding on the analysed issues.

4.2 Utility of E-SAM in Designing Ecotaxes

133

4.2 Utility of E-SAM in Designing Ecotaxes The interrelationship between an economy and the environment can best be understood in an accounting framework because such framework ensures clarity in linkages involved through the listing of the flow of resources between the two. This helps in understanding the dependency of one sector on the other and hence providing a base for analysing those sectors which might be pollution-intensive. Further, this framework also depicts the dependency of relatively less-polluting sectors on the pollutionintensive sectors. This brings out the indirect and induced effects that would further affect the environment (Pal et al., 2015). Such a framework could also be used for analysing the implications on the relatively less-polluting sectors, if the pollutionintensive sectors are taxed for the externality they generate. These relationships with environmental sectors are not depicted by the conventional accounting matrices existing in the literature, i.e. input–output tables and Social Accounting Matrices (SAM). This is due to the fact that none of these have an explicit environmental account which could be described as the flows between the economic and the environmental sectors. In the absence of such data, a need arose for extending these matrices with environmental accounts on other components such as water and land. E-SAM is an outcome of such an attempt and is an extension of a SAM2 . SAM and E-SAM are preferred over input–output (I-O) or environmental extension of the I-O because a SAM captures the entire circular flow of the economy by explicitly incorporating the institutional sectors such as various categories of households, private and public sectors in its rows as well as its columns (Pradhan et al., 2006). This ensures that the flows between the income earned and the expenditures made are accounted for. These are depicted in a three-way process; first, the income received by the factors of production, i.e. land, labour and capital, is accounted in the rows of these factors (please refer to the interaction of sectors 2, 1 in Table 4.1). Thereafter, the distribution of these incomes to their respective institutions, i.e. households, public and private sectors, is accounted in the rows of these institutions (please refer to the interaction of sectors 3, 2 in Table 4.1). Finally, the expenditures made by these institutions on the goods and services are captured in the columns of these institutions (please refer to the interaction of sectors 1, 3 in Table 4.1). This is not the case in an I-O or environmental extension of I-O as the institutions (in the form of final demand) are mentioned only in the column and not in the row, therefore excluding the linkage between the factors of production and the institutions. Normally, I-O tables are used when the role of households as an economic agent is required to be studied at an aggregated level, and in such cases, the final demand vector (as depicted in I-O table) meets the required need of the study. E-SAM as a database is also required to achieve the core objective of this study, i.e. to analyse the implications of the application of ecotaxes in the Indian context. This could be attempted by utilising the E-SAM by deducing the base of ecotaxes in India and thus examining the incidence, double-dividend hypothesis and competitiveness 2 Since

E-SAM is just an environmental extension of a SAM, therefore, the fundamental methodology of matrix multiplier being at the core of SAM methodology holds true also for E-SAM.

1

2

3

4

5

6

7

8

GHGs

Waste Water Disposed

Production

Factors of Production

Institutions

Indirect Taxes

Capital Account

Rest of the World

Damaging Substances (pollutants)

Sectors

Treatment of Waste Water through Industries

Absorption of Substances in Production

Imports

Taxes on Intermediate

Payment for Factors

Depreciation

Value Added Income

2

1 Intermediate Consumption

Factors of Production

Production

Table 4.1 Basic Structure of Environmentally Extended Social Accounting Matrix

Treatment of Waste Water through Government Institutions

Absorption of Substances in Consumption

Savings

Taxes on Purchase

Transfer from Other Institutions

Consumption of Goods and Services

3

Institutions

Total Tax Receive

4

Indirect Taxes

Taxes on Investment

Change in Stocks and Capital Formation

5

Capital Account

(continued)

Foreign Savings

Net Current Transfers

Net Factor Income from Abroad

Exports

6

Rest of the World

134 4 Designing Ecotaxes in India: An Environmentally Extended …

Environmental Theme

Depletable/ Degraded Natural Resources

Sectors

13

14

*Water pollution

*Land Pollution

11

*Degradation of Land

12

10

Depletion of Land

Greenhouse Effect

9

Depletion of Energy Resources

Table 4.1 (continued)

2

1

Extent of Land Degradation

Amount of Waste water Generated

Accumulation of GHGs

Degradation of Land

Depletion of Land through Conservation

Depletion of Energy Stock

Factors of Production

Production 3

Institutions 4

Indirect Taxes 5

Capital Account 6

(continued)

Rest of the World

4.2 Utility of E-SAM in Designing Ecotaxes 135

1

2

3

4

5

6

Production

Factors of Production

Institutions

Indirect Taxes

Capital Account

Rest of the World

Sectors

Table 4.1 (continued)

Emission of Pollutants from Consumption

Emission of Pollutants from Production

Waste Water Disposed by Households

Waste Water Disposed

Renewal of Energy Capital

9

Renewal of Land Capital

10

Reduction of Degraded Land

11

12

13

*Water pollution

8

Greenhouse Effect

7

*Reduction of Degraded Land

Renewal of Energy Resource

Waste Water Disposed

GHGs

Renewal of Land

Depletable/Degraded Natural Resource Environmental Theme

Damaging Substances (pollutants)

14

(continued)

*Land Pollution

136 4 Designing Ecotaxes in India: An Environmentally Extended …

Environmental Theme

Depletable/ Degraded Natural Resources

Damaging Substances (pollutants)

Sectors

13

*Water pollution

11

*Degradation of Land

12

10

Depletion of Land

Greenhouse Effect

9

8

Waste Water Disposed

Depletion of Energy Resources

7

GHGs

Table 4.1 (continued)

Emission from Land use Change

9 Removal of Substances

10

11

Reduction on Land’s Productivity

Reduction in Natural Stock

Accumulation of Substances

12

Amount of Waste water Generated

13

*Water pollution

8

Greenhouse Effect

7

*Reduction of Degraded Land

Renewal of Energy Resource

Waste Water Disposed

GHGs

Renewal of Land

Depletable/Degraded Natural Resource Environmental Theme

Damaging Substances (pollutants)

(continued)

Extent of Land Degradation

14

*Land Pollution

4.2 Utility of E-SAM in Designing Ecotaxes 137

*Land Pollution

14

9

10

11

12

13

*Water pollution

8

Greenhouse Effect

7

*Reduction of Degraded Land

Renewal of Energy Resource

Waste Water Disposed

GHGs

Renewal of Land

Depletable/Degraded Natural Resource Environmental Theme

Damaging Substances (pollutants)

Source Pal et al. (2015) *These sectors are an addition to the E-SAM of Pal et al. (2015)

Sectors

Table 4.1 (continued)

14

*Land Pollution

138 4 Designing Ecotaxes in India: An Environmentally Extended …

4.2 Utility of E-SAM in Designing Ecotaxes

139

of the sectors on which such taxes could be levied. Further, such analysis would be an attempt to contribute to the literature not only by updating the only existing ESAM for India to the year 2007–08, but also by extending the interactions between the economy and the environment by incorporating two key environmental sectors: water and land. This is imperative in the Indian context as the definition of environment has been adopted from the Environment Protection Act (EPA), 1986, which considers water, air and land to be its three components3 and the importance of these in India’s environmental context. Thus, our attempt here is more holistic than the earlier study by Pal et al. (2015), wherein the impact of policy changes was only analysed on the air pollution, and therefore, that study just included greenhouse gas (GHG) emissions as the indicator.

4.3 Understanding E-SAM in the Context of Ecotaxes At the outset, it is essential to look into the E-SAM literature critically in order to understand the similarities and differences in their structures. This study is concerned more with their structures rather than mechanically understanding the methodology adopted and the results obtained from the simulation exercises which might have been performed on the constructed E-SAM. Here, the focus is to see what and how can new sectors be added in the E-SAM of Pal et al. (2015) which could explain the interactions between the economy and the environment in a more comprehensive manner. But, before getting into the literature on E-SAMs, the emergence of E-SAM and also the other two forms of environmentally extended matrices that exist in the literature need to be explained. E-SAM has its roots in the input–output matrix which accounts for the flow of goods and services between the various productive sectors of any economy. Extension of input–output tables in context of impact on social parameters is Social Accounting Matrix, which not only provides an account of the exchange of goods and services between the productive sectors but also gives details of the interactions between the institutions in the sectors of the economy such as households, government and firms along with the other productive sectors. Therefore, E-SAM can be constructed in two ways, either the environmental accounts could be added separately in the form of satellite tables or by adding rows and columns in the existing SAM (Keuning, 1992). There are three different versions of SAM matrix which account for environmental sectors along with the other sectors’ transactions. First is called as National Accounting Matrix including Environmental Accounts (NAMEA), second as Social Accounting Matrix including Environmental Accounts (SAMEA) and third as ESAM (Keuning, & Timmerman, 1995; Xie, 2000). SAMEA and E-SAM structures are very similar, but there is a subtle difference in the structure of NAMEA and SAMEA/E-SAM. The fundamental difference is that the NAMEA does not have 3 Please

refer to Sect. 3.3 of chapter three for the definition of environment that has been adopted as per the EPA, 1986.

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4 Designing Ecotaxes in India: An Environmentally Extended …

a disaggregated level of various factors of production (labour, capital and environment) and institutions such as households, government and enterprises (Keuning, & Timmerman, 1995). NAMEA is an extension of I-O tables, whereas SAMEA is an extension of SAM (please refer to Appendices C, D and E). Further, it also does not have the disaggregation of the capital account into environment and non-environment as is found in the E-SAM of Xie (2000). Thus, SAMEA/E-SAM provides detailed information at the sub-sectoral level which is imperative for analysing the impacts of a policy change on the various categories of the households. Even after having disparities in their structures, all the three forms of environmental accounting matrices are similar in their theoretical formulation. All have their roots in input–output matrix which follows a set of assumptions (Pradhan et al., 2006): first, there is homogenous production of output in every sector, and the outputs of different sectors cannot be substituted with each other. Second, the Leontief production function is assumed for all the sectors, i.e. the share of each input in the level of output is a fixed proportion. Third, the Hawkins–Simon condition should be fulfilled. This condition in simple4 mathematical terms implies that the inverse of matrix [(IA)−1 ] which is used for computing the multiplier needs to exist, and for its existence, the determinant value of the matrix should not be zero. The economic meaning of this condition is that the inputs used in the production system of any good in a sector should not be greater than the output produced in that sector. Apart from the three similarities in all the accounting procedures, environmental accounts are listed in physical units unlike the transactions of other sectors of the economy which are mentioned in monetary values.

4.3.1 Lessons from Existing E-SAMs After understanding three different forms of environmentally extended accounting matrices, studies on E-SAMs need to be comprehended. We could get at seven ESAMs for six countries: Indonesia, China, Bolivia, Brazil, Chile and India (please refer to Table 4.2). The first attempt of constructing an E-SAM could be attributed to the work of Resosudarmo and Thorbecke (1996), wherein the impact of curbing air pollution on the household incomes has been attempted as further analysed by Gallardo and Mardones (2013). Following this, Weale (1970) also constructed an E-SAM for Indonesia, and this exercise included land degradation and depletion of oil reserves as the two important indicators of environmental pollution. The seven E-SAMs existing in the literature have considered various environmental indicators which range from air pollutants such as GHGs, to abatement activities. Studies such as Xie (2000) have also considered environmental factor of production and environmental capital as a separate sector. On the other hand, Lenzen and Schaeffer (2004)

4 Technically

satisfying the Hawkins–Simons condition would require all the principal minors of the I-A matrix to be greater than zero (Chiang, & Wainwright, 2013, p. 116-119).

4.3 Understanding E-SAM in the Context of Ecotaxes

141

Table 4.2 Studies using E-SAM-A comparative analytical picture S.

Authors and No. Year

Country

Basic environmental sectors considered in E-SAM

Methodology Shortcomings Can the applied for structure be impact adopted in analysis India and why?

1

Resosudarmo Indonesia Environmental & Thorbecke pollutants (1996) along with health cost data

Constrained fixed price multiplier method

Other environmental pollutants were not incorporated

2

Weale (1997) Indonesia i. Land clearing and degradation ii. Logging damage iii. Depletion of oil reserves

Multiplier analysis

Water & air No, because of pollution have data not been unavailability considered

3

Xie (2000)

i. Abatement activities (pollution cleanup payment) ii. Environmental factor of production (ecotaxes/fee in the row) iii. Environmental capital A/C iv. Pollutants and resources

Multiplier & 1. The No, because of structural pollutants data path analyses and unavailability resources are mentioned only in the column, and thus, it is not an account for these.

4

Alarcón et al. Bolivia 2000)

Four GHGs emissions, natural gas, petroleum and waste

Nil

China

Yes, as the data would be available, such a structure of an E-SAM would be limited only to explaining the deteriorating health

The balancing Yes of the substances A/C only has a column, and thus, it is not an account (continued)

142

4 Designing Ecotaxes in India: An Environmentally Extended …

Table 4.2 (continued) S.

Authors and No. Year

Country

Basic environmental sectors considered in E-SAM

Methodology Shortcomings Can the applied for structure be impact adopted in analysis India and why?

5

Lenzen and Schaeffer (2004)

Brazil

Non-renewable energy contents and carbon contents in fuels

Multiplier analysis and statistical analysis of multipliers

Other forms of environmental pollution such as water pollution and land degradation have not been considered

Yes, but this might not be relevant in international context as CO2 equivalent is widely accepted measure for climate change which has not been considered

6

Gallardo and Mardones (2013)

Chile

Environmental pollution emissions by including data on seven air pollutants & three water effluents

Linear multi-sectoral economic model (multiplier analyses)

Issues of land degradation have not been considered

Yes, as the data for air and water effluents is available

7

Pal et al. (2015)

India

GHG Multiplier emissions, analysis depletion of energy resources: coal & oil

Water and land degradation have not been addressed

Yes, as the data is available

Source As mentioned in Table

have chosen carbon and non-renewable energy contents as the environmental indicators. In the Indian context, it is difficult to get data on such kinds of environmental indicators. A major limitation with the approach of Lenzen and Schaeffer (2004) is to compare the results internationally for a policy impact on the polluting sectors. Here, the fact to be considered is that for the carbon emissions, CO2 equivalent is an internationally accepted indicator for climate change. In turn, this would limit the practical implications of such a study, when seen in a global perspective. A major drawback in all the reviewed studies is that none of them have taken environmental indicators which would depict all the three major forms of pollution, i.e. water, land and air pollution. Therefore, an attempt will be made in this study to fill this gap by considering all the three major forms of environmental pollution incorporated in the newly constructed E-SAM. Five out of six studies located here use the conventional multiplier analysis to quantify the impact of a governmental policy in curbing environmental degradation.

4.3 Understanding E-SAM in the Context of Ecotaxes

143

But Resosudarmo and Thorbecke (1996) used constrained fixed price multiplier model to assess the impact of environmental policy on the incomes of the households, whereas Alarcon et al. (2000) do not perform any impact analysis on the E-SAM, which they constructed for Bolivia. This bares the importance of the multiplier model in assessing the impact of an environmental policy in an economy. This discussion on multiplier is taken further ahead due to its analytical importance. Even though most of the structures of the E-SAM could be adopted in the context of India, but the E-SAM structure of Xie (2000), who incorporates abatement activities, environment as a separate factor of production and environment capital account as a separate account, might not be possible for India due to unavailability of data for most of these indicators. The paucity of data is also expressed by most of the researchers that restricts the study in providing a detailed E-SAM for India. However, an indicative attempt brings out all the most needed policy contours.

4.4 E-SAM: Design, Theory and Construct For the understanding of conceptual and theoretical construct of E-SAM, two components need elaboration. First, to highlight the nuances in the conceptual structure of E-SAM and its essential subcomponents. This will have theoretical backup. Second, the actual process of E-SAM and the procedure as desired in the prominent studies with the introduced modifications.

4.4.1 Conceptual Framework of E-SAM The structure of E-SAM here bears basically on the E-SAM 2006–07 prepared by Pal et al. (2015), which was described earlier in Table 4.1. As is evident from the table, there are nine accounts (as represented in first row and column) of which last three accounts are of environment and other accounts could be found in any basic structure of a SAM. The approach followed by the authors is that of the Keuning (1992) who built NAMEA for the Netherlands. This structure is different from what was observed in the previous tables mentioned in the Appendices C-E. The environmental accounts are added only at the end, after the SAM sectors, as additional rows and columns and the environmental entries in between the SAM sectors have not been considered (please compare the structure of Table 4.1 with Appendices C-E) as in India data is not available at an aggregated (nor at disaggregated level) level for abatement activities, environmental taxes/charges paid, as also environmental capital accounts. Due to this constraint, Pal et al. (2015) have taken only three environmental sectors, i.e. damaging substance (pollutants), depletable substances and environmental themes. An attempt has been made to further extend a few sub-sectors in these three environmental accounts so as to include the extent of land degradation and the amount of wastewater generated as a parameter for land degradation and water pollution, respectively. There

144

4 Designing Ecotaxes in India: An Environmentally Extended …

are two fundamental reasons for this approach followed in this volume: first, the definition of the environment from the Environment Protection Act (1986) considers land, air and water as the three components of the environment and second, ecotaxes are defined in a holistic manner, which not only include the environmental taxation on the production behaviour but also on the consumption and extraction behaviour that might be deemed to be polluting. The interpretation of the first six accounts in Table 4.1 is the same as that of the accounts of any SAM, wherein the entries in any cell will be read as the supply of/receipt for the goods/services for the sector in the row and the demand of/expenditure for the goods/services for the sector in the column5 . For example, in the second row and first column, the entries for the factors of production will be read as the receipt or payment for their services rendered to various sectors of production. And for the sectors of production or industries (represented in the column), it is the expenditure incurred for taking the services of the various factors of production. However, the interpretation of the environmental sectors is quite different from the conventional explanation of the SAM entries. The rows of damaging substances are understood as the absorption of polluting substances, i.e. GHG emissions and generation of wastewater into various sectors. The absorption of wastewater in the industrial/domestic sector implies that the wastewater has been treated before discharging. The column of the damaging substances implies the emissions/generation of the GHG/wastewater from the industries, institutions and land use changes. The row of the depletable/degradable substances could be interpreted as the depletion or degradation of these natural resources because of their use in production processes or as factors of production (usage of forest land for industrial or other purposes). The degradation of the land implies the reduction in the land’s productivity due to various factors such as deforestation, urbanisation and mining, and the depletion of the land here implies conversion of forests for developmental or other purposes. The column of the depletable/degradable substances can be understood as the renewal of these natural resources. The last account is the environmental themes, and it consists of three sub-sectors, namely greenhouse effect, water pollution and land pollution. All these sub-sectors are inventory account which computes the net emission/discharge/degradation of the environmental resources.

4.4.2 Derivation of E-SAM Multipliers E-SAM multipliers have to be derived in the same manner as in the case of any SAM because it is just an extension of a SAM, and thus, the assumptions and the theoretical underpinnings of the two methodologies are same (Pal et al., 2012). Therefore, the derivation of the E-SAM multipliers can be arrived with the help of a prototype 5 This

principle of a SAM could be simply remembered by concentrating on the English alphabet followed by C (representing column of the SAM) which is ‘D’, and therefore, the column represents demand. Similarly, alphabet after R (representing row of the SAM) is ‘S’ which implies supply.

4.4 E-SAM: Design, Theory and Construct

145

Table 4.3 Prototype SAM Sectors

Factors

Institutions

Activities

Exogenous injections

Total

Factors

0

0

w31

X1

Y1

Institutions

w21

w22

0

X2

Y2

Activities

0

w32

w33

X3

Y3

Leakages

L1

L2

L3

Total

Y1

Y2

Y3

Source Pyatt and Round (1979) cited in Pradhan et al. (2006)

SAM as outlined in Table 4.3. This framework has been adopted from Pyatt and Round (1979) as cited in Pradhan et al. (2006). There are three fundamental sectors in this framework: Factors, institutions and activities. The leakages (L) in the row represent the savings and other payments, which are not accounted in the other entries, whereas the exogenous injections (X) in the column imply the transactions which are not governed in an economy such as transfers from Rest of the World and payments to migrant workers. In a balanced SAM, the sum of the rows is equal to the sum of the columns, and therefore, both the row and the column depicting ‘Total’ in Table 4.3 are represented by Y 1 , Y 2 and Y 3 . In order to derive the multipliers, first the entries in the table have to be expressed in a matrix format. A flow matrix, say W, of the three sectors and the first three rows of the prototype SAM in a matrix form could be defined in the following manner: ⎞ 0 0 w31 W = ⎝ w 21 w22 0 ⎠ 0 w32 w33 ⎛

Y=W+X

(1)

Now, the share of each input is a fixed proportion of the total output, i.e. the Leontief coefficients. This share can be represented as follows: Aij = Wij /Yj

(2)

where i and j represent row and column, respectively. Replacing the value of Wij from equation two and inserting it in Eq. 1 results in Y = Aij Y + X => Y = (I−A)−1 X => Y = MX

(3) (4)

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4 Designing Ecotaxes in India: An Environmentally Extended …

The M in the above equation is the SAM multiplier which implies that if the exogenous injection through any factor is increased by a unit then the total value of the output in the economy will increase by M. Also, the multiplier M depicts the total effect on the economy due to a change in the exogenous variable. Total effect comprises direct and indirect effects (Pradhan et al., 2006). Direct effect implies the effect on the economy due to the direct relationship between the exogenous variable and the effected variable whereas; the indirect effect implies the effect on the economy due to the changes in the induced demand via the linkage of the exogenous sector through other sectors in the economy. The difference between the multiplier effect of a SAM and an input–output could also be explained with the help of this prototype SAM and derived equations. The total value of output in the activity sector (Y 3 ) can be written as Y3 = w32 + w33 + X3 Now, using Eq. 2, the above equation can be written as Y3 = A32 Y2 + A33 Y3 + X3 => Y3 = (I−A)−1 (A32 Y2 + X3 ) The fundamental difference in the structure of a SAM and input–output is that in an I-O matrix the total demand is not disaggregated into institutions. Thus, the term A32 Y 2 is considered to be exogenous, and it does not have a substantial impact on the economy. On the contrary, in a SAM, the institutions are divided into various classes of households, government and firms. Therefore, A32 Y2 is determined along with Y3 which increases the effect on the economy manifold due to the interlinkages of this sector with the other sectors of the economy (Pradhan et al., 2006). Hence, a SAM completes the circular flow of the economy. The E-SAM multiplier is also useful in analysing the effect of a change in the exogenous variables on the amount of pollution generated. Pal et al. (2015) used the methodology of Robert (1975) for formulating the aforesaid interlinkages. The relationship between environmental pollution and the output of a sector can be depicted:  ∗ Y33×33 E3×33 = P3×33

(5)

where6 , E represents the matrix of emissions/wastewater generated/amount of degraded land from all the 33 core sectors. P is the environmental pollution coefficient matrix of all the core sectors, and P’ is the transpose matrix of P 6 The

order of the matrices written in the subscript depicts the rows and columns of the E-SAM 2007–08 which have been constructed with 33 sectors of production and seven environmental sectors. For details, please refer to Appendix F

4.4 E-SAM: Design, Theory and Construct

147

Y is the matrix of total value of output in all the sectors Substituting the value of Y from the Eq. (3) in the Eq. (4) gives  ∗ (I−A)−1 X33×3 E3×33 = P3×33

(6)

P ∗ (I−A)−1 = T3×33

(7)

Let

T is the ‘pollution trade-off multiplier matrix’. This is similar to the SAM multiplier matrix M as for a unit change in the exogenous variable the environmental pollution in the economy will change by a factor of T.

4.5 Data and Methods: E-SAM for India (2007–08) E-SAM for 2007–08, for India, is an updated version of the only E-SAM prepared by Pal et al. (2015). To start with, the SAM for 2007–08 developed by Pradhan et al. (2013) has been aggregated taking a 33-sector SAM based on the sectors of environmental importance. These sectors also include the top five polluting sectors identified in India: iron and steel, oil refinery, fertiliser, sugar and cement industry (Pandey, 2005; Gupta, 2002). Pal et al. (2015) have constructed a 35-sector SAM/ESAM. Their E-SAM did not include biomass sector, disaggregated metals sector (as is evident in the Appendix F which depicts the 33 sector E-SAM constructed for this study) into iron and steel and aluminium. Rest of the 33 sectors have been adopted from their E-SAM. Here, the biomass sector has been dropped as our concern here is more with the environmentally polluting sectors. Our focus here is more about ecotaxes in India which would be levied on environmentally polluting products. Further, aluminium as a separate sector is not need because its share in water pollution is minimal, i.e. only 2.5% of the total pollution load of the sixteen red category industries as identified by the CPCB (Pandey, 2005; Gupta, 2002). Concordance mapping between the E-SAM sectors and the SAM of 2007–08 is shown in Table 4.4. This exercise is imperative because the aggregation of these sectors could be done only after listing out those sectors which needs to be combined together. This is depicted in the fourth column of Table 4.4. The sectors are pooled together to form one aggregated sector by adding across the rows and columns, one after the other. Table 4.4 depicts four different sectors of transport that reflect different modes of transport, i.e. land, rail, air and sea. The fourth column of Table 4.4 in all these four sectors depicts a part of s66 sector from the SAM of Pradhan et al. (2013). This sector is termed as ‘Supporting and Auxiliary Transport Services’ which is a part of these four transport sectors, and thus, there is a need to combine this with these four sectors. The following procedures were adopted: each transport sector’s share in the overall output of this sector, which is the sum of outputs in land, rail, air

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4 Designing Ecotaxes in India: An Environmentally Extended …

Table 4.4 Concordance map between E-SAM sectors and SAM 2007–08 sectors S. No.

Sector Code

Core sectors of E-SAM

Sectors of SAM 2007–08

1

PAD

Paddy rice

s1

2

WHT

Wheat

s2

3

CER

Cereal, grains, etc., other crops

s3–s6 and s17–s19

4

CAS

Cash crops

s7–s16

5

ANH

Animal husbandry and prod.

s20

6

FOR

Forestry

s21

7

FSH

Fishing

s22

8

COL

Coal and lignite

s23

9

OIL

Oil

s25

10

GAS

Gas

s24

11

MIN

Minerals n.e.c.

s26–s31

12

FBV

Food and beverage

s32–s37

13

TEX

Textile and leather

s38, s39, s44

14

WOD

Wood

s41

15

PET

Petroleum and coal prod.

s47, s48

16

CHM

Chemical, rubber & plastic prod.

s49

17

PAP

Paper & paper prod.

s42

18

FER

Fertilisers

s50

19

CEM

Cement

s51

20

MET

Iron & steel and non-ferrous basic metals

s53

21

OMN

Other manufacturing

s40, s52, s54, s57, s58

22

MCH

Machinery

s55, s56

23

HYD

Hydro

Part of s60

24

NHY

Thermal

Part of s60

25

NUC

Nuclear

Part of s60

26

WAT

Water supply

s61

27

CON

Construction

s59

28

LTR

Land transport

s63 and part of s66

29

RLY

Rail transport

s62 and part of s66

30

AIR

Air transport

s65 and part of s66

31

SEA

Sea transport

s64 and part of s66

32

HLM

Health and medical

s74

33

SER

All other services

s67–s73 and s75–s78

Source Basic concept adapted from Pal et al. (2015)

4.5 Data and Methods: E-SAM for India (2007–08)

149

and sea transport, was computed so as to get the coefficients which were multiplied with each entry of the row of the supporting and auxiliary transport services sector. The same procedure was also adopted for the column of the matrix. This gave the share of supporting and auxiliary transport services which can be attributed to these four transport sectors. Finally, the resultants were added to the original values of the transport sectors to get the value of the final sectors.

4.5.1 Disaggregation of Electricity Sector The electricity sector has been disaggregated into three sub-sectors: thermal, nuclear and hydro sectors (Pal et al., 2015). Disaggregation into these three sub-sectors is essential as there is a need to distinguish between non-renewable and renewable sources of energy and thus segregating the polluting and relatively less-polluting sectors. This would also help in analysing the implications for ecotax to be designed for the thermal sector and possible revenue utilisation from the levy of such a tax for subsidising of the renewable sources of energy. The SAM prepared here is for the year 2007–08, the technical coefficients are not expected to change in a year, and therefore, the coefficients from the study by Pal et al. (2015) could be used for disaggregation. A five step procedure has been adopted to accomplish this task. First, the ratio between the total outputs for each of these three sub-sectors to the total value of output of the electricity sector has been computed from the SAM of Pal et al. (2015). Second, these ratios for thermal, hydro and nuclear sectors are then multiplied to the total output of the electricity sector as provided by the 78 × 78 sector SAM of Pradhan et al. (2013). This has been done because any accounting matrices are in the nominal value for that accounting year and hence what remain same across the sectors over short to medium run are the ratios or technical coefficients. However, the nominal value of the output of these sectors changes due to the change in nominal prices of inputs and outputs. Thus, this justifies the multiplication of technical coefficients (which does not change) to the value of output of the year 2007–08. This results in the total value of output for the three sub-sectors for the E-SAM 2007–08. Thereafter, the ratios or input coefficients for each of the three sub-sectors with all the other sectors of the E-SAM-2006–07 were obtained which were then multiplied with the respective total value of outputs of thermal, hydro and nuclear sectors. Through this, the rows and columns of these sub-sectors for the E-SAM 2007–08 were finally obtained. Fourth, the entire procedure of disaggregation results in an imbalance of the totals in the 33 × 33 sector SAM which had to be balanced using RAS method. In total, twenty-three iterations were performed using the RAS method which was performed for columns and rows of this SAM. Finally, after using the RAS method, the imbalance in the rows’ and columns’ totals still existed for a few sectors. This was balanced by making alterations in the Rest of the World (ROW) and capital account sectors for both row and column. The entire procedure then resulted in the 33 × 33 sector balanced SAM for the year 2007–08. The SAM was then validated by comparing the GDP figures for India for the year 2007–08, and the difference between the GDP as obtained from

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4 Designing Ecotaxes in India: An Environmentally Extended …

this SAM and that from the CSO was only 0.05% which is in the acceptance range. Thus, this validates the 33 × 33 sector SAM constructed in this study. After obtaining the core 33 sectors of the E-SAM 2007–08, the matrix had to be extended by adding the environmental sectors. This has been done by majorly following the methodology adopted by Pal and Pohit (2014). This is because the authors constructed the E-SAM for 2006–07 and the major database used by them was by MOEF (2010) which had published environmentally relevant database for various sectors for the year 2007. Therefore, the estimates used by Pal and Pohit (2014) for their work are even more apt for this study as 2007–08 has been used as the accounting year for the present study. Since MOEF (2010) has been the major data source for constructing the E-SAM and one to one correspondence between the E-SAM 2006–07 sectors and MOEF sectors does not exist, thus there was a need to disaggregate the emissions for certain sectors obtained from the MOEF (2010). Table 4.5 depicts the method adopted by the authors for obtaining the emissions data at a disaggregated level. The table consists of emissions for the three basic GHGs, i.e. CO2 , N2 O and CH4 . After obtaining the emissions for these three gases, the authors converted the emissions of N2 O and CH4 into CO2 equivalent emissions for obtaining the column of environmental theme which is a standard practice in the literature of climate change. The conversion factor of 310 and 21 (as per MoEF) has been used for converting emissions from N2 O and CH4 into CO2 equivalent emissions (MOEF, 2010). Further, to balance the E-SAM, the net GHG emissions (emissions minus absorption) are considered as a natural capital which has been added as an entry in the E-SAM under the row of environmental theme and its corresponding column of capital. Even though no justification has been provided by the earlier authors for this, but it could be justified on the basis that the GHG emissions are emitted during the industrial and agricultural production processes which could be treated as a requirement for capital formation for the economy. The only environmental database provided by Pal and Pohit (2014) is that of air pollution. But, data related to the water pollution and land degradation has not been addressed in the literature to the best of our knowledge.

4.5.2 Wastewater Generation Wastewater generation has been taken as a parameter for incorporating water pollution in India by industrial and household sectors. MoEF (2010) and CPCB (2003) as cited in TERI (2009) provide the data for the wastewater generation from the industrial sector in India. These data are used by Pal et al. (2015) for mapping with the sectors in their E-SAM. The details are provided in Table 4.6. Except for iron and steel sector, all the sectors mentioned in the table match with the sectors of the E-SAM proposed here. In place of the iron and steel sector, the ‘metals sector’ has been considered which consists of iron and steel and non-ferrous basic metals as explained before. Therefore, caution has to be exercised while interpreting the wastewater generated from this sector. Wastewater generation causes environmental

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151

Table 4.5 Method of disaggregating source-wise GHG emissions in India Items to be disaggregated

CO2

N2 O

CH4

Paddy, wheat, cereals, cash crop and fishing

Energy-based Petroleum emission from consumption Agriculture sector shares have been used

NA

NA

Same as above

Emission from Soil

NA

Fertiliser consumption shares have been used

NA

Paddy rice

Rice cultivation

NA

NA

Directly treated as emission from paddy

Coal, oil and gas Fugitive emissions

NA

NA

Emission coefficients (CH4 /output) are obtained from MOEF, and quantity of output is obtained from energy statistics

Food and beverages, textiles, petroleum, chemical, paper, fertiliser, machinery and thermal electricity

Industrial wastewater-based emission

NA

NA

Share of industrial wastewater generated by the specified industries is estimated from MoEF data

Wood, fertiliser and pesticides, machinery and construction

Emission from non-specific industry

Energy use share obtained from our SAM has been used for disaggregating

Urban households classes

Municipal solid waste

Amount of solid waste is estimated from MoEF data, and household-wise shares have been used for disaggregating (continued)

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4 Designing Ecotaxes in India: An Environmentally Extended …

Table 4.5 (continued) Items to be disaggregated

CO2

Urban households classes

Domestic wastewater

Rural households

Burning of crop residue

Biomass consumption share obtained from SAM has been used

All households

Residential

Share of fuel use including coal and petroleum is obtained from SAM for disaggregating

N2 O

CH4 Amount of wastewater is estimated from MoEF data, and household-wise shares have been used for disaggregating

Source Pal and Pohit (2014)

Table 4.6 Wastewater generation in Indian industries

Sectors

Wastewater (million L/day)

Paper and paper products (PAP)

1881

Petroleum and coal tar products (PET)

143

Fertiliser (FER)

155

Metals (MET) Thermal electricity (NHY)

210 72,219

Food and beverages (FBV)

424

Textiles and leather (TEX)

2038

Chemicals (CHM)

231

Source Computed from Pal et al. (2015), TERI (2009) and MOEF (2010)

pollution in two ways, i.e. air pollution through CH4 emissions and water pollution through the discharge of polluted water in the fresh water bodies. Both pollution categories have been included in one E-SAM. The wastewater generated/treated for the four categories of urban household sector has been estimated by using the 64th round of the NSSO data and the estimate provided in MOEF (2010) for the wastewater generated/treated by the household sector. The rural areas are excluded from this estimation because the wastewater generated in these areas is not considered to

4.5 Data and Methods: E-SAM for India (2007–08)

153

be a source of GHG emissions or that of water pollution (MOEF, 2010). According to MOEF (2010), around 22,900 Millions of Litres per Day (MLD) of wastewater are generated from the tier I and II cities of the urban areas, and only 8376 MLD of the wastewater is treated before its discharge. Therefore, in order to distribute this quantity of wastewater across the four categories of urban households, the share of population in each class of household has been computed from the 64th round of the NSSO data which gives the households consumption expenditure survey details in 2007–08. This share was then multiplied with the amount of wastewater generated and treated, respectively, to obtain the values for the four urban household categories. Wastewater disposed by these households could be found in the column of the wastewater disposed and corresponding row of these households in the E-SAM provided in the Appendix F. The wastewater treated could be traced in the row of wastewater disposed and the corresponding column of the urban household classes of this E-SAM.

4.5.3 Land Degradation The data on land degradation is not available at the sectoral level, and therefore, certain assumptions have been made so as to obtain this data for a few sectors of the E-SAM used in this study. Two major data sources that have been used for this are Wasteland Atlas of India published by the Department of Land Resources and National Remote Sensing Centre (2011) and Directorate of Economics and Statistics (DES) (2011–12) (2012). The former provides aggregated data on industrial and mining wastelands for the year 2008–09. The report defines industrial wastelands as the areas in and around industrial activities which have been degraded due to dumping of the industrial wastes or discharge of industrial effluent, etc. Mining wastelands are those areas which degrade due to mining activities. The data on wasteland due to mining has been attributed in the E-SAM to sector 11, which is termed as minerals sector as all the mining activities have been aggregated in this sector in the E-SAM. In order to allocate the industrial wastelands to the industrial sector of the E-SAM, it was assumed that the total wasteland due to industries is proportional to the fixed capital invested in the year 2008–09, by these industries. As land would be a part of fixed capital and higher the investment, higher shall be the output, and thus, the land degradation would also be high. This assumption is in line with the assumption of linearity of the E-SAM modelling (please refer to Sect. 4.4), wherein the emissions generated were assumed to increase proportionally with the output of the industry. Thus, given this assumption, a concordance map was constructed between the sectors of E-SAM and All India Survey of Industries (ASI)-2008–09 (Government of India, 2011) as ASI provides the data on the fixed capital investment by the industries. The share of fixed capital investment was then multiplied with the total industrial land degraded obtained from wasteland atlas of India (please refer to Table 4.7). Total fallow land which consists of current fallow land and land other than current fallow has been used as a proxy for the data on land degradation due to agricultural

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4 Designing Ecotaxes in India: An Environmentally Extended …

Table 4.7 Data on land degradation Year

Fallow lands other Current fallows Total fallow than current (thousand ha) land (thousand fallows(thousand ha) ha)

*Industrial Wastelands (sq. km)

*Mining wastelands (sq. km)

2008–09

10,290

58

593.65

14,192

24,482

Source Directorate of Economics and Statistics (2011–12) *Department of Land Resources and National Remote Sensing Centre (2011)

activities. This aggregated data has been obtained from Directorate of Economics and Statistics (2011) which is shown in Table 4.7. After obtaining this data, the share of gross cropped area for the four agricultural sectors of the E-SAM was computed so as to allocate the area of degraded land to these sectors. The assumption here was that higher the share of gross cropped area higher would be the share of fallow land for that sector (after discussion with agricultural economists). This resulted in the sectoral data of land degradation in India for thirteen sectors of the E-SAM. Table 4.8 gives the details and the reasons for using the data sources for obtaining various sectoral data utilised for constructing the E-SAM 2007–08:

4.6 Tax Bases The answer to the question of where to levy the ecotax is important here. Since the primary concern of these taxes is to preserve the environment, the tax base needs to be, ‘any polluting factor of production/other inputs/outputs/by products…’. This was discussed earlier while proposing a comprehensive definition for ecotaxes in the Sect. 3.2.1 of chapter three. The E-SAM obtained will be utilised in order to arrive at the most polluting sectors in the Indian economy for air and water pollution and land degradation. In order to discuss and arrive at tax base, we need to have a clear idea of pollution coefficients and their categories.

4.6.1 Pollution Coefficients There are three types of environmental components which have been chosen in order to comprehensively understand the amount and kind of environmental pollution generated by various industries in India. To arrive at the sectors that are most polluting, there is a need for choosing an indicator of pollution which could be used to compare across these three environmental components. This is because all the three sectors are equally important for examining the extent and type of pollution generated in the Indian context. Pollution coefficient is one of the parameters which could be useful as it is a coefficient indicating the extent of pollution which could be computed

4.6 Tax Bases

155

Table 4.8 Explanation for the usage of data sources S. No.

Details of the data

Data source

Reason for Selection

1

SAM for India-2007–08

Pradan et al. (2013)

This is the latest SAM available

2

GHG emissions for 2007 for all sectors

MOEF (2010) as cited in Pal et al. (2015)

Proposed E-SAM is for 2007–08, and data provided by MOEF (2010) is also for 2007, as used by Pal et al. (2015)

3

CO2 removal data for forest MOEF (2010) land and crop land

MOEF(2010) gives the sectoral data for 2007–08

4

Crop-wise share in gross cropped area

Pal et al. (2015)

DES gives most authenticate data

5

Production data of crude oil, coal

TERI (2014)—TEDDY

Reliable source for compendium of Indian environmental data

6

New discoveries of crude oil, coal

TERI (2009)—TEDDY

Reliable source for compendium of Indian environmental data

7

Land use change between 2006–2007 and land conservation

MOEF (2010)

It gives the data for 2007 and is a government source

8

Formula for calculating CO2 equivalent emissions

MOEF (2010)

It uses the methodology of IPCC

9

Wastewater generated by various industries

MOEF (2010)

Only MOEF(2010) have industry-wise wastewater data for 2007

10

Land degradation data

Department of land resources and national remote sensing centre (2011)

Only database available

Source As mentioned in the table and Pal et al. (2015)

among the sectors of production. Even though this coefficient is not unit-less, but this would still be useful as it would relatively rank the polluting sectors in air, water and land components of the environment using the E-SAM generated through the process detailed in the previous section. These could then be combined with some statistical indicator that would help in identifying the most polluting sectors in India. The limitation of the unit shall not constrain the analysis as unit will always be a restriction because the pollution in these three environmental components cannot be measured using a single unit. Further, what is important for the analysis is the list of most polluting sectors in each of these three sectors of the environment, and thus, the unit does not matter as the comparison is within these sectors. Thus, pollution coefficient is a reasonable choice so as to identify the polluting tax bases for the potential levy of ecotaxes in the Indian context.

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4 Designing Ecotaxes in India: An Environmentally Extended …

Pollution coefficients (P)7 give the amount of pollution generated to produce one unit of output of sector ‘j’ when the inputs are taken from sector ‘i’, where i and j represent the row and column of IOT/SAM, respectively. This ratio remains constant among the sectors which represent constant relationship between the sectors that is normally associated with the constraint in the technology used for the production of goods in sector ‘j’. This is akin to the concept of input coefficient (A) used in an input–output or SAM terminology8 . There the term A implied the amount of input required from sector ‘i’ to produce one unit output of sector ‘j’. The Eq. 4 mentioned in Sect. 4.4.2 gives the matrix multiplier (M) which represents the direct as well as indirect requirements by a sector from other sectors of the economy (as depicted by the I-O Table/SAM). The matrix multiplier [(I – A)−1 ] primarily utilises the matrix A so as to give the total effect on the economy. Since, the relationship between the environmental emissions and the total output of a sector is represented through Eq. 5 (please refer to Sect. 4.4.2) therefore, it is through this equation that the total effect on the emissions could be understood. The final effect could be further comprehended better through the Eq. 6 which depicts the pollution trade-off multiplier [P’ * (I – A)−1 ] which is similar to the matrix multiplier [(I – A)−1 ]. Thus, it is the pollution trade-off multiplier (T) through which the total effect on the environment could be computed. It is evident from the formula of pollution trade-off multiplier that it consists of two components, first depicts the pollution coefficient, and the second represents the matrix multiplier. The total effect on the environment could be decomposed into direct and indirect-induced effect which is represented by these two components, respectively (Pal et al., 2015). Thus, it is the pollution coefficient which is at the core for understanding the direct relationship between the emissions and output of any sector. The pollution coefficients for all the three environmental sectors were computed, and these were constrained by the availability of the data as described in the Sect. 4.5. To obtain the polluting tax bases, top five most polluting sectors from each of the three environmental components have been identified using the values of pollution coefficients from Table 4.9. Thereafter, modal frequency as a statistical measure has been used so as to arrive at five most polluting sectors from the fifteen identified sectors. Mode has been used as a measure because all the three types of pollution are important in the Indian context, and thus, the sectors/industries which appear most number of times or quite often, while choosing the five most polluting sectors for each environmental parameter, have been selected. All the sectors in the final list of five most polluting sectors had two as the modal value which implies that they polluted two of the three environmental categories. Further, this could be considered as a comprehensive list since these sectors are a part of at least three of the five most polluting sectors of all the three classifications of environmental pollution. The five most polluting sectors that resulted from this exercise are thermal (NHY-non-hydro), fertilisers (FER), iron & steel and non-ferrous basic metals (MET), paper & paper

7 Please 8 Please

refer to Eq. 6 in sub-Sect. 4.4.2 so as to refer to its formula. refer to Eq. 2 in Sect. 4.4.2.

4.6 Tax Bases

157

Table 4.9 Five most polluting sectors in India Sectors

Direct pollution coefficients Net GHG emissions (tons/lakh of output)

Net wastewater Net land degraded disposed (L/day/lakh of (square feet/lakh of output) output)

Textile (TEX)

0.06

49.96

1.86

Paper and Products (PAP)

1.00

323.87

3.31

Fertiliser (FER)

4.70

22.91

NA

Metals (MET)

2.08

3.65

53.09

5183.55

Thermal (NHY)

2.64 NA

Source Author’s calculations using E-SAM 2007–08 constructed for this study

products (PAP) and textile & leather (TEX) (please refer to Table 4.9 for the details on their pollution coefficients).

4.7 Optimal Rates for Ecotaxes: Theoretical Deduction The conceptual understanding of ecotaxes, as also detailed in chapters one and three, draws on the pioneering work of Pigou (1920) but with modifications suitable for our purpose. According to Pigou’s formulation, the optimal rate/s of ecotaxes is the difference between the marginal social cost (MSC) and marginal private cost (MPC) (provided MSC > MPC which is the case of negative externality) which depicts the marginal external damage at the intersection of MSC with marginal private benefit (MPB)9 . This gives a simple yet effective solution to the recovery of the cost of negative externality to the society which is not internalised by the producers during the course of production. Issues arise during the computations of these marginal costs and damages that are different for different producers and thus leading to differential rates of taxation for individual polluters. This problem has been noted extensively in the literature of ecotaxation and thus leading to difficulties in arriving at the optimal implementation of such environmental levies. Optimal rates have been theoretically deduced in this section by visualising the relationship of the rates of ecotaxes and the value of output (or sustainable rate of profit) of the firms on which these taxes would be levied. Theoretical deduction becomes important as the computation of specific rates would be problematic and impractical. Pigou’s optimality would get distorted when other forms of taxes are also levied in the economy, which is a more realistic scenario (Sandmo, 2009). According to the author, optimal rate of ecotax would then be defined as a point lying somewhere between the Ramsey and Pigouvian forms of taxation by computing a weighted average of these two taxes. The weight will be a function of the marginal cost of 9 Please

refer to Fig. 1.1, Sect. 1.2 for a detailed explanation

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4 Designing Ecotaxes in India: An Environmentally Extended …

public funds (MCPF) which is the cost of raising revenue from the tax, and thus, if this cost is higher, the optimal rate will be closer to the Ramsey’s tax and vice versa. This clearly states that the optimality of tax rate is deduced from the objective of generating revenue from the levy of ecotax as MCPF is the parameter for computing weights and also Ramsey’s inverse elasticity rule is based upon the notion of maximising revenue generation at least cost. Therefore, the theoretical model that has been constructed here is under the condition of the first best outcome10 as the prime objective of levying these taxes is to reduce environmental damage and not to collect revenue. Earlier various polluting tax bases have been reviewed for a potential levy of green taxes in India, the value of output of the five identified polluting industries (NHY, FER, MET, PAP, TEX) was considered as the tax base, and the ecotaxes were perceived as the taxes on output. Thus, in a general equilibrium framework, the chain of reaction that identifies the effect on the economy would begin from these five industries whose value of outputs would be directly affected due to a levy of an ecotax. This implies that the producers’ of these and other industries which rely upon the inputs from these five industries will be affected the most, thereby making them imperative stakeholders. Two agents have been identified while deducing the optimal rates of ecotaxes, and these are producers and environment. Consumers would be automatically included on the opposite side of the analysis at the receiving end due to the well-established theory of duality. This theory underpins that the optimality could either be achieved by maximising the utility or minimising the costs. In addition to this, the consumers’ well-being is already included in the producers maximising behaviour as the optimality is designed through the maximisation of the sustainable rate of profit (and not profit) for the producers which ensures better environment and thus better health for the consumers11 . Here, government could be attributed as an agent who is attempting to arrest the process of environmental degradation through the levy of these taxes, and thus, the consideration of optimal rates through the environmental objective will automatically subsume government. On the environment, front ecotaxes are levied with an objective to arrest environmental degradation. This leads to identification of the determinants of the rates of ecotaxes which are perceived to be a function of three core variables, namely rate of pollution, cost of environmental damage, revenue for correcting the system and/or correcting the damage and fourth being any other factors that have not been considered explicitly. A priori the signs of these variables vis-à-vis rates of ecotaxes shall be positive because higher the rate of pollution, cost of environmental damage and revenue required for correction of system, higher would be the tax rate. This function could be represented through Eq. (8) as below: Rates o f Ecotax(Rt ) = f (Rate o f Pollution, Cost o f Envir onmental Damage, Revenue f or Corr ection o f System, Other s) (8)

10 Second 11 A

best outcome will be a simple extension of the model proposed, if desired. detailed understanding of the sustainable rate of profit has been put forward subsequently.

4.7 Optimal Rates for Ecotaxes: Theoretical Deduction

159

The choice of these variables is obvious. Rate of pollution is one of the fundamental factors that ecotaxes attempt to reduce, and thereby, determination of the rates of ecotax would necessarily be dependent on this variable. Change in damage would again be an important variable because higher the damage over the years, necessity of levying taxes at higher rates would be indispensible. This would further lead to an increasing demand for higher revenue collection in order to correct for the existing damages because one of the major forms of pollution is stock pollution through GHGs emissions. Particles of GHGs remain suspended for several decades and even centuries to result in a change in the climate. Thus, this justifies the choice of revenue requirement for correcting the system; however, as noted earlier, the revenue generation shall not be an objective of ecotaxes, but it is more an optimal utilisation of the revenue that results as a by-product of the levy of these taxes. The definitions of these variables are as follows: i.

Rate of Pollution

(R p ) = Tp V ot

Tp V ot

(9)

is the total pollution generated is the total value of output generated by the industry in time ‘t’

The rationalisation of total pollution to the value of output of industry/industries would be an ideal parameter for measuring the rate of pollution as it is the production process which is normally responsible for the generation of pollution and the relationship is generally increasing, though the rate of increase might vary. This is akin to the pollution coefficient that is utilised in the E-SAM, which was the basis of selecting the polluting tax bases in the previous section. ii.

Cost of Environmental Damage ( D t ) = V ot .R p . D m

V ot Dm

(10)

is the total value of output generated by the industry in time period t is the monetary value of environmental damage associated to per unit of pollution

The above equation defines the cost of environmental damage as the product of the value of output generated in time period ‘t’, rate of pollution and monetary value associated to per unit of pollution. The first two terms will provide the total pollution generated in the tth time period which is a simple algebraic deduction from the Eq. (9). This is then multiplied by the monetary value of the pollution generated ( D m ) so as to arrive at the total cost of the damage in a year. iii.

Revenue for correction of System

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4 Designing Ecotaxes in India: An Environmentally Extended …

(R c ) = r. D r D

(11)

is the revenue required for system correction for a rupee increase in D is the change in cost of damage between two successive time periods t and t −1

Revenue for any system correction is proportional to the change in the cost of environmental damage ( D) between two successive time periods. The proportionality constant is defined with the alphabet r which depicts the additional requirement of the revenue due to each rupee increase in the cost of damage. Thus, higher the cost of damage between two time periods higher would be the revenue requirement, and thus, the tax rate also has to be higher. The last variable that has been added in the function is ‘Others’. This has been added to reflect upon all the other variables which could affect the rates of ecotax (Rt ), and these could include bureaucratic framework of the government, political economy concerns, etc. The other stakeholder who is directly affected from ecotax is the producer because the tax would be levied on the value of output which would fundamentally raise the cost of the output of these industries and also other industries which are dependent upon the output of the taxed sectors’ products. The producers’ would always attempt at maximising their profits, and thus, profit could be considered as a variable through which the effect on the industry due to ecotaxes could be modelled. Thus, it is imperative to analyse the relationship between the rates of taxes and profit levels of the industries. The profit here has been termed as the ‘Sustainable Rate of Profit’ (SRP) because it is defined as the ratio of the rates of ecotax (Rt ) and the value of output it time period ‘t’. iv.

Sustainable Rate of Profit (S R P t ) =

Rt V ot

(12)

Two arguments could be put forward in order to understand this definition of sustainable rate of profit. Since the sustainable rate of profit is a function of value of output therefore, any producer would pay tax rate that is within the outer limits of their value of output, i.e. big industry would be in a position to pay more amount as taxes than a smaller firm. Therefore, when the profit function is defined in this manner (i.e. inverse relationship of SRP and value of output), the concept of sustainability in terms of the society and the firm could be incorporated. This is because pollution generation is normally considered to be proportional to the value of output, and thus, in order to attain rate of profit which is sustainable, rationalisation of the profits with the value of output is essential. This is exactly what the inverse relationship between SRPt and V ot depicts. The numerator of this equation represents the society’s wellbeing from the negative externality generated from the production of goods. This could also be related to the profit generated by the firm. The perceived relationship

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could be that higher the profit higher would be the externality generated keeping technology of production fixed. Thus, the rates of tax become an important measure to make the profit sustainable, and this is the reason for keeping the tax rate in the numerator. Further, the denominator of the equation, i.e. value of output, also ensures that the production process is not entirely stopped and hence undertaking the perspective of the industry as well. Having understood the basic structure of the mathematical formulations of the two important stakeholders, i.e. environment and producers, it is now essential to construct a problem, wherein interests of both stakeholders could be taken care of. Since the fundamental understanding was to theorise the optimal rates of ecotax, therefore, the problem could be formulated in a simple functional form: v.

Sustainable Rate of Profit (SRP t ) = F(Rt ) Where

Rates o f Ecotax(Rt ) = f (Rate o f Pollution, Cost o f Envir onmental Damage, Revenue f or Corr ection o f System, Other s) Optimisation of this function could be examined through a graphical representation of the relationship between Rt and SRPt . In order to comprehend the behaviour of the firms with respect to rates of ecotax, one fundamental idea has to be incorporated, and this is derived from the neo-classical philosophy of an agent maximising its pay-offs. The firms would maximise the pay-offs, as represented by the SRPt , and would pay taxes till the point it is feasible (please refer to Fig. 4.1). The producers in the market could be categorised into two types, type I is represented by Zone A which represents those producers which are relatively new entrant or are smallscale producers who are constrained with capital and thus cannot realise their true capacity. Type II is depicted by Zone B which comprises large-scale producers which

Fig. 4.1 Optimisation of SRPt in relation to Rt . Source Author’s Construction

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have dominant existence in the market and are thus not constrained by the capital. For firms in Zone A, the SRPt will increase as the rates of ecotax increase, but at a diminishing rate, this is in line with the neo-classical view of diminishing incentives from the production as the tax rates of ecotax increase. Thus, the shape of the curve before the point O* will be concave, as depicted in Fig. 4.1. Due to the constraints in the capital, these producers cannot realise their optimal capacity and thus would be better off by producing more and attempting to reach the point of optimality at O* . In case of the dominant producers who have been producing beyond the point O* , possibly before the levy of such a tax, the shape of the curve could be understood from the right hand side of the graph. These producers have been over producing possibly due to their historical existence which led to their dominance in the market. After a levy of ecotax, their production is no more sustainable as the rates of tax beyond O* increase steeply after this point, and thus„ the producers would find it profitable to reduce their production so as to reach this level of optimum. This generates a point of inflection at O* which could reflect the difficulty of attaining this level because of the issues related to identifying the true marginal private costs and benefits of the producers and society, respectively. Therefore, the point of inflection underscores the practical difficulties in arriving at the optimal rate which is considered to be idealistic. The mathematical depiction of this problem has been explained below. Fig. 4.1 clearly shows the dependency of SRPt on Rt . This will be used to formulate the first- and second-order conditions for optimal tax rates. The SRPt has to be differentiated with respect to Rt : d d(S R P)t = d Rt d Rt



Rt Vot

 =

1 Vot∗

(13)

The above result could be obtained by simply substituting the value of SRPt from Eq. (12) and differentiating it with respect to Rt . Now, as per Pigou’s formulation, the optimality of the rate of ecotax at the socially optimum level is equivalent to marginal external damage (MED). Therefore, the resultant of Eq. (13) can be equated to MED which could be deduced from Eq. (10). If we differentiate the cost of environmental damage (V ot .R p . D m ) with respect to Vot , the result will be Rp .Dm which is nothing but MED. The equality, however, may not hold because of the challenges in the computation of this rate, as pointed above in this section. Therefore, what is attained is the following: 1 ≈ R p .Dm Vot∗

(14)

The point of optimality is desired but is only an idealistic scenario which is represented by the approximate sign of equality in the Eq. (14) listed above. The understanding regarding the approximation is derived from the issues in measuring this optimal level which is constrained by the availability of data on damage caused due to environmental pollution which varies across firms and also the location of

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pollution. Further, the environmental damage is also dependent on the type of pollution which could be categorised into local, regional and global level. Computing the value of damage associated with global level pollutants such as GHGs is even more difficult as some of these gases can stay in the atmosphere for almost two centuries! The point of inflection could be proved using the second-order condition which is achieved by differentiating the first-order condition obtained in the Eq. (13): d d Rt



1 Vot∗

 =0

(15)

Mathematically, the conditions for an inflection point are two-fold; first, the second-order derivative should be zero12 , as has been obtained in Eq. (15) and second, the second-order derivative changes sign at the critical point. The second condition has been justified above by theorising the market behaviour by taking two zones and thus two types of producers, and this formulation would be close to the reality as most of the markets do consist of both the dominant/incumbent and small firms. Thus, the point of inflection is also proved mathematically.

4.8 Levying Ecotaxes Under the GST Regime The introduction of Goods and Services Tax (GST) is considered to be a major indirect tax reform for India. It has simplified the extremely complicated indirect tax structure which not only had several types of taxes but also numerous tax rates under each of these taxes and in addition to this the powers of levying these taxes being distributed among the Federal and the state governments. The entire prevailing system encompassed different states and different tax slabs. Octroi is a major part of this convoluted system of taxation that was highly infected by corruption (Rao, & Rao, 2005). Such a structure not only led to cascading effect but also to various forms of inefficiencies13 and tax evasions. With the advent of GST on 1 July 2017, the entire indirect tax system was simplified to a structure of taxation having seven rates of taxation (0, 0.25, 3, 5, 12, 18 and 28%) levied uniformly upon goods and services across the country based on consumption vis-à-vis income pattern. Rao and Rangarajan (2017) consider the present GST model to be complex, but overall, they are of the belief that the existing GST is a substantial improvement over the complex system of indirect taxation prevailing before GST. India has adopted a dual form of GST as it is administered by both centre and states, and it comprises three types of taxes, namely Central-GST (CGST), State-GST/Union Territory GST (SGST/UTGST) and Integrated GST (IGST). All these three types 



= R p .Dm in the Pigouvian framework and the rate of pollution (Rp ) and per-unit damage (Dm ) are not the function of Rt 13 Inefficiency in terms of both collecting the tax revenue and also in terms of making tax payments costly. 12 This is equal to zero because

1 Vot∗

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of taxes are destination-based implying that the revenue will be collected by and accrued to the state/union territory where the goods/services are finally consumed. This feature caused worry for a few states such as Tamil Nadu, Maharashtra and Karnataka as a substantial proportion of their revenue from indirect taxes was based upon manufacturing units situated in their states. Due to this, the states demanded compensation from the central government for the possible revenue loss because of the advent of GST. In response to this request by the states, union government subsumed all forms of cesses in the GST so as to utilise the revenue generated from these cesses to compensate the states. These cesses included clean environment cess on coal, cess on sin goods such as tobacco and tobacco products and aerated waters. The inclusion of these into the GST for utilising the revenue for compensation defeated the sole purpose of the levy of these cesses (Government of India, 2017). Subsuming of clean environment cess into GST, the only type of environmental tax levied by the union government in the Indian context, indicates the tax attitude of the Government of India regarding this levy. It was implemented in the year 2010, with the special purpose of addressing environmental concerns, but it has now been regarded as one among the other taxes which are levied for revenue mobilisation. This policy was adopted despite the report of the then Chief Economic Advisor to the Government of India recommending environmental taxes/cesses to be kept out of the GST framework (Subramanian, 2015). The report further recommended the government to levy 40% tax rate on these sin goods which also included tobacco and tobacco products, pan masala, etc. The amount from this cess was to be utilised for several environmental purposes such as cleaning of the river Ganges, funding renewable energy projects and drinking and sanitation projects. The revenue generated was to the tune of a whooping Rs. 28,500 crore in 2016–17, and hereon, the revenue generated could no more be utilised for the purpose of its design (Datt, 2017)14 . Environmental taxes are levied for a special cause, and therefore, protecting the purpose of its levy is imperative. An alternative in which the objective of these taxes and the GST tax structure could be merged is by creating different tax slabs with special provisions to levying non-rebatable cess on the identified polluting products. The provision could be in terms of utilising the revenue from these taxes for the purpose of restoring environmental degradation and thereby imposing a nonrebatable cess and not a tax under the GST. It is only then these taxes would possibly send the right signals to the tax payers. Transferring the proceeds from the levy of these taxes to the required sectors is indispensible for the effective and maximum utilisation of these instruments as these transfers reduce the costs associated with the levy of these taxes15 . Such provision will ensure that ecotaxes can achieve its

14 Even though this compensation period of five years will come to an end in 2022, but the issue lies with the irrational approach of the government which could even have implications for any further environmental levies in India. 15 The utilisation of revenue transfer will be examined in detail in the subsequent Chaps. (5 and 6).

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underlying objective of environmental restoration otherwise such special fiscal instruments would be regarded as any other indirect tax which is introduced for revenue mobilisation.

4.9 Conclusions E-SAM of the year 2007–08 for India was constructed using the SAM of Pradhan et al. (2013). The E-SAM so created differed from the only existing E-SAM for India of Pal et al. (2015) on the basis of two additional environmental sectors—water and land which were added so as to comprehensively represent the interrelationship of the industries and households with the environmental sectors. This framework can be used for examining the issues related to the implementation of ecotaxes in India, and the concerns of incidence of these taxes and the benefits accrued due to transferring of revenue generated from these taxes can also be analysed. The study also offers a potential for future research by utilising and extending the framework with the new dataset as and when available. The issues related to the design of these taxes were addressed by identifying the value of output of the five polluting sectors as the tax bases. These are thermal (NHYnon-hydro), fertilisers (FER), iron & steel and non-ferrous basic metals (MET), paper & paper products (PAP) and textile & leather (TEX). The optimal rates for ecotaxes were theoretically deduced which underscored the idea of redundancy of arriving at specific numbers of tax rates as these numbers are ideal scenarios which are desired but difficult to be attained. Environmental taxes can be easily subsumed under the framework of the GST by providing a separate tax slabs for these taxes with the provision of using the proceeds from these taxes for revenue transfers and earmarking the revenue for environmental purposes, and thus, we propose environmental cess and not a tax.

References Alarcón, J., Heemst, J. V., & Jong, N. D. (2000). Extending the SAM with social and environmental indicators: an application to bolivia. Economic Systems Research, 12(4), 473–496. Chiang, A. C., & Wainwright, K. (2013). Fundamental Methods of Mathematical Economics. McGraw Hill Education. Datt, D. (2017). From Cess to Environmental Mess. Retrieved 24 July 2018, from The Hindu: https:// www.thehindubusinessline.com/opinion/from-cess-to-environmental-mess/article9838688.ece. Department of Land Resources, & National Remote Sensing Centre. (2011). Wastelands Atlas of India-2011. Hyderabad: National Remote Sensing Centre. Directorate of Economics and Statistics (DES). (2012). Land Use Statistics-2011–12. Government of India. Gallardo, A., & Mardones, C. (2013). Environmentally extended social accounting matrix for Chile. Environment, Development and Sustainability, 15, 1099–1127. Government of India. (2011). Census of India 2011. New Delhi.

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Government of India. (2017). The Goods and Services Tax (Compensation To States) Act, 2017. New Delhi: Government of India. Keuning, S. J. (1992). National accounts and environemnt: The case for a system. (NA-053). Keuning, S. J., & Timmerman, J. G. (1995). An Information-systm for economic, environmental and social statistics: Integrating environmental data into the SESAME. (NA-076). Lenzen, M., & Schaeffer, R. (2004). Environmental and social accounting for Brazil. Environmental & Resource Economics, 27, 201–226. MOEF. (2010). India: Greenhouse Gas Emission 2007. Ministry of Environment and Forest. New Delhi: Government of India. Pal, B. D., & Pohit, S. (2014). Environmentally extended soxial accounting matrix for climate change policy analysis for India. Jouranl of Regional Development and Planning, 3(1), 61–76. Pal, B. D., Ojha, V. P., Pohit, S., & Roy, J. (2015). GHG Emissions and Economic Growth: A Computable General Equilibrium Model Based Analysis for India. Springer. Pal, B. D., Pohit, S., & Roy, J. (2012). Social accounting matrix for India. Economic Systems Research, 24(1), 77–99. Pandey, R. (2005). Estimating sectoral and geographical industrial pollution inventories in India: Implications for using effluent charge vs. regulation. Journal of Development Studies, 33–61. Perman, R., Ma, Y., McGilvRay, J., & Common, M. (1999). Natural Resources and Environmental Economics. Longman Publication. Pigou, A. C. (1920). The Economics of Welfare (Vol. 4th). London: Macmillan and Co. Pradhan, B. K., Saluja, M. R., & Sharma, A. K. (2013). A social accounting matrix for India 2007–08. IEG Working Paper (326). Pradhan, B. K., Saluja, M. R., & Singh, S. K. (2006). Social Accounting Matrix for India: Concepts, Construction and Applications. New Delhi: Sage. Pyatt, G., & Round, J. I. (1979). Accounting and fixed price multipliers in a social accounting framework. Economic Journal, 850–73. Rao, M. G., & Rangarajan, C. (2017). GST, a work in progress. Retrieved 24 July 2018, from The Hindu: https://www.thehindu.com/opinion/lead/gst-a-work-in-progress/article22178073.ece. Rao, M. G., & Rao, K. (2005). Trends and Issues in tax policy and reform in India. Brookings Papers on Economic Activity, 2, 55–122. Resosudarmo, B. P., & Thorbecke, E. (1996). The impact of environmental policies on household incomes for different socio-economic classes: The case of air pollutants in Indonesia. Ecological Economics, 17, 83–94. Robert, K. (1975). Input output analysis and air pollution control. In S. Edwin (Ed.), Economic analysis of environmental problems (pp. 259–274). Cambridge: NBER. Sahu, G. (2007). Environmental Governance and Role of Judiciary in India. Sandmo, A. (2009). The Scale and Scope of Environmental Taxation. Norwegian School of Economics and Business Administration. Subramanian, A. et al. (2015). Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST). 2015: Government of India. TERI. (2009). TERI Energy Data Directory (TEDDY) 2009. New Delhi: TERI. TERI. (2014). TERI Energy Data Directory (TEDDY) 2014. New Delhi: TERI. Weale, M. (1997) Environmental statistics and the national accounts. In P. Dasgupta, & K. -G. Ma¨ler, The environment and emerging development issues. Oxford: Clarendon Press. Xie, J. (2000). An environmentally extended social acoounting matrix. Environmental and Resource Economics, 391–406.

Chapter 5

Analysis of Incidence Through E-SAM

5.1 Introduction The question regarding the incidence of a tax is fundamental to any type of tax theory, and therefore, this is also true for environmental taxes. This is because any new tax will lead to relatively extra payment from some sections of society which depends upon the manner in which the tax system has been designed. The revenue so generated from this levy needs to be redistributed to the other sections of the society which are in need of such transfers; however, the redistribution may be in the form of explicit or implicit transfers. Former type of transfers imply that the revenue is being directly transferred to the affected components of the society, and in the latter case, the transfers are in built in the manner in which the tax is designed or is related to the type of tax. One of the examples of taxes in which the transfers are implicit is environmental taxes because environmental gains achieved from a levy on hazardous or polluting products implicitly transfers gain in terms of better environmental quality to the entire section of the society. However, these transfers are relatively more to those who are comparatively more vulnerable to the environmental damages. The literature on poverty and environmental quality has well established the fact that the poor are relatively more exposed to environmental damages since they have neither the means nor any defence mechanisms to protect them. Thus, the environmental gain reaped out of the environmental tax will also be higher to the poorer section of the society. Given this background the question of incidence and redistribution of the revenue generated from the design of environmental taxes becomes indispensible in the context of India because the extent of poverty is still widespread in the country. Thus, a tax which is meant for providing environmental benefits and thus protecting this section of the society shall not end up charging proportionately higher amount from this section for such a gain. It is in this context this chapter will build upon the data of the Indian economy that was assembled in chapter four which would help in answering the questions posed above through several simulation exercises performed using some rates of taxation. A priori examining incidence also becomes © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8_5

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imperative in the context of India as the apex judicial institution has remarked about several measures to be taken before undertaking any new intervention to protect from the negative externality of the project. For instance, Supreme Court directed in 1998 (M.C Mehta vs. Union of India) that the buses in Delhi which use diesel as its primary fuel for combustion should instead replace it with compressed natural gas (CNG) which is considered to be environmental friendly. This decision did not take into consideration operational issues associated with the decision and this is evident from the fact that this decision could have been implemented successfully, at least in the case of government run busses, only around the year 2012. A few analysts also aired a view that judiciary need not appropriate the executives role without understanding the nuances in execution.

5.1.1 Analysing Incidence The essential question that has to be answered while designing environmental taxes is, ‘Who actually pays?’ This question could also be answered by analysing who relatively bears the burden of the tax payment, which primarily would be an imperative issue of examination. This becomes a pertinent issue in the case of indirect taxes which are generally levied on value of goods and services rather than direct taxes, wealth tax, etc. that are levied on income, wealth. This is because in the former case, tax payment is normally found to be shifted to other agents in the society as the tax base is in the form of good/service on which several agents may simultaneously depend. For example, if a tax is levied on the producers generating a product, then this could easily be shifted on to the consumers by increasing the price of that good and thus, even though the producers were liable to be taxed but ultimately both producers and consumers are paying the tax. Such a shift of the tax payment may not be possible in the case of direct taxes where the tax base is comparatively more associated to the entity on which the tax is being imposed. For instance, income tax is levied on the income earned by an individual, and hence, the tax cannot be shifted to any other agent and has to be borne by the individual himself. Environmental tax also falls under such category of indirect taxes which could either be levied1 on the polluting input/output, polluting processes or directly on the emissions. Thus, answering the question of incidence becomes central with respect to environmental taxes. The amount of tax payment borne by an agent would depend upon how elastic is the supply/demand of the tax payer. Higher the elasticity lower will be the share of tax payment because it would be relatively easier for the tax payer to adjust to the increase in the prices due to the tax and thus shift it to another person having lower elasticity. Thus, elasticity becomes an important measure to understand the proportion of tax payment borne by key persons of the society. The question about 1 Please

refer to Sect. 3.2.1 Chap. 3 of the volume where the definition of tax base for ecotaxes has been provided in detail.

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the share of tax payment could also be answered by understanding the share of expenditure incurred by the households or other tax payers who are categorised on the basis of their income. If the proportion of expenditure on the taxed commodity is high, then the effect of the tax shall also be relatively more than the others. Thus, if this proportion is higher for a lower-income household than the higher-income household, then this would imply that the tax is inequitable as it proportionately charges higher amount to the lower-income category and the tax is designated to be ‘regressive’ (Smith, 1904). This chapter is organised into seven sections. Immediately following are the Sects. 5.2 and 5.3 which deal with the issues pertaining to incidence in the existing literature of environmental taxes and the method used to examine the incidence of ecotaxes in India, respectively. This is followed by the description of simulation results in Sect. 5.4 which are categorised further on the basis of pre- and post-revenue transfer scenarios. Section 5.5 provides possible reasons for the results obtained from the simulation exercise performed on the household groups used for the examination. This is followed by concluding remarks and limitations of the SAM model utilised for the analysis in Sects. 5.6 and 5.7, respectively.

5.2 Ecotaxes and Principle of Equity: Lessons Learnt One of the major concerns of a tax design is to be equitable while generating revenue from the levy. This is to say that the tax should be designed in a manner that the revenue should be in tandem with the ‘ability to pay’ of the tax payer. Smith (1904) was the first to propagate this idea as the fundamental principle for levying a tax in a society. This was one among the four canons of taxation that was laid by him and equity necessitates that the payment should be in relation to the capability of the tax payer as the payment towards any tax is a contribution towards the society. Therefore, this forms the essential idea of examination through understanding of the regressivity/progressivity related to ecotaxes. Further, if the contribution of the lower-income households in the revenue generated from ecotax is relatively more than the higher-income households, then revenue transfers could be seen as a measure to compensate these households. This issue is delved into and in this section two subsections are addressed to attempting an examination of the principle of equity related to ecotaxes in the existing literature and thus bringing out the issues related to these.

5.2.1 Issues in Incidence of Ecotaxes In the literature, we find significant discussion on carbon taxes and fuel taxes, as these are important in this context. Keeping this in view this section carries the discussion categorised under these two sub-sections, whereas carbon tax has uses proportion of

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carbon emissions as the base for tax, potential air pollution forms the basis for fuel tax. Leaving apart the incidence or the impact on the household economic activity, many authors used household budget shares as proxies. Higher the budget share allocated to the provocative commodities (carbon emitting or pollution augmenting), higher will be the total tax incidence. If the lower-income strata has higher share of their expenditure on these commodities, then the tax charged will be regressive in nature. Therefore, the incidence will be either regressive or progressive depending on the share of expenditure on these commodities.

5.2.1.1

Incidence of Carbon Taxes

Carbon tax policy has been under the debate recently (Lee & Sanger, 2008). British Columbia (BC) State in Canada uses SPSD model for accounting using social accounting method. It was observed that even though the tax is regressive, it could be manoeuvered with supplementary policies. Murray and Rivers (2015) showed that the analysis provided by Beck et al. (2015) and that of Beck et al. (2015) differ from that of Lee and Sangers (2008). This is mostly because of the computable general equilibrium (CGE) methodology used by the latter authors wherein the tax burden will be transferred to the consumers. This was unlike the assumption of Lee and Sanger (2008) wherein, they consider the burden of the tax to be fully shifted. Beck et al. (2015) argued that the ecotaxes in BC remain progressive even without the compensatory revenue transfers, whereas Beck et al. (2015) showed that the tax (in rural and urban setting) could be initially regressive but can be made progressive with tax credit policy. Thus, it is clear that tax model makes all the difference. Ruggeri and Bourgeois (2009) also studied the BC policy frame that was to be borrowed in New Brunswick State of Canada, and the result of their analysis was that a Carbon tax levied @ $30/tonne makes a regressive tax structure even after the levy proceeds are used to wean out the incidence. This however was different in India, and in a study, Somani (2013) concluded firmly about the carbon tax which would be relatively regressive in nature. Finally, the common thread across the examined literature is that the carbon tax is relatively regressive from the view of relative measures of equality.

5.2.1.2

Incidence of Fuel Taxes

Porterba (1991) argued that total expenditure is a better variable than household income for arriving at the budget shares of the households. This is due to the fact that the case of fuel taxes is sensitive to the expenditure and therefrom to the normalisation of budget shares to understand the incidence. According to the author, this is due to the consumption decisions of the consumers which are bounded by their life time and wealth than just the annual earnings, which is visible in European countries. An edited volume by Sterner (2012) includes case studies of 20 countries, and he found that all the developed and Latin American countries show a neutral scenario or the

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fuel tax seemed progressive (Verma & Pal, 2018). In the case of developing countries, this was found to be strongly progressive. This was endorsed in the study by Datta (2010), in the case of India, with the exception of Kerosene as it is regressive. China showed a different behaviour, and the fuel taxes were observed as progressive (Cao, 2012). Gasoline Tax was progressive (Blackman et al., 2009), whereas diesel taxes were regressive in Costa Rica. Kenyan transport fuel taxes were noted progressive as majority of the population use private vehicles unlike in US, where these taxes are regressive but made progressive through other measures (Sterner, 2012; Morris & Sterner, 2013) as also identified in our earlier work (Verma & Pal, 2018).

5.2.2 Criteria for Utilisation of Revenue Potential for revenue generation along with internalising the externalities are the two key features of any successful environmental tax. The design of ecotaxes combines these two effective functions as these not only help in generation of revenue but also reduce the environmental damages. However, it is essential to rethink about the use of revenue so generated as these taxes should not join the bandwagon of other taxes which are the only instrument of revenue generation. Its major task is to reduce the pollution, and in the Pigouvian sense, the optimal level of the attack should be decided based on intersection of the marginal social cost and marginal private benefit. Certainly, revenue generation is not the major focus of ecotaxes, and the avenues for using generated revenue are determined a priori so that these revenues will supplement the basic purpose of such taxes. One can visualise four major uses of the revenue collected through ecotaxes, the first one being, the revenue can be ploughed back into welfare of the society in order to reduce the burden of these taxes. This could be achieved by providing help in the form of subsidies. Second, the revenue could be used towards such development projects which will contribute to incremental welfare as well as reduction in the causes of pollution.2 Third, these could also be used to reduce the existing distortions3 injected by other components of the tax systems in the form of subsidies or tinkering with the rates of other taxes and finally such revenue could be used for maintaining aggregate revenue neutrality for accommodating the political will.4 The revenue proceeds could then be used in the manner which is quite comfortable for the prevailing political and economic conditions of the country. The core criteria for utilising the generated revenue should be focused on the incremental welfare of the society, and bringing in the equity concerns strongly which will be impacting the aggregate tax structure. As for the canons of taxation laid down by 2 The case of Environmental Fiscal Reforms (EFR) which has been deliberated upon in the Sect. 2.1

of Chap. 2. issue will be undertaken in the Chap. 6 and this was also touched upon in the Sect. 2.1 while discussing the concept of Environmental Tax Reform (ETR). 4 Revenue neutrality implies that the net revenue generated from ecotaxes should be zero. This is possible if the revenue that is collected is used for reducing tax rates of other distortionary taxes. 3 This

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5 Analysis of Incidence Through E-SAM

Smith (1904), the incidence as well as the revenue generation of any tax must add to the equity as a theme in its final incidence. But in ecotaxes equality would result into relatively higher impact as compared to the rich because the burden of environmental degradation will be shifted to the heads of poor than that of the rich. In totality if ecotaxes are regressive and if that situation is unavoidable, then the revenue proceeds should be utilised to the benefit of the poor (like poverty ameliorating schemes) so that the incidence is normalised. The third and the fourth options of revenue utilisation as listed above need to be differentiated as the proceeds used for minimising the distortions may not necessitate a revenue neutral scenario always. Also, the proceeds so used would ideally depend on the socio-economic situations prevailing in a country. For example, the case for developing country must first be to reduce the inequity caused from any additional levy even if the tax is for the betterment of the environment. This purpose of utilising the proceeds from green taxes could also be justified for a developed country. However, in the case of industrialised nations, as reviewed in our earlier work also (Verma & Pal, 2018), the tax-GDP ratio for these countries is certainly high and so also the provisioning of environmental public goods (Srivastava & Kumar, 2014). Therefore, these countries in contrast to that of their emerging counter parts can easily make use of the proceeds for ameliorating the distortions caused by the existing tax structure. This obviously is not the case for emerging nations and therefore, in this study we argue for the utilisation of the revenue for restoring the environment rather than reducing the distortions. However, the notion of double dividend which tests the hypothesis of revenue neutrality is also explored in the chapter six for understanding the impacts of ecotaxes in a comprehensive manner in the Indian context. Therefore, if ecotaxes are largely progressive, then their tax revenue could be used for reducing the distortions even in the developing country case so as to eliminate/lower the additional cost of such a tax on the agents of the economy.5

5.3 Onus of Ecotaxes in India: Data and Methods It is important to understand the linkage of the major agents of the economy, i.e. consumers (households), producers (industries), government and environment in order to examine the incidence of ecotaxes. Only through a macroeconomic interrelationship the effect of such a levy could be comprehended convincingly since any tax would result in an increase in prices of the taxed commodities and necessarily alter the behaviour of these agents. Therefore, it is only through a dataset which explains this interdependency between the agents that the implications of ecotaxes could be examined and this is why the present, and the following chapter uses E-SAM as its primary database for studying the effect on the economy and other agents. The details regarding the core sectors, household categories and environmental sectors of the E-SAM have been provided comprehensively in Sect. 4.5 of the Chap. 4. There 5 Clarity

on this aspect will be ascertained after chapter six has been read along with chapter five.

5.3 Onus of Ecotaxes in India: Data and Methods

173

Table 5.1 Five most polluting sectors in india Sectors

Pollution coefficients net GHG emissions (Tons/Lakh of output)

Net waste water disposed (L/Day/Lakh of output)

Net land degraded (square feet/Lakh of output)

Textile (TEX)

0.06

49.96

1.86

Paper and Products (PAP)

1.00

323.87

3.31

Fertiliser (FER)

4.70

22.91

NA

Metals (MET)

2.08

3.65

53.09

5183.55

Thermal (NHY)

2.64 NA

Source Verma and Pal (2018)

are nine households that have been considered in the E-SAM of which five belong to rural and four to urban categories. The details on the population of these groups could be seen from NSSO 64th round because their categories of households are in tandem with that used in the E-SAM for the year 2007–08. This has been utilised for rationalising the incidence, tax burden and revenue transfer across these household classes. The five most polluting sectors are taken as the tax base for analysing the incidence of taxes for which the modal value6 was two, these sectors are: thermal (NHY-NonHydro), fertilisers (FER), iron and steel and non-ferrous basic metals (MET), paper and paper products (PAP) and textile and leather (TEX) (Table 5.1). A point to be noted here is that the choice of the tax base has been comprehensive as all the three environmental pollution, i.e. air, water and land have been considered, and thus, this would attempt to address the research gap in the literature which has majorly restricted to either one or two types of environmental pollution category. Ecotaxes are usually levied in the form of input tax, output tax or on proxies (Chelliah et al., 2007). Besides, emissions and effluents also attract these taxes; however, such types of ecotaxes are difficult to collect as the definition of the base is quite difficult. Like the emissions data has to be collected from the sources and that is just infeasible. Therefore, it becomes feasible to model ecotaxes directly on the value of output of any sector but that should exclude the already paid indirect taxes, and we follow this approach in this chapter. The removal of indirect taxes from these computations is quite rational as this is how any ad valorem taxes are charged. As we shall be using Social Accounting Matrix (SAM) framework wherein the output of the sector goes as input for another sector and therefore, input taxes are naturally incorporated in this methodology. One of the important assumptions of the SAM framework is that the supply curve is considered as perfectly elastic and therefore, the entire tax burden is shifted to the consumer. However, the completely elastic scenario of supply curve is an idealistic assumption, the suppliers also bear 6 Details

Chap. 4.

on the method of computation of the polluting tax bases can be found in Sect. 4.6 of

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5 Analysis of Incidence Through E-SAM

share of the incidence of the taxes. The change in the composition of demand post the imposition of ecotaxes has not been considered in this model.

5.3.1 Alterations to the Existing Method7 The impact of ecotax on the prices of the commodities has been seen through a ‘price vector model’ after altering the Datta (2010) framework. The order of the matrix has been taken as 33 × 33 because the E-SAM constructed for this study has 33 core sectors of production. −1  P33×1 = I − AT 33×33 .V33×1

(5.1)

AT is the transpose of the input coefficient matrix V is the matrix of the share in value added of the exogenous vectors P is the price vector Subscripts indicate dimensions of the matrix involved. While computing the incidence, we have utilised different methodology than used by Datta (2010), as we are more interested in ecotaxes as share of the value added, and Datta (2010) moderates ecotaxes as an explicit component of the price vector. This results in building prices in this study through the value-added component which can be comprehended from Eq. (5.2).  −1 P33×1 = I − AT 33×33 .V33×1  (TBk )1×1 =

Xk Yk

(5.2)

 .dP33×1

(5.3)

1×33

TBkis the tax burden borne by kth household.  Xk is the share of kth household’s expenditure on the 33 sector commodities Yk of E-SAM. In order to understand the tax burden and incidence of ecotaxes in rural and urban households, we utilised the change in the relative prices (P) of commodities and expenditure conducted on these goods across the sectors in the total consumption of the household. The budget shares were with respect to the total expenditure of the household and that would give the relative position of the household also. It has been argued elsewhere that expenditure of the household is a better measure of 7 This section and parts of Sect. 5.4 draw from the author’s co-authored work published previously as—Verma, R., & Pal, B. D. (2018). Incidence of Environmental Taxes in India: Environmentally Extended Social Accounting Matrix-Based Analysis in India. In K. Mukhopadhyay (ed.), Applications of Input–Output Framework. Singapore: Springer Nature. Also accessible at: https:// link.springer.com/chapter/10.1007/978-981-13-1507-7_10.

5.3 Onus of Ecotaxes in India: Data and Methods Table 5.2 Household categories considered

175

Household code

Description

RNASE

Rural Non-Agricultural Self-Employed

AGL

Agricultural labour

RNAL

Rural non-agricultural labour

RASE

Rural Agricultural Self-Employed

ROH

Rural other households

USE

Urban self-employed

USC

Urban salaried class

UCL

Urban casual labour

UOH

Urban other households

Source Pal et al. (2015)

well-being, and therefore, we utilised the expenditure shares in our computations. For the purpose of analysis as indicated in Table 5.2, we took five categories of rural areas’ consumers and four from the urban consumers group. These are categorised based on the SAM 2007–08, by using nine household groups as stated above and at two different tax levels, namely 5 and 10% along with the population of the groups based on the 64th NSSO round. The changes in the incidence of ecotaxes before and after the revenue transfers have been analysed in order to locate the household category which relatively has higher tax burden. Our analysis focused on two components distinctly with 5 and 10% rates of taxation in order to arrive at per capita revenue transfers. Section 5.4.2 provides justification for the amount of transferred revenue where simulation has been used. Figure 5.1 also shows the details of the approach followed in this study. Further, the per capita tax paid was arrived at by looking into the changing per capita expenditure for the classes of the household. Mechanically speaking, the tax paid by the every household was multiplied by the initial expenditure incurred by the household to obtain the final expenditure in these

Incidence of Ecotax

Pre-Revenue Transfer

Rural HHsEcotax @ 5% & 10%

Urban HHs Ecotax @ 5% & 10%

Post-Revenue Transfer

Per capita Revenue Transfer @ 5% of the Revenue Generated @ 5% and 10% Tax Rate

Fig. 5.1 Structure of incidence of ecotaxes. Source Verma and Pal (2018)

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5 Analysis of Incidence Through E-SAM

categories by utilising Eq. (5.3).8 Per Capita Tax Burden =

Initial Expenditure . Tax Burden - Initial Expenditure . Population (5.4)

In order to understand the changes in total expenditure, it will be necessary to take the difference between final expenditure and the initial expenditure. This difference is divided by the population, and per capita tax burden is arrived at (See Eq. 5.4). This would indicate the people affected due to levy of ecotaxes. The change in expenditure is taken as a measure of tax paid by the household, and therefore, it will be necessary to use only per capita tax burden rather than the total expenditure. In order to comprehend the incidence of ecotaxes, we have taken household expenditure both in rural and urban areas and a rate in increasing order of their annual per capita expenditure. E-SAM is used in order to arrive at these computations following the method by Porterba (1991), wherein the author had ranked the households in increasing order of their expenditure that revealed the differences in the incidence of ecotaxes across expenditure groups. The ‘range of incidence’ has been used to evaluate the overall incidence of ecotaxes. The procedure followed, included subtracting of per capita tax paid in the lowest income group, and if the value is negative, then it implied that ecotax is overall regressive. In other words, the per capita tax rendered by the lowest class of expenditure is higher than the highest class of expenditure, and thus, the sign turns out be negative.

5.3.2 Revenue Transfers: Issues in Implementation An essential observation that was made in previous section was that of the transfer of revenue which might be important, when these taxes are inequitable in the effect on the agents bearing the burden of taxation. This was proven in countries such as Canada wherein, the carbon tax could have been made progressive after transferring the revenue generated from these taxes. Revenue transfers had a vital role in making the taxes equitable and thus justifying the critical review of the criteria for revenue utilisation. However, it might be difficult to practically realise the benefits from such transfers because of the issues faced during its implementation. Some of these issues could be: identifying the beneficiary households, timely transfer of the revenue and transparency in such transfers. These issues would be country specific as they are majorly governance-related issues and thus would be dependent upon the efficiency in the functioning of the government structures. In the context of India, the highlighted issues above would be important as the transfer from the government has been plagued with severe malfunctioning. The condition, however, seems to be

8 One

of our earlier studies (Verma & Pal, 5.2018) has also used this approach.

5.3 Onus of Ecotaxes in India: Data and Methods

177

improving in the context of transfer of subsidies but even then there exists plenty of scope. In the scenario of transferring the revenue from ecotaxes levied in India, issues in identification of the beneficiary households could be resolved without many difficulties. This is because the categorisation of households has been adopted from the 64th NSSO round (2010), which necessarily has the list of these households. NSSO collects primary level data based on scientific sampling procedures, and therefore, the whereabouts of these households should not be a cause of concern. The second and third issues would require evolving a system of transfer which would minimise the trade-offs between timeliness and transparency of such transfers. The system adopted by the Department of Income Tax for the reimbursement of the Income Tax Returns could be a source of learning. One of the prime reasons for the IT department to timely and efficiently transfer the revenue back to the respective accounts is because of the seeding of the permanent account numbers (PAN) with the profiles of the citizens filling income tax. This leads to efficiency and transparency in the transfers. The problem with ecotaxes in Indian context, especially so in the case of rural households, would be the non-availability of PAN with several households which would lead to problems in reimbursing the proceeds from ecotaxes. This could be overcome by seeding the Jan Dhan accounts of the rural households along with their twelve-digit Unique Identification Numbers (Aadhaar). This shall ensure that the proceeds from the levy of ecotaxes would reach the beneficiaries in-time and also maintain transparency in the entire process.

5.4 Simulating the Incidence of Ecotaxes 9

In the absence of hard data for over a few years and across various industries/components, it is difficult to demonstrate the incidence of ecotaxes. But this could be achieved through simulation technique using a few tenable assumptions and parameter. This has been attempted in the paragraphs below. The E-SAM methodology used gives quite dependable results.

5.4.1 The Prerevenue Transfer Scenario of Ecotaxes Per capita taxes paid by the households in rural and urban areas at 5 and 10% levy of taxes have been shown in Figs. 5.2 and 5.3, respectively. The categories of the households have been arranged in the increasing order of their income standardised by population to get at per capita income figures. This has clearly brought out the incidence of ecotaxes across the categories, and we understand the per capita taxes 9 This

section only gives the results from the E-SAM model, the explanations for these results have been provided in Sect. 5.5.

178

5 Analysis of Incidence Through E-SAM 3000 2500 2000 At 5% Ecotax Scenario

1500 1000 500 ROH (RH5)

RNAL(RH3)

RNASE (RH1)

AGL (RH2)

RASE (RH4)

0

At 10% Ecotax Scenario

Fig. 5.2 Per capita tax burden (Rs.) of rural households. Source Verma and Pal (2018)

3000 2500 2000 At 5% Ecotax Scenario

1500 1000

At 10% Ecotax Scenario

500 USC (UH2)

UOH (UH4)

USE (UH1)

UCL (UH3)

0

Fig. 5.3 Per capita tax burden (Rs.) of urban households. Source Verma and Pal (2018)

paid which would imply that ecotaxes are either progressive or regressive. Figure 5.2 indicates that ecotaxes are overall progressive for both the rates of 5 and 10%. The highest income category of the rural households that is the rural other households (ROH) bears the larger tax burden than the lowest income category, namely the agricultural labour in rural areas. The difference in the per capita tax paid between these categories is positive which amounts to Rs. 604. When the tax rate is doubled from 5 to 10%, the overall progressive characteristic of the taxes almost doubles as seen from the difference between ROH and rural agricultural labour households. The Rural Agricultural Self-Employed (RASE) depicts ecotaxes which are regressive from the data in that group, as these households are under lower-income category. The per capita tax computed for the households at 5% tax rate works out to be Rs. 398 which is Rs. 42 more than rural non-agricultural labour (RNAL). It was found that ecotaxes are overall progressive at 5 and 10% rates in the urban areas because of the higher-income categories belonging to Urban Other Households

5.4 Simulating the Incidence of Ecotaxes

179

(UOH) have to bear more burden than lowest income category of Urban Casual Labour (UCL) (Fig. 5.3). The difference in the per capita tax computed at 5% comes to Rs. 1104 and at 10% tax rate it comes to Rs. 2106. The taxation between the two groups differs by a factor of 1.91. Actually, it indicates that the rates do not play very significant role in determining the ecotax burden, in absolute terms the ecotax burden changes; however, the pattern remains the same. This could be easily observed from Fig. 5.3. The linearity assumption in the SAM method may be the reason for this. Therefore, the results in 5 and 10% are almost similar in their pattern. Following the proposition of Porterba (1991), the per capita tax burden (Rs.) of rural households under various expenditure groups has been computed. These are presented in Fig. 5.4. Similarly, per capita tax burden of urban households by expenditure groups is presented in Fig. 5.5. The progressiveness can no more be observed in both the regions across the households. When one compares these results along with the earlier graphs, Figs. 5.2 and 5.3 are compared simultaneously with 5.4 and 5.5, and we can clearly understand the difference. However, if we compute the overall progressiveness using range as a measure, the per-capita incidence of ecotax is still progressive as even now the value of range is positive. Now, for the purpose of meaningful comparison, one must also attempt to arrange these results after normalising every household category’s total expenditure with their respective population. Once we do that, the entire result for both the region gets back to its previous pattern. In addition to that, the regressiveness which was observed between the two categories of RASE and RNAL is no more to be seen and therefore one can conclude that normalising the total expenditure with population is a better parameter than the other two parameters utilised for the analysis.

Per-Capita Tax Burden (Rs.)

3000 2500 2000 Per-Capita Tax Burden (Rs.) in 5% Ecotax Scenario

1500 1000

Per-Capita Tax Burden (Rs.) in 10% Ecotax Scenario

500

ROH (RH 5)

RASE (RH 4)

RNASE (RH 1)

AGL (RH 2)

RNAL (RH 3)

0

Fig. 5.4 Per capita tax burden (Rs.) of rural households arranged through expenditures. Source Verma and Pal (2018)

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5 Analysis of Incidence Through E-SAM

Per-Capita Tax Burden (Rs.)

3000 2500 Per-Capita Tax Burden (Rs.) in 5% Ecotax Scenario

2000 1500 1000

Per-Capita Tax Burden (Rs.) in 10% Ecotax Scenario

500 0 UCL UOH USE USC (UH (UH (UH (UH 3) 4) 1) 2)

Fig. 5.5 Per capita tax burden (Rs.) of urban households arranged through expenditures. Source Verma and Pal (2018)

5.4.2 The Post-revenue Transfer Scenario of Ecotaxes The principal thrust of ecotaxes is more to control pollution, and incidentally, revenue generation takes place. Therefore, it is necessary to plan for utilisation of the generated revenue. The principle of equity put forth by Smith (1904) states that the taxes should be according to ability to pay of the individuals. Here we make an attempt to understand how to use ecotaxes’ revenue so as to reverse the mild regressivity obtained in the results for RASE category. The analysis clearly shows that RASE shares relatively higher burden of the ecotax at about 5 and 10% levels. This is true when we compare with higher-income category household of RNAL. The incidence in the lower-income category of AGL is slightly higher, and therefore while transferring the revenue of ecotaxes, it should be kept in mind that the transfer should be made so that the amount is in between the burden of taxation borne by household group of AGL and RASE. Similarly, the transfer should not exceed the burden borne between RNAL and RASE. It is necessary to meet the situation and if not, both the transfers will be higher and the AGL households will have to bear slightly higher burden. It is also possible that such transfers will be insufficient to remove the regressivity. Therefore, the principle of transfer should be to reduce the regressivity and keep in mind the incidence of ecotaxes borne by these three categories of households. These are actually Rs. 202, Rs. 398 and Rs. 356 at 5% level for these groups, agricultural labour; Rural Agricultural Self-Employed and rural non-agricultural labour, respectively. As a result, the range of per capita tax burden is between Rs. 42 and Rs. 196. For 10% tax level, this range goes between Rs. 81 and Rs. 375. RASE group takes relatively more tax burden at both five and 10% rates when compared to higher-income category RNAL. Table 5.3 shows clearly this picture, and it is evident that the total cost of transfer ranges between Rs. 126 lakhs and Rs.

5.4 Simulating the Incidence of Ecotaxes

181

Table 5.3 Range of revenue transfer required for making ecotax progressive Tax rate scenario

Minimum absolute revenue transfer (Rs. Lakhs)

Maximum absolute revenue transfer (Rs. Lakhs)

Minimum revenue transfer (%)

Maximum revenue transfer (%)

Per capita transfer @ 5% of total tax revenue generated (Rs.)

5% tax rate

126,001

558,415

2

10

94

10% tax rate

234,821

1,071,011

2

11

171

Source Verma and Pal (2018)

900 800 700 600 500 400 300 200 100 0

Before revenue transfer

AGL (RH2) RASE (RH4) RNAL(RH3) RNASE (RH1) ROH (RH5)

Per-Capita Tax Burden (Rs.)

558 lakhs at 5% tax level and at 10% this range goes to Rs. 224 lakhs and Rs. 1000 lakhs. This is about 2–10% of the revenue generated through ecotaxes. Understanding the impact of revenue transfers on a regressivity of ecotaxes at 5 or 10% tax rates could be complicated. This was simplified in this model, and actual transfer amount could be easily indexed to these rates of taxation, which are indicative. In Figs. 5.6 and 5.7, we have presented the impact of such transfers and it is evident from the accompanying graphs that the incidence for RASE has declined proportionately with respect to RNAL. As the conditions of transfers towards correcting the distortions required that the transfer amount should range between 2 and 10%. With these structures, progressivity between the categories of the household could be maintained, and on an average 95% of the revenue generated from ecotaxes will still be with the government. It will be easier for the government state to decide about how to share this revenue based on the criteria proposed in Sect. 5.3.2. The major requirement in the revenue transfers generated out of ecotax is to ensure that regressivity is removed, and such a condition can be fulfilled as depicted in Figs. 5.6 and 5.7. The revenue generated could also be utilised for environmental goals, development projects, cleaner electricity generation, construction of common effluent treatment plants, etc.

Aer 5% Revenue Transfer

Fig. 5.6 Per capita tax burden in rural HHs @5% tax rate post-revenue transfer. Source Verma and Pal (2018)

5 Analysis of Incidence Through E-SAM 1800 1600 1400 1200 1000 800 600 400 200 0

Before Revenue Transfer

AGL (RH2) RASE (RH4) RNAL(RH3) RNASE (RH1) ROH (RH5)

Per-Capita Tax Burden (Rs.)

182

Post 5% Revenue Transfer

Fig. 5.7 Per capita tax burden in rural HHs @10% tax rate post-revenue transfer. Source Verma and Pal (2018)

5.5 Incidence of Ecotaxes on Household Groups For the purpose of finding the reasons behind the above obtained results, one must go back to the formulae mentioned in the Eqs. (5.3) and (5.4) wherein the tax burden was computed through Eq. (5.3) and the per-capita burden through (4); therefore, one must concentrate on the construct of these equations so as to explain the results. These two variables are important to understand whether ecotax follows the principle of equity. The fundamental change in the tax burden, as explained through Eq. (5.3), is because of the dP. Therefore, using this equation we have plotted the incidence of ecotax on the household categories of both the regions for 5 and 10% tax rates in Figs. 5.8 and 5.9, respectively. For the purpose of analysis and comparison with Figs. 5.2 and 5.3, we have organised the groups of households from smallest to highest per capita income. It is quite clear that there are differences in the incidence. These 1.030

Tax Burden

1.025 1.020 1.015

5% Ecotax 1.010

10% Ecotax 1.005 1.000

Fig. 5.8 Tax burden in rural households. Source Verma and Pal (2018)

5.5 Incidence of Ecotaxes on Household Groups

183

1.030

Tax Burden

1.025 1.020 1.015

5% Ecotax Rate

1.010 1.005

10% Ecotax Rate

1.000

Fig. 5.9 Tax burden in urban households. Source Verma and Pal (2018)

figures bring out the differences that exist in the pattern of the two.10 This is done in order to bring out the differences that could arise due to competition and methods for computation of the per capita incidence of taxation. The per capita tax incidence can be arrived at by dividing the increase in total expenditure with the population of its household category. Such increase in the total expenditure shows the additional expenditure due to ecotaxes, and this is arrived by following the Eq. (5.4) which is the difference between final and initial expenditures and this is nothing but a function of the total initial expenditure and population.11 It is due to this that the pattern of per capita tax paid is different than the total tax incidence (Figs. 5.2, 5.3, 5.8 and 5.9 need to be referred here). A significant difference was located between RNASE and ROH as shown in Figs. 5.2 and 5.8. The difference is largely due to the population and initial expenditure as can be seen from Table 5.4. The increase in per capita incidence due to ecotax for RNASE is also because of this same reason as also shown in Table 5.4. When we compare the previous households on the horizontal axis of Fig. 5.2, initial expenditure seems to be relatively higher. That has led to higher ratio for RNAL, and the tax charged shows an increase. In almost similar manner, ROH depicts lowest density of population among the rural households and therefore, the per capita tax is higher in these cases. As regards to the urban households, the per capita incidence has been increasing, and it declines as the income increases (see Figs. 5.3 and 5.9). One can find support to this argument in Table 5.4, and the ratio of expenditure to population increases as their per capita income increases. Therefore, higher per capita tax payment is different here. The overall progressive picture of ecotaxes is visible in Fig. 5.3, 10 The results do not change even if the incidence is examined by organising households as per their

total expenditure and therefore these graphs have not been presented in the text. Initial Expenditure . Tax Burden - Initial Expenditure Per Capita Tax Burden = Population 11 Initial Expenditure = (Tax Burden − 1) Population

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5 Analysis of Incidence Through E-SAM

Table 5.4 Population and expenditure details of the HHs

Household category

Total population (Million)

Total expenditure (Rs. Trillion)

AGL (RH2)

203.91

2.90

RASE (RH4)

286.37

7.58

RNAL(RH3)

80.88

2.11

115.37

3.49

ROH (RH5)

66.77

4.52

UCL (UH3)

34.35

1.03

USE (UH1)

111.96

7.56

USC (UH2)

105.45

9.66

UOH (UH4)

15.12

2.22

RNASE (RH1)

Source Verma and Pal (2018)

whereas in Fig. 5.9 ecotaxes looked to be regressive. This brings back the primacy of normalisation of the tax computation with the ratio of initial expenditure and the population concerned. To continue with the reasoning for the results, we have also attempted to explain the diagrams of the incidence of ecotaxes for both the regions. For this, we have again resorted back to the notion of the composition of the budget, and we have computed the mean value of the budget share for all the groups of household. This analysis has been conducted for the commodities which have been taxed (Figs. 5.10 and 5.11). The budget shares or its composition, for any good, depicts the proportion of the total expenditure incurred on the purchase of that commodity. If this share is higher, then one can easily state that there is a large dependence of the household on this commodity and it could be relatively inelastic in demand. We have computed these incidences by using Eq. (5.3), wherein the share of expenditure on the commodity share is inherent component of the equation. It is therefore becomes imperative to see

AGL (RH2) RASE (RH4) RNAL(RH3) RNASE (RH1) ROH (RH5)

4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00

Average Budget Share of Taxed Products in Rural Households

Fig. 5.10 Average share of total expenditure by rural HHs. Source Verma and Pal (2018)

5.5 Incidence of Ecotaxes on Household Groups

185

2.50 2.00 1.50 1.00 0.50 0.00

Average Budget Share of Taxed Products in Urban Househods

Fig. 5.11 Average share of total expenditure by urban HHs. Source Verma and Pal (2018)

the pattern of tax incidence and the share of total expenditure on the commodities that are taxed. As an aggregate, we have model ecotaxes to be levied on most polluting five sectors of the economy, namely TEX, PAP, FER, MET and NHY. Out of these sectors, the information on the share of budget in the case of FER and MET is not available at this moment. It is quite feasible that these products are not consumed by the households directly from the producers in the sector. To arrive at the average budget shares of the sectors and the tax pattern for these three sectors, namely TEX, PAP and NHY, the data was obtained separately for rural and urban households categories. Figures 5.8, 5.9, 5.10 and 5.11 help to compare the pattern of budget shares and the tax burden. The movement in these diagrams is similar to each other which help in explaining the pattern. It comes out clearly that the average of the share of tax burden declines in rural areas for the three household categories. Almost similar is the case of households in urban areas.

5.6 Conclusions Even after three decades of the existence of ecotaxes world over certain pertinent issues remain without any definite answers. These questions include the definition of ecotaxes, appropriate tax base, and if implemented, one is not sure whether these taxes are progressive or regressive? Here we have made an attempt to analyse these issues using an Environmentally Extended Social Accounting Matrix (E-SAM) for India 2007–08. In Indian situations, these issues become quite tricky as the data is quite unorganised, and there are many sources of pollution. Besides, following the canons of taxation as enunciated by Smith (1904), these taxes should be equitable and given the Indian framework where still large share of the population belongs to lower-income group, a uniform application of these taxes may result in inequity. The present status of ecotaxes in India is quite intriguing as analysed by Verma (2016),

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and that gives further clue to exploring these issues relating to design and the effects of ecotaxes in India. In this chapter, an attempt is made to answer the aforementioned issues. To begin with the design of ecotax base was attempted at by computing pollution coefficients of the sectors from the E-SAM framework. The three sectors, namely air water and land are taken as important sector that find specific mention in the Environmental Protection Act, 1986. Five important tax bases were taken for the purpose of analysis, namely thermal (NHY-Non-Hydro), fertilisers (FER), iron and steel and non-ferrous basic materials (MET), paper and paper products (PAP) and textile and leather (TEX). These five sectors are taken for the purpose of analysis, and the tax was modelled on their value of output but after the indirect taxes paid by these sectors that were excluded from the total value of output. These could be categorised as output taxes. Simulation exercise was undertaken by assuming two tax rates, namely 5 and 10% so that further indexing with any tax rate is viable. After the simulation exercise, the incidence of ecotaxes on a total of nine categories of rural and urban households (five and four categories, respectively) was estimated using the price vector model illustrated by Datta (2010). This procedure was suitably altered to accommodate the ecotax design as illustrated in this study. The simulated revenue generation from the implementation of the ecotaxes at both 5 and 10% tax rates was computed. Using the results of these questions, one can easily get to the revenue generation after understanding the population base and the distribution of income and expenditure. Our further analysis indicated that per capita tax incidence among the rural households is higher in the higher-income groups at both at 5 and 10% tax rates. It is obvious that the lower-income groups have less burden and hence the tax structure looks to be progressive. Similarly, in the urban households sector, the per capita incidence was also progressive. The policy of per capita revenue transfer for the rural households was found mildly regressive in the group of RASE households. Almost 2–10% of the revenue generated from the implementation of the ecotaxes at 5 and 10% rates shall be transferred to the households via different welfare schemes to make ecotaxes progressive for this household class. The policy of such transfers inherently involves higher-income households paying more taxes as against lower-income households. In the urban areas, no such revenue transfer to the household was required as the ecotaxes themselves were progressive in nature of the incidence. Both in the urban and rural scenarios, there are a certain pattern of per capita tax incidence. These patterns arise due to the normalisation of the tax incidence and initial total annual expenditure of the households to the total population. Such a pattern is different if computed at the per capita level. For the per capita tax payments, normalisation of the total tax incidence by population of respective groups makes the result comparable across the groups of the households and usable to understand the final effects of ecotaxes on the household sector. The different patterns observed of the incidence of tax could be explained by the budget shares of different groups and share of the commodities consumed by the households.

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5.7 Limitations of the Model Our analysis did not consider the feedback effect of revenue transfers from the levy of ecotaxes. The dynamic efficiency which could be achieved by a substitution of technology which is environmentally harmful with an environment friendly technology will also have to be taken up in order to plug in the technological effect. This was not captured in this E-SAM model, and such an exercise can be taken up at a later date when such data is available.

References Beck, M., Rivers, N., & Yonezawa, H. (2015). A rural myth? The perceived unfairness of carbon taxes in rural communities. Retrieved 25 November 2016, from SSRN https://ssrn.com/abstract= 2603565 Beck, M., Rivers, N., Wigle, R., & Yonezowa, H. (2015). Carbon tax and revenue recycling: Impacts on households in British Columbia. Resource and Energy Economics, 41, 40–69. Blackman , A., Osakwe, R., & Alpizar, F. (2009). Fuel tax incidence in developing countries: The case of Costa Rica. (RFF DP 09–37). Cao, J. (2012). Is fuel taxation progressive or regressive in China? In T. Sterner (Ed.), Fuel taxes and the poor: The distributional effects of gasoline taxation and their implications for climate policy. RFF Press. Chelliah, R. J., Appasamy, P. P., Sankar, U., & Pandey, R. (2007). Ecotaxes on polluting inputs and outputs. Academic Foundation-MSE. Datta, A. (2010). The incidence of fuel taxation in India. Energy Economics (32), S26–S33. Lee, M., & Sanger, T. (2008). Is BC’s carbon Fair? CCPA. Morris, D. F., & Sterner, T. (2013). Defying conventional wisdom: Distributional impacts of fuel taxes. Gothenburg: Mistra Indigo. Murray, B. C., & Rivers, N. (2015). British Columbia’s revenue-neutral carbon tax: A review of the latest “grand experiment” in environmental policy. NI WP 15-04. National Sample Survey Office (NSSO). (2010). Household consumer expenditure in India—2007– 08. Government of India. Pal, B. D., Ojha, V. P., Pohit, S., & Roy, J. (2015). GHG emissions and economic growth: A computable general equilibrium model based analysis for India. Springer. Porterba, J. M. (1991). Is the gasoline tax regressive? In D. Bradford (Ed.), Tax policy and the economy (Vol. 5). MIT Press. Ruggeri, J., & Bourgeois, J. P. (2009). The incidence of the proposed carbon tax in New Brunswick. Working Paper Series—2009–02. Smith, A. (1904). In E. Cannan (Ed.) An inquiry into the nature and causes of the wealth of nations (5th ed.). Methuen & Co., Ltd. Somani, A. K. (2013). Environmental tax reform and economic welfare [Doctoral Dissertation: Harvard University]. Srivastava, D. K., & Kumar, K. K. (2014). Environment and fiscal reforms in India. SAGE. Sterner, T. E. (2012). Fuel taxes and the poor: The distributional effects of gasoline taxation and their implications for climate policy. RFF Press. Verma, R. (2016). Ecotaxes: A comparative study of India and China. ISEC Working Paper Series. Verma, R., & Pal, B. D. (2018). Incidence of environmental taxes in India: Environmentally extended social accounting matrix-based analysis in India. In K. Mukhopadhyay (Ed.), Applications of input-output framework. Springer Nature.

Chapter 6

Double-Dividend Hypothesis and Competitiveness: A Critical Examination

6.1 Introduction Maximising the economic efficiency (or minimising inefficiencies) is one of the fundamental requirements for levying a tax in any economy, and ecotaxes are not exception as these are meant to preserve the environment and achieve a desired environmental quality at the least cost.1 It is in order to maintain this efficiency (cost minimisation and outcome optimisation), there is a need for utilising the revenue generated from the levy of such taxes and arriving at an overall efficient tax system. It becomes essential to examine this issue because even an environmental tax would have some costs associated with its design. It does internalise the negative externality in a cost-effective manner, when compared with command and control (CAC) instruments but simultaneously it also affects the other sectors of the economy through an increase in the price of the goods causing pollution. Further, there is an increase in the price of goods of other sectors because every sector is interlinked and dependent on each other for its inputs. Therefore, when a tax is imposed on sectors causing environmental damage, several types of costs such as decline in overall production in the economy (GDP), reduction in the wages of factors of productions, extra tax burden on households, reduction in cost competitiveness of taxed sectors, etc., are generated (Goulder, 1995; Fullerton & Metcalf, 1997). In order to minimise these inefficiencies and also to reduce the inefficiency already existing in the prevailing tax system (such as income tax, corporate taxes), the revenue generated from the levy of ecotaxes could be utilised for good in the economy. Besides, the ecotaxes will discourage the harmful impacts of production process. This form of utilisation of the revenue for not only reducing inefficiency in other taxes but also for minimising/eliminating the costs generated by ecotaxes is termed in the literature as ‘Double Dividend’ or an additional benefit from the levy of such taxes (Goulder, 1995). Examining such issues becomes indispensable while understanding implementation issues related to such taxes. 1 Please

refer to Sect. 1.1.2 of Chap. 1 for details on cost advantages from levying ecotaxes.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8_6

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The core to the question of double dividend is, ’how best the revenue generated from the levy of ecotaxes could be utilised?’. Maximising the overall gains from levying ecotaxes is the underlying reason for utilising the revenue from these taxes. Normally, the literature on double dividend is confined to reducing the deadweight loss from the prevailing tax system which could be corrected by recycling the revenue. In the literature, discussion is seldom carried out as the costs associated with the levy of environmental taxes itself. An attempt, therefore, is undertaken here to address this gap in the Indian context by utilising four parameters, GDP, wages of labourers, net emissions and competitiveness, for examining the existence of double dividend and competitiveness of the sectors on which a potential levy has been designed. The underlying philosophy for preserving environment through ecotaxes is to increase the costs of production of the sectors which causes environmental damage as these industries do not disclose their true social cost of production. Such a tax might then make these industries relatively uncompetitive vis-à-vis the others if similar policies are not imposed in other countries. In this context, analysing export competitiveness also becomes important especially when issues related to implications of these taxes are being deliberated. This issue is all the more relevant in the context of developing country such as India, as it is still on its course of development and international trade could act as one of the important drivers to growth, as the experiences of the South-East Asian countries depict during 1960–1980s. Utilisation of revenue from the levy of ecotaxes for a possible reduction of the effect on competitiveness of the taxed sectors could act as a solution. Thus, the role of revenue transfer to these sectors2 also assumes importance.

6.2 Double-Dividend Hypothesis: Procedural Issues Concerning Revenue Utilisation Double dividend in simple terms could be defined as, ’the additional benefit realised in terms of increased economic efficiency by utilising the revenue from the levy of ecotax to either reduce the tax rate of existing distortionary taxes or to replace them entirely with ecotaxes’. Current debates majorly are around the later part of the definition mentioned above, i.e. whether a double dividend is achieved through a reduction in tax rates of the existing taxes or through a complete swap with an environmental tax. This has resulted in two kinds of double-dividend hypothesis in the literature: ‘weak’ and ‘strong’ form of double-dividend hypothesis. Goulder (1995), however, proposes three forms of double-dividend hypotheses and uses a theoretical model to analyse the efficiency gains from transfer of revenue. According to Goulder, an ‘intermediate’ form of this hypothesis could also be considered. The definition surrounding the intermediate form, however, is closely linked to the strong form of double-dividend hypothesis and thus has not been explained. The objective of this section is to distinguish between the ‘weak’ and ‘strong’ forms and to understand 2 Conditions

for such revenue transfers are detailed in Sect. 6.5.

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the importance of these definitions in the context of green taxes defined in the strict Pigouvian framework. The two forms of the hypotheses as put forward by Goulder (1995) are as follows: Weak Form: “By using revenues from the environmental tax to finance reductions in marginal rates of an existing distortionary tax, one achieves cost savings relative to the case where the tax revenues are returned to taxpayers in lump-sum fashion” Strong Form: “The revenue-neutral substitution of the environmental tax for typical or representative distortionary taxes involves a zero or negative gross cost”

As is evident from the above definitions, the major difference lies in the manner in which the revenue recycling is considered. The weak form does not necessitate a tax swap but only restricts to the usage of the revenue so as to reduce the existing tax rates from the distortionary taxes, whereas the strong form necessitates a revenue neutral tax swap. Further, there is no comparison between the ‘lump sum’ transfers in order to achieve efficiency gains in the strong form of the hypotheses. It is only concerned with the gross cost (total cost of implementation of ecotaxes) being either zero or negative. On the other hand, weak form clearly states that the comparison of the cost savings needs to be attempted in relation to the policy scenario which returns the revenue in a lump sum or direct manner. The third difference between the two lies in the amount of transfer. The latter requires the taxes to be finally ‘revenue neutral’, but there is no such restriction in the former. Revenue neutrality of an ecotax requires that the entire revenue generated from the levy of such taxes needs to be recycled back in the economy. Such a requirement is not necessary for the existence of any form of double dividend, but this argument possibly emanates from the political acceptance of introducing a new tax in the economy. A new tax is normally opposed in any economy as it creates additional burden on the stakeholders. Therefore, a revenue neutral swap between a tax on ‘good’ and a tax on ‘bad’ would be a readily acceptable policy than a new tax on polluting products without eliminating the pre-existing tax. It is argued here that since the fundamental objective of an environmental tax is to reverse environmental degradation and is not focused on revenue generation, thus priority shall be given for preserving the quality of the environment than the aspect of revenue neutrality. Revenue transfer should thus only be considered as a mechanism to reduce the cost arising from the levy of such a tax and not as an indispensable requirement of revenue neutral tax swap. The proceeds from these economic instruments should be optimally utilised as these are an inevitable outcome of the levies which if utilised judiciously could maximise overall gains. It is in this context the study tests the weak form of the hypotheses because it does not necessitate a tax swap. If the environmental tax is swapped for an existing tax such as income, wealth or corporate tax, then in any span of time it could be seen as a revenue raising instrument than an instrument for environmental preservation, which would be in conflict with the original objective of levying such a tax. If environmental tax needs to fulfil its given purpose, then the revenue from such taxes would decline over the years as the emissions/environmental deterioration should be expected to diminish in response to these levies. Thus, generating revenue as a purpose of these taxes will not be fulfilled, which would be an expectation if the taxes on ‘bads’ have been

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swapped and replaced by ecotaxes. Further, an ecotax in medium to long run would also incentivise a substitution of inefficient technologies with environment friendly technologies which would help to reduce pollution and hence a decline in the revenue (Srivastava et al., 2011). Once the revenue starts declining, a tax swap would require the rates of taxation to be increased even if they are close to their optimal rates which would overshadow its fundamental purpose. Given the above background, weak form of hypotheses has been preferred over the strong form. Further, a revenue neutral recycling has been considered for simulation purposes as not just to maximise efficiency gains from these instruments but also to test whether overall gains from such a policy would lead to a larger political acceptance of these taxes. The case of less than full revenue recycling, i.e. revenue positive policy scenario has also been considered under the policy scenario of reduction in the taxes on households. This is done so as to incorporate pragmatic aspects postrevenue transfer to the households, i.e. not all the revenue transferred would be used for consumption.3 Therefore, both revenue neutral and revenue positive scenarios are analysed here depending on the nature of the policy option.

6.3 Competitiveness Concerns The essential idea behind the relationship of ecotaxes with the competitiveness effect and thus the importance of this issue in context of ecotaxes is straightforward. These taxes, like any other indirect taxes, raise the cost of production or the price of final output depending on the usage of the taxed product in a particular industry/sector. For example, if the product on which tax is levied is the output of an industry which manufactures paper, then such a tax raises the final price of this product; whereas, when such manufactured paper is utilised by printing industry as an input of their industry, it increases the cost of production of producing books, diaries, etc., and thus this increase in the cost would eventually be translated in the increase in the price of output generated from this industry. This is how the price of the output of all the sectors will get affected as they directly and indirectly are dependent on the taxed sectors. The concern related to competitiveness emerges from the increase in price of domestic industries vis-à-vis the price of similar products in rest of the world (ROW), when international markets are concerned. The issue of competitiveness could also arise when domestic markets are concerned and the focus would be in relation to the varying capacities of different firms in the same industry, i.e. concerning their market share. This issue emerges from the fact that the tax would affect smaller firms relatively more than larger firms in the domestic markets because the former may not have enough capacity to adjust to the increased cost. Issues surrounding competitiveness could be broadly classified depending on the type of market in question, domestic or international market. Competitiveness in the context of the former market will largely be concentrated as an intra-industry study, 3 For

further details please refer to Sect. 6.4.2.

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wherein the effect of an ecotax is analysed among the firms of a sector/industry. Interindustry analysis may also be possible if the sectors are classified at disaggregated level by separating the printing industry from the paper manufacturing industry, as was the case in our example, and the effect of tax could then be studied for these two industries separately. When international markets are studied, the scenario of competitiveness could be analysed at three different levels: national, sectoral and firm. This classification is found widely in the literature (Smith, 2003; Ekins & Speck, 2010; Andersen et al., 2007 etc.). The definition of competitiveness would then depend on the questions posed by any study, and these questions would further be dependent on the context in which the analysis has to be carried out. Looking into export competitiveness of the sectors/industries on which ecotaxes have been proposed to be levied becomes, therefore, necessary here for a few sectors: textile and leather, paper and paper products, fertiliser and metals sector. Thermal sector had to be excluded from the analysis as the output of this sector is electricity which is produced through thermal power plants and electricity produced from all other processes, except hydro and nuclear4 . The polluting sectors on which ecotaxes have been proposed are not changed because these sectors were among the top five polluters in the three environmental categories of pollution considered here: air, water and land. Thus, keeping the sectors unchanged could be justified on the grounds that the basis for choice of the tax base for an environmental tax has to necessarily be the relative extent of pollution these sectors emit and not necessarily their relative exports. Analyses of the effects on the export competitiveness of these sectors have been conducted at an aggregated level, because this study aims at understanding the issues in application of ecotaxes at a macrolevel. A disaggregated level of analysis of the competitiveness of these sectors is thus outside the scope of the present study. The indicator and methodology used for computation of export competitiveness have been detailed in Sect. 6.5.

6.4 Testing Double-Dividend Hypothesis: Data and Methods The major data source used for this analysis is the E-SAM, 2007–085 which has been reconstructed from the SAM, 2007–08 of Pradhan et al. (2013) and also from the E-SAM, 2006–07 of Pal et al. (2015). E-SAM consists of 33 core sectors and nine household categories, details of which could be traced to Sect. 4.5. The details on the population of these households categories have been obtained from the NSSO 64th round survey (National Sample Survey Organisation, 2010).

4 For

further details about this sector and the other four polluting sectors, please refer to Sect. 4.6 of Chap. 4. 5 The latest sectoral level data available for environmental pollution is for the year 2008, and hence, it was non-viable to build an E-SAM for the recent years.

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Methodology of Grottera et al. (2015) is adopted for analysing the existence of double-dividend hypothesis in the Indian context. An attempt is made to further develop upon this methodology, and necessary changes are made to cater our needs here. It is through the multiplier matrix (I − A)−1 any simulation could be performed in a SAM framework. Therefore, an exogenous shock in the economy, normally representing a change in policy or advancement in technology, could be depicted through an alteration of this matrix. This may be represented through a change in the total output of the sectors which occurs due to an exogenous policy shock in the economy. This is precisely the understanding that has been utilised by Grottera et al. (2015) to simulate the impact of carbon tax in the Brazilian economy. When a carbon tax is levied in an economy, it affects the decision making of the agents of that economy through a change in the prices of the polluted product on which the tax is levied. This change in the prices of the products of polluting sector further affects the prices of other sectors as all the sectors of the economy are interlinked, and this effect is captured through the multiplier (I − A)−1 of the SAM. Thus, due to the levy of a carbon tax, the industries/sectors adjust their output levels because the prices of the inputs have risen which leads to a change in the output of several sectors that consequently affect the input coefficient matrix A. Thus, the matrix A changes which eventually affects the original (I − A)−1 matrix, and the levy of carbon tax could then be simulated in a SAM framework. Pollution coefficients of air, water and land for all the 33 core sectors of the E-SAM were computed, and thereafter, the five sectors having highest modal value of the top five polluters of each environmental sectors were chosen6 . This resulted in the value of output of the five polluting sectors as the tax base: thermal (NHY-Non-Hydro), fertilisers (FER), iron and steel and non-ferrous basic metals (MET), paper and paper products (PAP) and textile and leather (TEX). This would ensure that the tax base is identified and recorded with not much of an additional cost to the government, as the law requires disclosure of the value of output by every firm. Further, such a tax could also be subsumed in the present GST framework and thus could be monitored appropriately without a requirement of any separate institutional mechanism. This is where the study improved over Grottera et al. (2015) in pragmatically designing environmental taxes so as to address the practical applicability of ecotaxes. The authors in their study designed a carbon tax on carbon emissions of the seven core sectors of the Brazilian economy. It is difficult to monitor such a tax in practice as it would be levied on ‘emissions’ that are hard to measure and hence the tax base is fragile. Therefore, the design of ecotax here is simulated through a tax on the gross value of output of the five sectors which excludes net indirect taxes paid by these sectors. This has been done so as to model the imposition of ecotaxes in practice. Tax rates of 5 and 10% have been used for the simulation purpose that would match the GST framework and could be easily up scaled. These rates have been chosen as indicative figures so that the actual rates could be indexed to these figures. The tax revenue can be represented through the following equation:

6 Please

refer to Sect. 4.6 for further details on the parameter used for arriving at these five sectors.

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Ti = t · Vi t Vi Ti

(1)

Tax rate Gross value of output of ith sector Tax revenue of ith sector



T i = wi · T i wi  Ti

(2)

Weight of the ith sector in total pollution Weighted tax revenue of ith sector 

The tax revenue used for computation is represented by T i which is the weighted average of the tax revenue Ti (Grottera et al., 2015). The weights have been defined as the proportion of total pollution generated in air, water and land categories. Thus, the sector which generates higher pollution shall have to pay proportionately higher tax. All these three categories of pollution have been assigned a weight of 1/3 each, because all of these are important in the Indian context. The model proposed here is thus a flexible model as the tax rates could be indexed to 5 and 10% rates and could be changed every year, whereas the weights proposed would be non-alterable in the short run as the pollution produced by the industries would not change much in the short run. Thereafter, Eq. (3) represents a diagonal matrix (O) of the order7 33 × 33 that has been constructed whose diagonal elements represent the proportion of new output to the initial output due to the levy of ecotax. The new output is computed by  subtracting the weighted tax revenue (T i ) from their initial output (Yi ). Therefore, the sectors on which there is no tax shall have a value of 1, and for others the value would be between 0 and 1.    Ti Oii = 1 − (3) Yi Oii Yi

Proportion of new output due to levy of tax (diagonal element of O matrix) Total initial output of ith sector

[O]33×33 · [ A]33×33 = [ Anew ]33×33 Anew

(4)

Coefficient matrix post-ecotax

[Y new ]33×1 = [I − Anew ]−1 33×33 · [X]33×1

(5)

order of the matrix has been chosen as 33 × 33 , because the core sectors/industries in the E-SAM are 33. 7 The

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Exogenous demand vector

  The levy of ecotax changes the output of the taxed sector Yi − Ti which is represented through Eq. (3); therefore, this must be reflected in the coefficient matrix. The new coefficient matrix is obtained by multiplying the matrix O with the matrix A, as represented by Eq. (4). This further changed the multiplier to Anew which eventually affects the output of the sector that could be obtained by the conventional matrix formula depicted in Eq. (5). Therefore, an exogenous policy shock, such as a levy of ecotax, impacts the output of every sector of the economy even if a particular sector is not directly taxed. The interactive effect which is depicted by the new multiplier matrix (I − Anew )−1 is the cause for such effect, as shown by Eq. (5). Once the change in the output is calculated, the effect on various macroeconomic indicators such as GDP and wages of labourers can also be computed. Many policy simulations could be modelled through Eq. (5), and revenue recycling effects have also been modelled through this equation. The revenue generated from the levy of an ecotax is to be recycled back into the economy, and this is modelled via a change in exogenous matrix X which will then give the overall change in the output. This could simply be represented with Eq. (6) which describes the mathematical representation of a policy shock that is channelled through a change in matrix X. [Y new ]33×1 = [I − Anew ]−1 33×33 · [X]33×1

(6)

The reason (I − Anew )−1 matrix would remain same is because the policy scenario only recycles the revenue generated from the levy of ecotax in the economy. Thus, the new multiplier matrix must remain intact so as to represent the revenue generated through the taxes. This notion has been used to simulate various policy scenarios of revenue recycling which is different in the manner in which Grottera et al. (2015) obtained their simulation results. Here exactly our approach differs from Grottera’s analysis in this fundamental manner. The existence of double-dividend hypothesis in the Indian economy has been tested using three parameters so as to analyse the effects of a shock on the economy through ecotax. These parameters are GDP, wages of labourers, level of pollution through emissions (GHGs and wastewater) and through the level of degradation of land. The first three parameters could be measured through a change in exogenous demand vector X as mentioned above through Eq. (6). These parameters help in examining the effects of a tax not only on the economy but also on its agents comprehensively. Using these three parameters effects of ecotax has been modelled under three policy scenarios: (i) direct transfers to the households (ii) reduction in taxes on households and (iii) reduction in corporate taxes. Since the hypothesis to be tested is the ‘weak form’ of double dividend, a comparison is made between the policy of direct revenue transfers and revenue transfer through a reduction in taxes for households and for industries/sectors. It is imperative to understand and thus compare the policies of reduction of taxes for both: households and corporations, as both are important stakeholders in the economy and further to also obtain the effects

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from different perspectives. Thus, comparing the differences in the effects of ecotax under these two policy options would be interesting. In order to get the results of the above-mentioned three policy options, two different versions of Eq. (6) have been used. The difference in Eq. (6) being only in the order of the matrix [I − Anew ]−1 . Two different orders of the matrices have been used, 39 × 39 and 48 × 48. The first matrix takes the sectors till Rest of the World (ROW) in the SAM; whereas, the second matrix computes multiplier for sectors till households, i.e. till ‘Urban Other Households (UOH)’. The choice of the order of the matrix depends on the manner in which the policy shock has to be incorporated in the exogenous vector X. Since the objective of the study is also to compute the change in the competitiveness due to ecotax, the sector of ROW was also included in the computation of multiplier matrix. This was done to obtain the change in its output under various policy scenarios. The change in the order of the matrix X will not change the results because the order and thus the value of the matrix (I − A)−1 should also change with the different order of matrix X, thus keeping the results unchanged. Only in the scenario of direct transfer of the revenue to the households, an order of 48 × 48 has been taken; otherwise, the order of 39 × 39 of matrix (I − A)−1 has been chosen. The reason for the choice of the order of the matrix and the manner in which the revenue from the ecotax is recycled back to the economy is also explained.

6.4.1 Direct Transfers to Households In the E-SAM-2007–08,8 the interaction of government and households is mentioned as a column and row, respectively. Therefore, this interaction clearly depicts a transfer from the government to the households in various forms. In order to depict a direct transfer of the ecotax revenue from the government to the various categories of the households, it was important to endogenise the households in the model, i.e. to include the households for computing the multiplier matrix. Thus, the model makes households endogenous and government as a part of the exogenous demand vector which would make the order of the multiplier matrix as 48 × 48 (Please refer to either the first row or column of the E-SAM provided in the Appendix F). This would eventually result in the output for these 48 sectors. The revenue from the levy of ecotax has been equally divided between rural and urban areas. Higher the difference between the per capita annual income of a household category and the total per capita income of that region (rural or urban), higher would be its weight and thus that household category would receive higher revenue transfer from the government. This ensures that the lower income household receives higher transfer than the upper income, thereby ensuring equity.

8 The latest sectoral level data available for environmental pollution is for the year 2008, and hence,

it was non-viable to build an E-SAM for the recent years.

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6.4.2 Reduction in Taxes on Households Second policy scenario that has been considered is the utilisation of the revenue for reducing the taxes on the households. The revenue from the ecotax has been divided equally into urban and rural areas, as was also the case in the scenario of direct transfer. Further, the proportions of the indirect taxes in both rural and urban areas have been computed separately, and these have been used for transferring the revenue back to the household categories. The proportion of the indirect taxes has been used because ecotax is a form of indirect tax, therefore using it as a measure for distribution of revenue would be more appropriate. Since some amount of money is saved by the households and is not utilised for consumption purposes, in this context it has been assumed that all the revenue that has been recycled back is not used for consumption of the core 33 sectors of E-SAM. Therefore, an average of the net savings rate9 of the rural (28%) and urban (25%) household categories has been used to arrive at the amount of revenue that will be termed as leakage from the system. This amount could also be considered as the amount remaining with the government in the form of unutilised revenue. As a result, the net amount transferred is the product of (1 − s) and the total revenue generated from the ecotax levy, where ‘s’ is the marginal propensity to save and (1 − s) is the marginal propensity to consume. This simulation is incorporated in the SAM model by making all the sectors up to ‘ROW’ (Rest of the World) as endogenous, i.e. the order of the multiplier matrix being 39 × 39.

6.4.3 Reduction in Corporate Taxes The final policy option that has been considered is the reduction in the corporate taxes of the five polluting sectors that have been taxed. This would be a meaningful policy option because the government could recycle back the revenue to these polluting sectors on the condition that the transfer amount would be used for upgrading the existing technology for production so as to make it environmentally friendly. The exact effect of such a policy option, however, could not be captured in the present static SAM framework, but the effect of revenue transfer without the technological improvement could be captured. This is captured by assuming that all the revenue transferred from the government is utilised for further investment by these polluting sectors (e.g. in environmentally friendly technologies). Thus, this interaction could be incorporated via the interaction between the capital account column and the corresponding rows of the five polluting sectors in the E-SAM. The multiplier matrix would then be of the order of 39 × 39. Under this scenario, there are two different ways in which the revenue has been recycled back to the polluting sectors. In the first scenario , the recycling has been done in proportion to the capital investment of the four sectors (NHY-Non-Hydro Sector, i.e. largely thermal sectors have been excluded because of the non-availability of the data for capital investment in the 9 This

has been computed from the E-SAM constructed.

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E-SAM). In the second policy scenario, the revenue has been recycled in proportion to their outputs. In this case, the data was available for all the five sectors. However, in both the cases if the sectors are arranged in the decreasing order of the proportion used for recycling the revenue, then this order would remain the same, except for NHY sector. The effect on emissions of GHGs, emitting of wastewater and degradation of land has been seen through the methodology proposed by Robert (1975) as cited in Pal et al. (2015). The method proposed is simple yet logical and is represented as follows10 (7): 

E 3×1 = P3×33 · Y33×1 E P Y

(7)

Total emissions of all the three types of pollution Transpose of pollution coefficient matrix Total output of core sectors



E 3×1 = P3×33 · (I − A)−1 33×33 · X 33×1

(8)

Equation (7) clearly depicts that the change in total emissions in the economy is due to the change in total output. The change in total output could be easily obtained from Eq. (5). Thus, the environmental effect on the economy could also be computed through the effect on the total output. The change in total output could be calculated by using the methodology detailed in the previous subsections. In order to obtain change in sectoral emissions due to ecotax, the exogenous matrix mentioned above has to be taken as a diagonal matrix of the order 33 × 33.

6.5 Approach Towards Export Competitiveness A simple yet effective methodology has been developed in this study to compute the change in the export competitiveness due to the levy of ecotax at 5 and 10% tax rates. The question of export competitiveness that has been examined here relates to the exports of four sectors in relation to the ROW. This required a parameter which can compute the competitiveness in exports of these sectors due to the proposed levy of ecotax. Mikic and Gilbert (2007) provided an indicator for measuring export competitiveness which has been defined as a ratio of the value of exports of a product/sector from a country to the total value of exports of that product/sector in the world. The formula for which is

10 This relates to the analysis carried out in Chap. 4. For details regarding this equation, please refer

to Sect. 4.4.2 of Chap. 4.

200

6 Double-Dividend Hypothesis and Competitiveness…

 xisd d × 100 wd x iwd x isd x iwd

(9)

total exports of commodity/sector ‘i’ by country ‘s’ to all countries ‘d’ total exports of commodity/sector ‘i’ by all countries

Using this formulation for computing the export competitiveness of the four polluting industries11 on which ecotax is modelled at 5 and 10% rate, the simulations are arrived at. Thermal sector (non-hydro sector) has not been used for computing the competitiveness because there are no exports of electricity produced from non-hydro sector, i.e. majorly thermal sector. Thus, export competitiveness for this sector is not relevant. The numerator of the ratio mentioned in Eq. (9) has been obtained from E-SAM for both pre and post-tax scenarios. These values ensure that the effect on competitiveness is a result of imposing ecotax only on the four sectors while keeping other things constant. This advantage of analysing the effects only from a policy change emerges from the E-SAM methodology which examines an external policy shock in a linear general equilibrium framework. Thus, the methodology developed in this section by combining the methodology of E-SAM and the parameter of export competitiveness, as given in Mikic and Gilbert (2007), ensures that the results of competitiveness are not affected by any other policy. The denominator of Eq. (9) has been obtained by constructing a concordance map between the four polluting sectors of our E-SAM and four digit HS-2007 code obtained from WITS. The methodology discussed in Sect. 6.4 uses the E-SAM method to provide the change in output for all the sectors post the imposition of ecotax, for the three different policy scenarios. It also gives the output for the Rest of the World (ROW) sector for these scenarios at both 5 and 10% tax rates. This has been used to obtain the value of exports for these four polluting sectors post 5 and 10% tax rates and post-revenue transfers under all the scenarios. This is obtained by multiplying the new technical coefficients (Anew ) for both the respective tax rates with the different output levels of ROW sector for varying policy options. Then the ratio of the changed value of exports and the total world exports of the four sectors was taken so as to obtain the changed value of export competitiveness of these sectors. The decline in the sectors’ output would not only affect the employers’ profits but would also impact the workers in those industries; therefore, the effect on the level of employment in these sectors has also been modelled. This effect has been exhibited using three categories of the workers, i.e. unskilled, semi-skilled and skilled workers, employed in these sectors. This has been done by multiplying the change in exports in the various policy scenarios, obtained from the methodology detailed above, with the new technical coefficients obtained for both 5 and 10% tax rates. By proposing the above methodology, an attempt has been made to model the impact of ecotax on not only the sectoral output and thereby on the employers but also on the employees through the change in their wages which act as a proxy for their employment levels. 11 textile

sectors

and leather (TEX), paper and paper products (PAP), fertiliser (FER) and metals (MET)

6.6 Simulations Outcomes

201

6.6 Simulations Outcomes 6.6.1 Double Dividend Tables 6.1 and 6.2 summarise the results obtained from ecotaxes simulated for 5 and 10% on the gross output of five polluting sectors in India, respectively. A priori Table 6.1 Impact of ecotax levied at 5% on the Indian economy Policy scenarios

GDP (%)

Wages of workers (%)

Net direct GHG emissions (%)

Net direct wastewater disposed (%)

Net direct land degraded (%)

No recycling

−0.22

−0.16

−0.022

−0.046

−0.0008

Direct transfer

9.99

9.978

0.075

0.037

0.165

Reduction in household taxes

−0.01

0.043

−0.020

−0.044

0.002

Reduction in corporate taxes-proportion of capital investment

0.027

0.030

−0.017

−0.958

−0.862

Reduction in corporate taxes-proportion of total output

0.044

0.051

−0.011

−0.958

−0.862

Source Author’s computations based on simulation exercise

Table 6.2 Impact of ecotax levied at 10% on the Indian economy Policy scenarios

GDP (%)

Wages of workers (%)

Net direct GHG emissions (%)

Net direct wastewater disposed (%)

Net direct land degraded (%)

No recycling

−0.43

−0.32

−0.043

−0.090

−0.002

Direct transfer

10.40

10.382

0.079

0.041

0.171

Reduction in household taxes

0.20

0.249

−0.018

−0.043

0.006

Reduction in corporate taxes-proportion of capital investment

0.273

0.223

−0.012

−0.958

−0.862

Reduction in corporate taxes-proportion of total output

0.306

0.265

0.0005

−0.9568

−0.8618

Source Author’s computations based on simulation exercise

202

6 Double-Dividend Hypothesis and Competitiveness…

negative signs would be expected for all the three parameters (change in GDP, wages of workers and pollution levels) used for depicting the effect on the Indian economy due to an ecotax. This is evident from the fact that a tax imposed on the value of output of a few productive sectors will reduce the output of the taxed sectors. Further, this in turn would reduce the output of other sectors as these are dependent on the taxed sectors for their inputs thus creating a multiplier effect in the economy due to which it is expected that the entire output for the economy would shrink and thereby reducing the GDP and wages of workers. Since the emissions are related linearly to the output of the sectors (represented through Eq. 7), the emissions are bound to reduce. This is exactly how the results are depicted for ‘no recycling’ scenario wherein the revenue from the tax is not recycled back in the economy. Simulation exercise brings out that due to a 5% ecotax, the total value of production of goods and services in the economy is reduced by 0.2% which is also reflected in the reduction of the wages of workers by around 0.2%. The direct pollution from GHGs, wastewater and degradation of land, on the other hand, is also reduced by 0.02%, 0.05% and 0.0008%, respectively. These results, as depicted through Table 6.1, almost double when the ecotax is levied at 10% rate, thus following the characteristic of the linear model which could also be regarded as its limitation. This linearity in the results could be explained simply from Eq. 3 mentioned in the previous section. These results are bound to change when the revenue generated from the levy of ecotax is recycled back in the economy. The effects would depend on the manner in which the revenue is transferred and also upon the amount of transfer. The objective here is to see the existence of double dividend in a revenue neutral scenario; therefore, the amount of revenue transferred is the same under various policy scenarios but different across two tax rates. The only policy option in which the transfer is different for a given tax rate is the scenario of ‘reduction in the household taxes’12 . In this case since the recycled revenue is used directly for the consumption of goods from the core 33 sectors of the SAM, therefore it has been assumed that 28% and 25% of this money is saved by the rural and urban households, respectively. This saved money is considered to be leakage from the economy, which could also be treated as a net revenue not transferred by the government. The effect of these revenue transfers in the policy options through ‘direct transfers’ and ‘reduction in corporate taxes’ could be attributed to the design of these policies rather than the amount of the transfer because the amount of transfer is same in both the scenarios. For a weak form of double dividend to exist, there shall relatively be more cost savings in the policy scenario of reduction in prevailing taxes as compared to the policy of direct transfer of the revenue to the households (Goulder, 1995). Table 6.1 shows that in the case of ‘direct transfer’, the GDP and the wages of workers increased by around 10% but the pollution levels in air, water and land also increased by 0.08%, 0.04% and 0.2%, respectively. This clearly depicts that even though such a transfer could have a positive effect on the economy through an increase in the GDP and wages of labourers, but there is no improvement in the quality of environment, 12 This

is the revenue positive scenario.

6.6 Simulations Outcomes

203

rather it could lead to its deterioration. Thus, the first benefit, i.e. environmental improvement is negated due to lump sum transfers. On the other hand, the policy scenario of the reduction of corporate taxes led to an increase in the GDP and wages in the economy and at the same time also improved the quality of environment. This way both the benefits are reaped from these policy options. In the case of revenue transfers being provided through the reduction in taxes for households, both the dividends are achieved by levying ecotax only at 10% because when the tax is levied at 5% the GDP declines by 0.01%. Comparison of these policies with the policy option of ‘direct transfer’ reveals the cost savings in the context of better environmental quality which is depicted by a reduction in all three forms of pollution in both the policy scenarios at 10% rate. The only exception is the case of net land degradation that increased by a minimal amount of 0.006% when the revenue is returned through a reduction in taxes for households (please refer Table 6.2). When ecotax is levied at 5%, the savings are achieved only in the scenario of reduction in corporate taxes. Therefore, it can be deduced that the ‘Double Dividend’ works in the Indian context under the given situations, and it also does not matter as to whether the revenue is recycled through a reduction in household taxes or in corporate taxes when the tax rate is 10%. These results also get support from the existing literature (Grottera et al., 2015; Ojha, 2011 and Van Heerden et al., 2006). Also, the revenue in the third scenario could either be recycled in proportion of the capital investment or total output of the five polluting firms which were taxed. Another interesting result is depicted from the comparison of Tables 6.1 and 6.2. Here it is found that the benefit from the revenue transfer increases as the tax rate increases because higher tax rate would also imply more amount of revenue being transferred and thus leading to more benefits to the entire economy. The benefits to the environment are, however, limited only to certain tax rates beyond which full revenue transfer would not lead to any change in the environmental quality. For example, at 10% tax rate, the revenue transfer in the scenario of reduction in corporate taxes in proportion to total output would not lead to any change in the net direct GHG emissions as the percentage is negligible.

6.6.1.1

Examining the Cost of Levying Ecotax

One of the major implications of levying ecotaxes in an economy is the costs associated with such a tax. The question is whether the cost of levying ecotaxes could be minimised by utilising the proceeds generated from these taxes. This section attempts to answer this question by comparing the results of levying ecotaxes in ‘no recycling scenario’ with the three policy options of revenue transfer. These results ascertain the existing notion of a trade-off between the economic growth and environmental conservation prevalent in the literature of environmental economics. This hypothesis claims that every economy in its initial phase of development sacrifices its environmental quality so as to attain higher economic growth, but after achieving some specific growth rate, this trade-off does not exist and environmental quality and economic growth complement each other. Thus, an inverted U-shaped curve is

204

6 Double-Dividend Hypothesis and Competitiveness…

depicted which in the literature is also referred to as environmental Kuznet’s curve, named after Simon Kuznets (Stern, 1998; Panayotou, 1999; Dinda, 2004, etc.). The trade-off between growth and environmental quality is clearly visible in the policy scenario of no recycling of the revenue. The GDP reduces which is the cost that has to be borne in order to achieve better environmental quality through the levy of environmental tax. This is evident from a reduction in GDP by 0.22% so as to achieve environmental improvement which is apparent from a reduction in the GHGs emissions, disposal of wastewater and degradation of land by 0.02%, 0.05% and 0.0008%, respectively (please see Table 6.1). Therefore, an environmental policy such as environmental taxation has an implicit cost associated with its levy. This is in the terms of economic growth of the country. The results of this trade-off, however, could be reversed, when the revenue is recycled into the economy (contingent upon the kind of revenue transfer policy adopted). When the revenue is recycled through a lump sum transfer to the households, the trade-off would still prevail but if the transfers are given through a reduction in the taxes for the households (only at 10% tax rate) or reduction of corporate taxes of the polluting sectors (both at 5 and 10%), and then this could lead to dual benefits, i.e. higher economic growth and better environmental quality. This implies that revenue transfer leads to a win-win situation as the trade-off between environmental quality and economic growth could be overcome.

6.6.1.2

Implications on Wages of Workers

The effect of ecotax and various policy options of recycling its revenue on the wages of labourers could also be seen from Tables 6.3 and 6.4. The effect on the wages is in tandem with the effect on GDP as both are related. The GDP of the economy is disaggregated into wage and non-wage income in a SAM. SAM model further Table 6.3 Impact of ecotax levied at 5% on the wages of the labourers Policy scenarios

Wages of unskilled labour (%)

Wages of semi-skilled labour (%)

Wages of skilled labour (%)

No recycling

−0.12

−0.19

−0.20

Direct transfer

10.25

9.71

9.87

Reduction in household taxes

0.09

0.01

0.01

Reduction in corporate taxes-proportion of capital investment

0.03

0.02

0.03

Reduction in corporate taxes-proportion of total output

0.06

0.05

0.04

Source Author’s computations based on simulation exercise

6.6 Simulations Outcomes

205

Table 6.4 Impact of ecotax levied at 10% on the wages of the labourers Policy scenarios

Wages of unskilled labour (%)

Wages of semi-skilled labour (%)

Wages of skilled labour (%)

No recycling

−0.24

−0.37

−0.39

Direct transfer

10.67

10.10

10.27

Reduction in household taxes

0.30

0.22

0.22

Reduction in corporate taxes-proportion of capital investment

0.18

0.23

0.26

Reduction in corporate taxes-proportion of total output

0.25

0.29

0.27

Source Author’s computations based on simulation exercise

assumes the wage income of the workers into three types of labourers, i.e. unskilled, semi-skilled and skilled labour, whereas non-wage income has been allocated into capital and land categories of the SAM (Pradhan et al., 2013). Therefore, if the GDP is negatively affected, then the wages would also be negatively affected due to an exogenous policy shock in the economy. Tables 6.3 and 6.4 depict the effects of ecotax on all these three types of labourers. The benefit for the revenue transfer in all the three policy scenarios could be attributed more to unskilled labourers. The increase in the wages of unskilled labourers is the most as compared to semi-skilled and skilled workers. Further, if the revenue is not recycled back, then the unskilled workers are the least affected. This implies that these taxes could be termed as progressive because the unskilled workers are the least affected due to these taxes, and they are also benefitted the most when revenues are transferred to the households or the taxed sectors. The only exception is the case when the revenue from a levy of 10% tax is recycled through a reduction in the corporate taxes of the polluting sectors, here the semi-skilled workers gain relatively higher than unskilled workers, as a result equity will be impacted.

6.6.2 Export Competitiveness Impact of 5 and 10% ecotax on the four sectors’ change in export competitiveness is detailed in Tables 6.5 and 6.6. As expected, these tables include the ‘no recycling’ scenario, the competitiveness reduces, and this reduction is double for 10% tax rate. The reduction in competitiveness is maximum for metals sector (−0.0384% points) followed by textile sector (−0.0324% points). The least affected sector is that of fertilisers for which the decline in competitiveness is only by 0.0005% points. The

206

6 Double-Dividend Hypothesis and Competitiveness…

Table 6.5 Change in competitiveness (%) of the taxed polluting sectors due to ecotax at 5% Polluting sectors

No recycling

Direct transfer

Reduction in household taxes

Reduction in corporate taxes-proportion of capital investment

Reduction in corporate taxes-proportion of total output

TEX

−0.0324

0.225

−0.027

−0.014

−0.017

Paper, paper products (PAP)

−0.0011

0.014

−0.001

0.000

0.000

Fertiliser (FER)

−0.0005

0.007

0.000

0.000

0.000

Metals (MET)

−0.0384

0.143

−0.035

−0.025

−0.027

Source Author’s computations based on simulation exercise

Table 6.6 Change in competitiveness of the taxed polluting sectors due to ecotax at 10% Polluting sectors

No recycling

Direct transfer

Reduction in household taxes

Reduction in corporate taxes-proportion of capital investment

Reduction in corporate taxes-proportion of total output

TEX

−0.0644

0.214

−0.041

−0.014

−0.021

Paper, paper products (PAP)

−0.0023

0.015

−0.001

0.001

0.000

Fertiliser (FER)

−0.0009

0.007

0.000

0.001

0.000

Metals (MET)

−0.0764

0.119

−0.060

−0.041

−0.046

Source Author’s computations based on simulation exercise

role of revenue transfer is also seen in this section, i.e. the effect of a revenue transfer on the competitiveness of these sectors. The policy options analysed are same as that in the previous subsection. The revenue transferred does not change the impact of competitiveness substantially on paper, paper products and fertiliser sectors for two rates of 5 and 10%. This is evident from Tables 6.5 and 6.6, wherein, for a 10% tax rate also the change in competitiveness is almost the same for these two sectors for all the policy options. For other two sectors, i.e. textile and metals, the competitiveness declines more for 10% than 5% rate. This could be attributed to the smaller technical coefficient for 10% rate than 5%. Direct transfer results in improving the competitiveness than the pretax scenario but at the cost of environmental deterioration as also observed in the previous section. There seems to exist a trade-off in terms of competitiveness of these sectors and environmental improvement under the policy

6.6 Simulations Outcomes

207

scenario of reduction in households’ taxes, except for fertiliser sector for which there is no change in the competitiveness at three decimal levels. The ‘paper and paper products’ industry also seems to show no change in its level of export competitiveness under the policy option of reduction in corporation taxes. Textile and fertiliser sectors have the maximum benefit in scenarios of direct transfer and reduction in household taxes, respectively. On the other hand, at 5% tax rate paper and paper products along with fertiliser sector benefit the most under the scenario of reduction in corporation taxes. The overall effect on export competitiveness of the taxed sectors could be said to be negligible in all the policy scenarios, and this is evident from the values pertaining to Tables 6.5 and 6.6, which are mostly at three decimal places (in some cases at two decimal places) of the percentage change.

6.6.2.1

Implications on Level of Employment of Taxed Sectors

The simulations also provide to understand the implications of the change in polluting sectors’ competitiveness on the employment levels. The wages of workers have been taken as a proxy to understand the effect on the employment of these sectors due to the change in competitiveness of these sectors as SAM does not provide number of workers employed in various sectors. Tables 6.7 and 6.8 depict the impact of a 5 and 10% tax on the wages of workers. The change in competitiveness, as obtained from previous section, is meagre, and this is also translated in the effects on the wages of these workers. It is only the textile sector in which the wages are most affected in a no recycling scenario for both 5 and 10% and even this is only −0.18%, followed by metals sector (−0.14%). For all the other sectors, the change in the wages is at two decimal places. Also, the reduction in the wages of the workers in these sectors is double for 10% tax rate. Under the revenue transfer scenarios, the direct transfer is the only policy option under which the wages for all the workers in every sector increase for both the tax rates. This is expected because there is an increase in the overall competitiveness of all the sectors due to the direct transfer to the households, as explained in Table 6.5. For the other two policy scenarios, the decline in the wages of the workers is lower when compared to the no recycling scenario implying that the revenue transfers help in reducing the cost of ecotaxes on the working class, however small the cost might be. It is noted that for the workers of fertiliser sector, there is an increase in the wages due to the transfer made through the reduction in the corporation taxes of the polluting industries at 5% tax rate. Under such transfers, the metals sector is most impacted followed closely by textile sector. When the transfers are provided through reduction in corporation taxes at 10% tax rate, the workers of paper and fertiliser industries benefit (please refer to Table 6.8). Under the policy scenarios of reduction in taxes and corporation taxes, the workers in textile and metals industries are affected more when the tax rate is 10% (Tables 6.7 and 6.8). This again could be attributed to the reduction in the technical coefficients for these sectors for 10% rate vis-à-vis 5% rate while this is not the case for paper and fertiliser industries. Thus, all the transfer scenarios benefit the workers vis-à-vis the no recycling option,

FER

MET

FER

MET −0.1405

TEX 1.2561

TEX

PAP

FER

MET

Reduction in corp taxes-proportion of capital investment

−0.0009

FER 0.0137

MET 0.5231

TEX

PAP

FER

MET

Reduction in corp taxes-proportion of total output

0.1832

PAP

Direct transfer

Source Author’s computations based on simulation exercise

Change in wages −0.1514 −0.0107 −0.0006 −0.1269 −0.0008 −0.000003 0.000002 −0.0009 −0.0940 −0.0028 0.000013 −0.1004 of workers (%)

PAP

TEX

Sectors

Change in wages of workers (%)

Reduction in HHs taxes

TEX

−0.1809

Sectors

Policy scenarios

PAP −0.0147

No recycling

Policy scenarios

Table 6.7 Change in wages of labourers (%) due to change in exports (in Rs. Lakhs)-5% tax

208 6 Double-Dividend Hypothesis and Competitiveness…

MET

Source Author’s computations based on simulation exercise

FER

PAP

FER

MET

TEX

PAP

FER

MET

TEX

PAP

FER

MET

TEX

PAP

FER

MET

TEX

PAP

TEX

−0.360 −0.029 −0.002 −0.280 1.197 0.186 0.014 0.435 −0.230 −0.011 −0.0004 −0.220 −0.080 0.009 0.001 −0.151 −0.115 0.005 0.001 −0.167

Reduction in corp taxes-proportion of total output

Change in wages of workers (%)

Reduction in corp taxes-proportion of capital investment

Sectors

Reduction in HHs taxes

Direct transfer

Policy No recycling scenarios

Table 6.8 Change in wages of labourers (%) due to change in exports (in Rs. lakhs)-10% tax

6.6 Simulations Outcomes 209

210

6 Double-Dividend Hypothesis and Competitiveness…

but there is an increase in the wages of workers for all the sectors in direct transfer scenario and for certain sectors in reduction of corporate taxes scenario. However, direct transfer option benefits the workers at the cost of environment, but this is not so in the case of transfer being provided through reduction in corporation taxes. At an aggregate level, the change in wages of the workers is also small, as was also the case in competitiveness.

6.7 Examining the Double-Dividend Results At the core of the SAM analysis for examining, the effect of ecotax on the economy is the change in the output of its sectors through which the effects on GDP, emissions and wages of labourers were modelled. Equation (3) earlier represents this change in the proportion of the output of the sectors due to a levy of ecotax. It subtracts the tax revenue from the total output of the sectors so as to obtain the new output. This is then used to compute the new output through Eq. (6). The importance of output is also evident from Eq. (7) which represents the change in the emissions. The change in emissions due to an ecotax is exactly equal to the change in the total output of the sectors due to tax. This happens due to the emissions which caused changes in output as pollution coefficients are assumed to be constant under the Leontief assumption of ‘constant technical coefficients’. Thus, it is the change in the total output that determines the impact of an ecotax on the economy. In the earlier analysis, the negative sign was observed between the GDP and emissions due to an ecotax. This could be explained using Tables 6.9 and 6.10. As the GDP of an economy could be measured through the incomes of the factors of productions, referred to as income approach, which is readily available in the SAM. Table 6.9 Percentage change in income accrued to the factor of productions in various policy scenarios for 5% tax rate Factors of production

No recycling

Direct transfer

Unskilled labour

−0.12

10.25

Semi-skilled labour

−0.19

9.71

Skilled labour −0.20 −0.28

Capital

Reduction in household taxes

Reduction in corporate taxes-proportion of capital investment

Reduction in corporate taxes-proportion of total output

0.09

0.03

0.06

0.01

0.02

0.05

9.87

0.01

0.03

0.04

9.85

−0.07

0.03

0.04

Land

−0.06

16.68

0.27

0.03

0.06

Average

−0.17

11.27

0.06

0.03

0.05

Source Author’s computations based on simulation exercise

6.7 Examining the Double-Dividend Results

211

Table 6.10 Percentage change in income accrued to the factor of productions in various policy scenarios for 10% tax rate Factors of production

No recycling

Direct transfer

Reduction in household taxes

Reduction in corporate taxes-proportion of capital investment

Reduction in corporate taxes-proportion of total output

Unskilled labour

−0.24

10.67

0.30

0.18

0.25

Semi-skilled labour

−0.37

10.10

0.22

0.23

0.29

Skilled labour −0.39

10.27

0.22

0.26

0.27

Capital

−0.55

10.26

0.14

0.33

0.35

Land

−0.13

17.35

0.60

0.13

0.19

Average

−0.33

11.73

0.29

0.23

0.27

Source Author’s computations based on simulation exercise

The changes in incomes of the various factors of production due to 5 and 10% tax rates of ecotaxes are depicted in these Tables 6.9 and 6.10, respectively. Average of these incomes has been taken as a parameter so as to understand the effect of ecotax on the change in the GDP which is also shown in the tables. As can be seen from both the tables, the ‘no recycling’ scenario is the only policy option in which impact on the average of factors of production incomes is negative, hence implying that the GDP should also be negative. The only exception in Table 6.10 is the scenario of the reduction in household taxes, wherein the average of the factors’ incomes depicts a positive value of 0.06 but the overall GDP has declined by 0.01% (Table 6.1). This could be explained from the decline in the profits earned from capital by 0.07% which would have led to an overall decline in the GDP under this scenario. From Tables 6.9 and 6.10, it is also clear that the maximum change in the output is under the scenario of direct transfer to the households, due to which the increase in GDP is also maximum. The reason as to why a tax leads to maximum reduction in the emissions under ‘no recycling’ scenario is shown in Fig. 6.1. Figure 6.1 indicates the average of the percentage change in output for the five most polluting sectors (sectors that were taxed) for all the policy scenarios. These represent the most polluting sectors in the economy. Therefore, if the average percentage change for a policy option is high, this would imply that this sector may also have high emissions. Under ‘no recycling’ scenario, there is a maximum reduction of percentage of the output of these sectors which was translated into the maximum reduction in the emissions. Juxtaposed to this is the scenario of ‘direct transfer’, wherein the average percentage change in output for taxed sectors is the maximum, this gets translated into maximum increase in the total emissions. The only exception is the scenario of revenue transfer via reduction in corporate taxes in proportion of total output, in which the average change in the output has increased but still the emissions have decreased (compare Fig. 6.1 and Table 6.1). Since the value of the average percentage change in output

212 10.00 8.00 6.00 4.00 2.00 0.00 -2.00

6 Double-Dividend Hypothesis and Competitiveness…

No Recycling

Direct Transfer

Reducon in Household Taxes

Reducon in Reducon in Corporate TaxesCorporate TaxesProporon of Capital Proporon of Total Investment Output

Average % Change in Output for Taxed Sectors

Fig. 6.1 Average percentage change in output for taxed sectors at 5% tax rate. Source Author’s computations based on simulation exercise

is very minimal and further average is affected by the extreme values, this could be a possible reason for the difference. The trade-off between economic growth and environmental improvement as depicted in the case of ‘direct transfer’ (please refer to Table 6.1) could also be explained by Fig. 6.1. Even though there was a revenue transfer but such transfers led to a proportionately higher consumption from the polluting sectors which led to an overall increase in the pollution of the economy. Another interesting result that was arrived at in the previous section was the benefit reaped by the unskilled labourers vis-à-vis semi-skilled and skilled labourers in all the policy options for 5 and 10% tax rates. The unskilled labourers were also relatively less affected in ‘no recycling’ scenario. Together these two results lead to a better equitable scenario as an impact of ecotax revenue transfers. The average of the proportion of factor’s income in the total output of the sector has been chosen as the parameter to explain this result. Since there are 33 core sectors, top five sectors for which the percentage change in output was the highest were considered. Thus, these sectors are different for different policy scenarios but since the parameter of comparison is percentage, therefore it could be compared across the policy options. As is evident from Fig. 6.2, the proportion of unskilled labourers’ income in total 0.30 0.25 0.20 0.15 0.10 0.05 0.00

0.27

0.02

0.05

No Recycling

0.23

0.06 Direct Transfer

0.09

0.07 0.02

Reducon in Household Taxes

0.02

0.03

Reducon in Reducon in Corporate TaxesCorporate TaxesProporon of Proporon of Total Capital Investment Output

Proporon of Unskilled Worker's Income in Total Output Average of Proporon of Semi-Skilled and Skilled Workers Income in Total Output

Fig. 6.2 Average of the factor income to total output in top five sectors having maximum % change in output at 5% tax rate. Source Author’s computations based on simulation exercise

6.7 Examining the Double-Dividend Results

213

output for the five sectors is less than that of the average of semi-skilled and skilled labourer’s income and vice versa in other policy options. Thus, when the revenues are not recycled back to the economy, the semi-skilled and skilled labourer’s wages are affected more than that of unskilled because their share in total output is more for the top five sectors for which the output changes the most. The converse also holds true for other policy options because the proportion of unskilled labourer’s income to total output is relatively more than semi-skilled and skilled labourers for the five sectors having maximum change in their output due to the revenue transfer (Fig. 6.2).

6.8 Explaining the Export Competitiveness Impacts There are two kinds of results that need to be explained, first, results pertaining to change in competitiveness for various policy scenarios and second, change in wages of the workers due to the change in competitiveness (Tables 6.5, 6.6, 6.7 and 6.8, respectively). Both these results could be explained using two parameters, technical coefficients of exports13 (post-tax and pretax technical coefficients) and percentage change in the output of the polluting sectors. Equations (5) and (6) give the possible justification for the importance of these parameters in explaining the results. These parameters have been depicted in Table 6.11. The competitiveness of a sector has been measured using the ratio of the exports of a sector to the total world exports of that sector. Therefore, the numerator of this ratio is affected due to ecotax levied on the polluting sectors that primarily affects their total output which is further translated into the change in exports of these sectors. As a result, the price of the final products of these sectors increases. The decrease in exports will depend not only on the change in the post-tax output but also on the magnitude of change in the technical coefficients of exports of these sectors. It is the product of the post-tax technical coefficients of exports and post-tax new output that will determine the total exports of these sectors after the levy of ecotax. Therefore, Table 6.11 uses both these parameters for explaining the results of export competitiveness. In the scenario of ‘no recycling’, the metals sector’s export competitiveness reduces significantly (please refer to Table 6.5) because the change in the output, due to the levy of 5% ecotax, is the highest when compared to other three polluting sectors (refer to Table 6.11). This is followed by textiles sector because its output reduces by 0.49% and its ratio of post to pretax technical coefficient is 0.994 which is the second lowest in the group of polluting sectors. Lower this ratio, higher will be the effect of a tax on the competitiveness. Further, this ratio is the least for the fertiliser sector, and the reduction in output is also the least (−0.18%); therefore, its competitiveness is reduced by only 0.0005% points (please compare Tables 6.5 and 6.11). Similar is the case for all the other policy scenarios except for direct transfer, wherein the textile sector is the most benefitted from these transfers. This is because 13 Technical

coefficients which are computed by taking four polluting sectors in row and ROW in column of the E-SAM so as to show the exports from these four sectors to the ROW.

0.0012

0.0001

0.0414

Paper, paper products (PAP)

Fertiliser (FER)

Metals (MET)

0.0409

0.0001

0.0012

0.0627

0.0404

0.0001

0.0012

0.0624

0.988

0.999

0.998

0.994

Source Author’s computations based on simulation exercise

0.0631

0.976

0.999

0.996

0.989

At 10% tax rate

At 5% tax rate

Post 10% tax

Pretax

Post 5% tax

Ratio of technical coefficients

Technical coefficients

TEX

Polluting sectors Direct transfer

12.50 9.01

13.10 1.55

No recycling

−0.49 −0.33

−0.18 −1.37

−1.31

0.09

−0.14

−0.22

Reduction in household taxes

Change in output (%) due to 5% tax

Table 6.11 Technical coefficients of exports and percentage change in output post 5% tax for polluting sectors

1.147

1.057

0.444

0.379

Reduction in corporate taxes-proportion of capital investment

0.170

1.400

1.252

1.083

Reduction in corporate taxes-proportion of total output

214 6 Double-Dividend Hypothesis and Competitiveness…

6.8 Explaining the Export Competitiveness Impacts

215

the output of this sector has increased by 12.5% which is second to fertiliser sector whose output has increased by around 13%, whereas the technical coefficient of textile sector is way higher than fertiliser sector, and thus the product of technical coefficient and output is more for the textile sector. The other interesting result that was observed in the previous section was the competitiveness did not change much for 10% tax rate for paper and paper products and fertiliser sectors when compared with 5% tax rate scenario. This could again be explained from Table 6.11. As is evident, the technical coefficients for these sectors do not change even at four decimal places between 5 and 10% tax rates. This leads to a minimal change in the competitiveness for different tax rate scenarios. Results pertaining to changes in the wages due to ecotax could be explained using Tables 6.12 and 6.13. It was observed that the percentage change in the wages for workers, even though negligible, was maximum in the case of textile sector followed by metals sector. The change in wages has been computed by multiplying the technical coefficients of wages of these workers (Table 6.12) with the change in the exports (Table 6.13). The technical coefficients of wages have not changed due to the levy of ecotax but even then it will have an impact on the wages of the workers because the wages are determined as the product. Table 6.12 clearly shows that the technical coefficients of the textile sector are relatively way higher than any of the other sectors, and the change in the exports in all the policy scenarios for this sector Table 6.12 Technical coefficients of wages Polluting sectors

TEX

Paper, paper products (PAP)

Fertiliser (FER)

Metals (MET)

Unskilled worker

0.054

0.012

0.006

0.004

Semi-skilled worker

0.039

0.021

0.007

0.008

Skilled worker

0.015

0.026

0.014

0.013

Source Author’s computations based on simulation exercise

Table 6.13 Change in exports (%) due to 5% tax Polluting sectors

No recycling

Direct transfer

Reduction in household taxes

Reduction in corporate taxes-proportion of capital investment

Reduction in corporate taxes-proportion of total output

TEX

−0.94

6.23

−1.20

−0.41

−0.60

Paper, paper products (PAP)

−0.56

7.06

−0.43

0.36

0.17

Fertiliser (FER)

−0.45

7.30

−0.20

0.58

0.40

Metals (MET)

−1.57

4.87

−2.46

−1.69

−1.88

Source Author’s computations based on simulation exercise

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6 Double-Dividend Hypothesis and Competitiveness…

is also high. This could be the possible reason behind the change in wages of this sector being the highest (Tables 6.7 and 6.8). However, change in the metals sector’s output is the largest in all the policy scenarios, except the scenario of direct transfer, which could have led to the second largest change in the wages of this sector. The results for 10% tax rate can also be explained in the similar manner.

6.9 Conclusions The study attempted to examine the existence of double-dividend hypothesis and the issues of competitiveness with the imposition of ecotaxes in the Indian context. Using the E-SAM results, simulation exercise was carried out with three policy scenarios and GDP, wages of the workers and emissions as the three parameters. The major assumption of the model being a full pass through the tax levied. The change in competitiveness post-ecotax levy was tested for four polluting sectors: textile, paper and paper products, fertiliser and metals sector. The weak form definition of the double-dividend hypotheses was used, wherein revenue transfer results were compared between the policy of direct transfer to the households vis-à-vis revenue transfer through reduction of taxes on households and on polluting firms (Goulder, 1995). Revenue positive scenario was considered in the policy of reduction of household taxes, whereas the other two policy options considered the case of revenue neutral transfers. The results from this simulation exercise following the methodology of Grottera et al. (2015) found that, at both 5 and 10% tax rates the revenue recycling did generate double dividend as there were cost savings not in terms of increment in GDP but in terms of environmental improvement depicted through emissions of GHGs, wastewater discharge and land degradation. This is because in the direct transfer scenario, the first benefit, i.e. environmental preservation was itself not achieved. Further, the trade-off between the preservation of environmental quality and economic growth could be overcome via revenue recycling in both the policy scenarios. Reduction in taxes on households and corporate taxes also indicates interesting results. It was also observed that the environmental taxes are progressive in nature as they tend to increase the wages of unskilled workers more than the semi-skilled and skilled workers for all the policy options and that has implication for equity. Even in the policy option of no recycling of the revenue, the taxes reduced the wages of the semi-skilled and skilled workers relatively more than that of unskilled workers. The effect of ecotaxes on competitiveness of the polluting sectors and the wages of the workers due to the change in export competitiveness was found to be minimal at both the tax rates. The revenue transfer scenarios did mitigate these effects but could not negate it. Finally, these results could be explained comprehensively through the percentage change in the output of the sectors and the technical coefficients of exports and wages of the polluting sectors. These results were limited in the usage of the fixed coefficient methodology that was utilised, but the study provides a framework for modelling the research questions in a nonlinear framework. Further, the effect of

6.9 Conclusions

217

Table 6.14 Summary of effects on key parameters due to 5% levy of ecotax Sectors

TEX

Effects (% change)

No Direct recycling transfer

Reduction in household taxes

Output

Decline

Decline

Increase

Increase

Marginal decline

Marginal decline

Wages of workers

Marginal decline

Marginal decline

Marginal Increase decline

Marginal decline

Decline

Decline

Increase

Increase

Marginal Marginal Marginal decline increase decline

Increase

No change

No change

Marginal Marginal Marginal decline increase decline

Marginal decline

Marginal decline

Increase

Increase

No change

No change

No change

No change

Fertiliser Output Decline Increase Increase (FER) Export Marginal Marginal No competitiveness decline increase change

Metals (MET)

Reduction in corporate taxes-proportion of total output

Export Marginal Marginal Marginal competitiveness decline increase decline

Paper, Output paper Export products competitiveness (PAP) Wages of workers

Increase

Reduction in corporate taxes-proportion of capital investment

Wages of workers

Marginal Marginal Marginal decline increase decline

Output

Decline

Increase

Increase

Export Marginal Marginal Marginal competitiveness decline increase decline

Increase

Marginal decline

Marginal decline

Wages of workers

Marginal decline

Marginal decline

Marginal Increase decline

Decline

Marginal decline

Source Author’s construction based on simulation exercise

advancement in environmentally friendly technology is difficult to be captured in the model which can be one of the conditions on which revenue could be transferred from the government to the polluting sectors. Nevertheless, this offers a good potential for further research (Table 6.14).

References Andersen, M. S., Barker, T., Christie, E., Ekins, P., Gerald, J. F., Jilkova, J., et al. (2007). Competitiveness Effects of Environmental Tax Reforms (COMETR): Final report to the European Commission, DG research and DG TAXUD. National Environmental Research Institute, University of Aarhus. Dinda, S. (2004). Environmental Kuznets curve hypothesis: A survey. Ecological Economics, 49, 431–455. Ekins, P., & Speck, S. (2010). Competitiveness and environmental tax reform. Green Fiscal Commission. Fullerton, D., & Metcalf, G. E. (1997). Environmental taxes and the double dividend hypothesis: Did you really expect something for nothing? Chicago Kent Law Review.

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Goulder, L. (1995). Environmental taxes and the double dividend: A reader’s guide. International Tax and Public Finance, 2, 157–183. Grottera, C., Pereira Jr, A. O., & Rovere, E. L. (2015). Impacts of carbon pricing on income inequality in Brazil. Climate and Development. Mikic, M., & Gilbert, J. (2007). Trade statistics in policymaking. United Nations. National Sample Survey Office (NSSO). (2010). Household consumer expenditure in India-2007– 2008. New Delhi: Government of India. Ojha, V. P. (2011). Climate change mitigation strategies in South Asia. In R. Jha (Ed.), Routledge handbook of South Asian economics (pp. 309–322). Routledge. Pal, B. D., Ojha, V. P., Pohit, S., & Roy, J. (2015). GHG Emissions and economic growth: A computable general equilibrium model based analysis for India. Springer. Panayotou, T. (1999). The economics of environments in transition. Environment and Development Economics, 4(4), 401–412. Pradhan, B. K., Saluja, M. R., & Sharma, A. K. (2013). A social accounting matrix for India 2007–2008. IEG Working Paper 326. Robert, K. (1975). Input output analysis and air pollution control. In S. Edwin (Ed.), Economic analysis of environmental problems (pp. 259–274). Cambridge: NBER. Smith, S. (2003). Environmental taxes and competitiveness: An overview of issues, policy, options, and research needs. Paris: OECD. Srivastava, D. K., Kumar, K. K., Rao, C. B., & Purohit, B. C. (2011). Coping with pollution: Ecotaxes in a GST regime. Chennai: MSE. Stern, D. L. (1998). Progress on the environmental Kuznets curve? Environment and Development Economics, 3, 175–198. Van Heerden, J., Gerlagh, R., Blignaut, J., & Horridge, M. (2006). Searching for triple dividends in South Africa: Fighting CO2 pollution and poverty while promoting growth. The Energy Journal, 113–142.

Chapter 7

Summary and Conclusions

7.1 Introduction Environmental degradation in India is increasing at a faster pace in the recent past, and this has resulted in premature deaths due to various kinds of diseases that one is infected with (World Bank, 2014). This report further highlights that around 25% of the premature deaths in the world due to PM2.5 occur in India. The issue is also connected with climate change debate. This and several other such reports highlight the importance of preserving environment and further question the existing methods of preservation of environmental quality in India. The country has extensively relied upon regulatory policies of command and control (CAC) type that are laced with poor legislative system and ineffective institutional support (Pollution Boards) coupled with impractical verdicts of the judiciary that has resulted into a poor quality of atmosphere in every aspect be it air, water or land (Karpagam et al., 2012, Sahu, 2007, MoEF, 2009 and CPCB, 2010). It is this increasingly deteriorating condition of environmental quality that forms the background for this study. We were attracted to explore options for reversing or arresting this phenomenon and restoring the environmental quality in India. Market-based instruments (MBIs) have been argued in the literature of environmental economics for several decades which provide an alternative to the CAC policies in curtailing several types of environmental pollution. One such MBI which has been successfully used in many countries is ecotaxes or environmental taxes. Ecotaxes have been extensively used in developed countries especially in the Nordic countries for almost over two and a half decades with good success. Yet, these forms of taxes have not been used often in the Indian context. Thus, the main focus of this study is to explore the issues in design and implementation of these taxes in the Indian context and its economic feasibility so as to complement the CAC policies for preserving the environment. Proposing a tax will necessarily require answering a few critical questions, and these include: i. What is the purpose of levying such a tax? ii. Where to levy the tax? iii. How to impose the tax? iv. What should be the rates of the tax? v. Will the tax cause disproportionate burden on certain sections of the economy? vi. How can © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8_7

219

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7 Summary and Conclusions

the inefficiencies related to the levy of the tax be minimised? All these questions are indispensible in the context of environmental taxes which can be categorised into two broad issues related to the design and implementation of these taxes. Proposing an unconventional tax with a special purpose of conserving environment will require answering these questions as these are fundamental in understanding the manner in which these taxes should be levied and also to comprehend their effects, if any on the agents of the society. The inefficiencies in the form of dead weight loss generated from a tax are well documented in the theory of public finance, but these taxes enhance environmental quality which should be accounted while arriving at the net benefits or costs of such levies. Thus, the design and implementation issues have a vital and specific role in the context of ecotaxes.

7.2 Designing Ecotaxes Four imperative aspects of designing environmental taxes are considered in this study. These include the core objective of levying a tax which can be comprehensive in its form and implementation. The place of levy, i.e. identifying the tax base, optimality of tax rates and administrative feasibility of such a tax, all these have to be discussed. Except for the objective of the levy, other aspects listed above could be said to be derived from the four canons of taxation listed by Smith (1904) which have been discussed subsequently.

7.2.1 Defining Environmental Taxes Defining any tax is essential because it is only through its definition one can understand the objective and the scope of such levy. Only after comprehending the tax base and deducing its optimal rate, one can proceed for a clear definition. In the context of environmental taxes, this becomes a necessity because even after two and a half decades of its existence, primarily in Nordic countries, there does not exist a comprehensive definition of ecotaxes, let alone acceptance of a uniform definition. There are various conflicting definitions in the literature provided by several organisations and economists including OECD, Eurostat, etc. These have been examined on the basis of four principle characteristics of any tax to be levied, namely: i. tax base, earmarking of the revenue from the tax, ii. type of tax, i.e. ad valorem or per-unit tax, iii. whether the taxes levied are requited or unrequited payments as also iv. the principles of tax administration. Our analysis indicated three major highlights of this exercise: first, there exists ambiguity in the identification of the tax base. It is unclear as to whether an indirect tax on polluting input/output would also be considered as an ecotax. Second, there is no explicit mention of the nature of taxation, i.e. progressivity or regressivity of such taxes. Third, confusion also prevails on the place of the levy of these taxes because the definitions are unclear as to whether an ecotax is

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221

levied only upon the site of environmental degradation or also upon the use/misuse of environmental resources. The above scrutiny steered us to define environmental taxes in a comprehensive manner to incorporate fundamental underpinnings of ecotaxes and also address the operational difficulties which would be witnessed while implementing an ecotax. In this regard, it was essential to propose a definition for ecotax which would adopt the fundamental principle proposed by Pigou (1920): an environmental tax should be levied such that it increases the cost of production/consumption/extraction behaviour of any agent which creates negative externality for the third party from its activity. Thus, the following definition was proposed in our earlier work: An ecotax is a tax1 whose tax base2 is designed so as to internalize the negative externality generated either from production/consumption/extraction behaviour in an economy (Verma, 2016, p. 4).

This definition is an attempt to incorporate the shortcomings of the existing definition by clearly mentioning that an ecotax can be levied on either production, consumption or extraction behaviour which are deemed to be polluting. Further, it also comprehensively defines tax base as it considers the indirect levy on polluting input or output to be an ecotax. Finally, it necessitates that ecotax should be progressive as this would be in line with the basic Pigouvian principle; i.e. the cost (externality) associated with a more polluting activity would be relatively higher, and such an activity needs to be taxed more. Apart from attempting to address the fundamental theoretical gaps in the existing literature, the definition could also be used to identify an ecotax with ease. Here, two major aspects need to be considered; first, if the tax base is a polluting factor of production/other inputs/by-products and the tax is progressive, i.e. tax rate increases with the extent of externality generated, then the tax can be called as an ecotax. This aspect of the proposed definition was utilised for examining the status of ecotaxes in India. Keeping this backdrop, an extensive review of fifteen countries was carried out so as to understand the relative international experiences in not just levying ecotaxes but for also examining the status of other fiscal instruments such as subsidies and rebates which are called as Environmental Fiscal Instruments (EFIs). This provided a holistic view of the fiscal instruments that are commonly used to combat environmental pollution. Two primary questions were explored, first, to document the Environmental Fiscal Instruments, thus understanding the ecotaxes and lessons that could be drawn for India from this documentation. To answer these questions, the countries that were examined were categorised into two groups: OECD and emerging countries. Former group consisted of eleven OECD countries where EFIs have been levied for several years. Of these eleven countries, five Nordic countries were chosen, 1A

tax is defined as ‘Any compulsory, unrequited payment to general government-central, state or district level-depending upon the fiscal structure of the economy’ (OECD, 2006). 2 A tax base in the Pigouvian context could be defined broadly as ‘any polluting factor of production/other inputs/outputs/by products on which if a tax is imposed would increase the cost of production/consumption/extraction of either the produced/consumed/or the extracted natural resource in proportion to the externality generated’.

222

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Denmark, Finland, Iceland, Norway and Sweden, because these were the most environmentally conscious countries and were also the forerunners in levying environmental taxes in the world (OECD 2002 & 2006). Other six countries were Australia, Canada, Netherlands, Germany, UK and United States of America (USA). Among the emerging countries, Brazil, India, China and South Africa were chosen because within the group of developing countries these were comparable to a certain extent. The data for all these countries was obtained from OECD/EEA database3 as it is only this database that provides revenue/financial costs of ecotaxes/subsidies and other details are also mentioned. The major outcomes of this analysis were: first energy taxes followed by transport taxes were the most prevalent form of ecotaxes across the OECD countries. These forms of taxes could also be vital in the Indian context as these could help India in meeting its target of reducing the emission intensity by 33–35% till 2030 (Government of India, 2015). Further, pollution taxes could be difficult to implement because such instruments would require complex and costly administrative and technological measures. This was also the case with other developed countries. Resource taxes would be a necessity given the issues of environmental degradation related to mining and other related activities in India. Second, tax reductions, grants, soft loans etc., are examples of subsidies and tax expenditure which are widespread in the developed countries as a form of EFIs. Third, the OECD/EEA database did not comprehensively compile the EFIs of developing countries, especially that of India. Several of these instruments were not even mentioned in the database, for instance, Forest Developmental Tax, Sikkim Ecological Fund, etc. Fourth, ecotaxes and other EFIs complement each other in their objective of preserving environment because former internalises negative externality and the latter addresses positive externality by primarily reducing the cost of investment in environmentally sound projects. Thus, even though the former has advantage of generating revenue as a by-product of its implementation, the latter is indispensible for incentivising the greener initiatives. Finally, the revenue as a proportion of GDP and total tax revenue in OECD countries ranges from 2 to 4% and 5–10%, respectively, with US and Canada being an exception. On the other hand, for emerging countries’ ratio of revenue to GDP and total net indirect tax revenue is between 0 and 1% and 1–10%, respectively. Relatively recent implementation of these taxes in emerging countries could be a possible reason behind the share of the tax revenue being so low (Verma, 2016). The two important aspects of the proposed definition of an ecotax are (as discussed earlier) tax base being a polluting factor of production/other inputs/by-products and the tax rate being progressive, and were utilised for examining the status of ecotaxes in India. This was essential because the OECD-EEA database had two major shortcomings; first, it defines ecotaxes in a limited concept of environmentally related taxes, thus not considering the fundamental Pigouvian arguments, and second, the database was incomplete in its listing of various ecotaxes in India. This led to an examination of ecotaxes in India using the author’s proposed definition. Such an exercise has not only pointed out the lacunae in the database but also became helpful 3 http://www2.oecd.org/ecoinst/queries/

7.2 Designing Ecotaxes

223

in identifying deficiencies in the design of existing environmental taxes in India. This was done by first exploring the list of those environmental taxes in the literature which were not listed by the database and thereafter examining whether these levies could be regarded as ecotaxes based on the two fundamental features of the proposed definition of ecotaxes. Of the fifteen types of environmentally related taxes identified in India from the literature, only two could be deemed as environmental taxes. ‘Vehicles tax (on old automobiles)’ levied in the states of Andhra Pradesh, Tamil Nadu, Rajasthan, Karnataka, Goa and Maharashtra and ‘vehicles entry tax’ in Himachal Pradesh and Uttarakhand could be called as environmental taxes because only these had a polluting tax base and their rate structures were also progressive. There were examples, wherein both the conditions were met but still the tax rate had no relation with the effect on environment or ecology. ‘Forest Development Tax’ in Karnataka best fits in this category as the tax rate has no relation with the scarcity of the forest produce. For example, scarce trees such as sandalwood are also taxed at par with extracts from other trees. This analysis revealed that the taxes related to environment existing in India could be best called as environmentally related taxes but not ecotaxes. Analysing the status of ecotaxes was not the only objective of constructing a definition of ecotaxes. Assessing the adequacy and relevance of the design of such taxes in India was also imperative so as to understand the lacunae in the existing design of ecotaxes. The problem faced in conducting such an exercise was the non-availability of the studies attempting to assess the impact of ecotaxes on: environmental preservation, budget of the people, industries and the economy as a whole. Most of these taxes have been levied only after the year 2002, except for forest development tax of Maharashtra and Kerala (Verma, 2016). The taxes/funds for which a few studies were available are Clean Environment Cess, Forest Development Tax of Karnataka and Maharashtra, and Sikkim Ecology Fund and Environment Cess. Most of these studies on utilisation of the funds from levy of these taxes imply that the funds have either not been collected appropriately or not been utilised for the purpose for which it was meant for (Paliwal & Goyal, 2013, CAG, 2014; Nihal, 2013). The only exception to these taxes is the Sikkim Ecology Fund and Environment Cess in which around 20.5% of the funds generated between 2007 and 2012 were utilised for environmental purposes (Mandal et al., 2013). After the implementation of GST in 2017, the Government of India proposes to utilise the funds from these and other cesses for compensating the state governments for the loss in their revenue collection due to the structural change in the indirect tax system (Government of India, 2017). Such propositions undermine purpose of levying a cess and fulfilling their role in achieving the objectives for which they were imposed.

7.2.2 Identifying Tax Bases Designing a tax for any purpose would require an answer to a pertinent question, “Where the tax should be levied?”, i.e. what shall be the tax base? Without answering

224

7 Summary and Conclusions

these questions, a tax cannot be designed appropriately. While defining ecotaxes, the tax base was defined comprehensively by incorporating even the polluting input/output as a potential tax base. Thus, identifying the polluting tax bases was the subsequent step that was carried out. This was done first by extensively reviewing the literature to identify key polluting sectors/activities/goods and then computing the pollution coefficients so as to identify the polluting sectors in an Environmentally Extended Social Accounting Matrix (E-SAM) framework. Three major steps were followed while reviewing the literature for the tax bases. First, a holistic definition in the Indian context had to be adopted for environment so as to understand its components. Second step was to identify broad polluting sectors and their key polluting source/goods/activities that were responsible for pollution. Third and the final step was to identify the major cities/states where these polluting sources are majorly located. The Environment Protection Act (1986) was considered for adopting the definition of environment and its associated terms: environment includes water, air and land and the inter-relationship which exists among and between water, air and land, and human being, other living creatures, plants, micro-organism and property environmental pollutant means any solid, liquid or gaseous substance present in such concentration as may be, or tend to be, injurious to environment environmental pollution means the presence in the environment of any environmental pollutant” (Government of India, 1986).

As is evident, the act considers environment to be composed of not only the three natural constituents: water, air and land but also the interrelationship among these three components and that of between these three and other living creatures. The definition of environment proposed in the act is very broad, and operationalising the relationships would be complicated; therefore, this study confined to the three components of environment while identifying their pollutants, i.e. water, air and land. Further, the definition of environmental pollutant and thus environmental pollution, as given in the act, is very limiting, as was noted by Rosencranz et al. (1991). A polluting activity is not considered as a form of environmental pollutant. This was incorporated while identifying the pollutants in the three forms of environmental pollution, namely water, air and land. The second step was to identify broad polluting sectors4 for each of the three environmental components and thereafter finding key polluting sources/goods/activities that were responsible for pollution for all the three components—water, air and land. Agricultural sector was the only one which was found to be responsible for all the three forms of environmental pollution, and this was closely followed by the industrial sector. Agriculture, industries and household sectors are majorly responsible for water pollution in India (MoEF, 2009). Leaching of pesticides and fertilisers from the agricultural fields is the prime reason of water pollution in agricultural sector. On the other hand, wastewater disposal in the form of toxic organic and inorganic substances 4 Seven polluting sectors were identified: agriculture, industries, households, mining, developmental

sector, transport sector and power sector.

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and metal contamination from thermal power tanneries and mining activities pollutes water bodies in industrial sector. Of the sixteen major polluting industries in India, ‘iron and steel’, ‘pulp and paper’ and ‘aluminium’ industries alone result in around 95% of the total pollution load (Pandey 2005 & Gupta, 2002). In addition to the above two sectors, households are also considered to be one of the major sources of water pollution through untreated sewage discharge and disposal of solid waste (MoEF, 2009). Approximately, 45% of the land has degraded in India for which agriculture, mining and developmental sectors are primarily responsible (MoEF, 2009). This report further mentions that fertile land in India has degraded due to traditional as well as modern practices in agriculture, such as shifting cultivation, burning of agricultural waste in the fields and extensive use of fertilisers and pesticides, and over-extraction of groundwater. Open cast and underground mining also results in soil erosion as these activities lead to deforestation and clearing of vegetation, thus leading to the loss in fertile layer of soil (MoEF, 2009). Further, rising demand for various developmental purposes leads to construction of roads, houses, etc., and it also is responsible for the change in the land use pattern. Air pollution could be classified on the basis of indoor and outdoor pollutant for which the major polluting sectors are primarily households in the rural areas and transport, industries, power and agricultural sectors for outdoor air pollution (MoEF, 2009). As air is mostly polluted by gaseous emissions and dust particles and these are sources of local pollutants, i.e. they differ from place to place, thus, most of the literature is confined to understanding the impact of local pollutants, such as vehicular pollution and road dust, in a few cities. A relatively recent and comprehensive study analyses six major polluting cities in India which had been conducted by CPCB (2010). A comprehensive review of the causes was carried out keeping air pollution in Bangalore, Chennai, Delhi, Kanpur, Mumbai and Pune as focus with the three major air pollutants PM10 , NOx and SO2 . Further, these three pollutants could be categorised on the basis of their major sources, i.e. vehicles, industries, road dust and area source. The upshots of this study are: road dust which is a source of PM10 is the leading cause of air pollution in the cities of Delhi, Chennai and Pune. On the other hand, in Mumbai and Kanpur area source is the major reason of air pollution. Bengaluru is the only city in which vehicles are the major cause of pollution of the atmosphere. Further, vehicles were found to be the major source of NOx and around 65% or more of this pollutant gas was found to be the major source of pollution in Bengaluru, Pune and Chennai. However, industries are the major source of emitting SO2 in all these six cities but for Chennai. Further, the study also points out the categories of vehicles which are the dominating source of vehicular emissions. The share of PM10 and NOx is majorly emitted by bus and truck which dominates as a source of vehicular pollution in all the cities but for Kanpur where three wheelers surpass bus and truck in their proportion of PM10 . However, cars and two wheelers are the major emitters of NOx in all the six cities after bus and truck. Finally, we tried to identify a few states, wherein these industries are located. This will help in detecting the areas where the concentration of pollution is relatively more. Pandey (2005) and Gupta (2002), as cited in Srivastava and Kumar (2014), provided the list of five largest polluting industries in India along with the states in

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which these are located. Maharashtra comprises three of these polluting industries, i.e. oil refinery, fertiliser and sugar industries. This was followed by Madhya Pradesh and Uttar Pradesh which have the existence of cement, iron and steel industries and fertiliser, and sugar industries, respectively. The other states in which one of these polluting industries are situated are: Bihar, Tamil Nadu, Andhra Pradesh and Gujarat. Our analysis helped in understanding the major polluting sectors/sources which pollutes the three components of the environment. We tried to validate the literature through data on various polluting sectors in India; besides, an attempt was made to reflect on these sectors through the framework of an E-SAM. The E-SAM matrix so constructed provided interactions among the various sectors of the economy and also between these sectors and the households. Further, it also showed interactions of these stakeholders with the environment and that is exactly where it extends the framework of a Social Accounting Matrix (SAM). It may be noted that the existing ESAMs around the world have not taken into consideration all the three environmental sectors, this gap in the literature was attempted by our study and further the E-SAM for India was also extended to the year 2007–08. The matrix constructed had 33 core sectors, nine household occupational categories of which five are from rural areas and four from urban locations and three environmental categories, i.e. air, water and land. However, while attempting such a comprehensive matrix for India, efforts were obviously constrained by data and especially so for these three sectors of environment. For air pollution, the data for all the thirty-three sectors was readily available but for water and land pollution data was available only for a few sectors. Nevertheless, this attempt did document certain interactions between the industries and water and land sectors. The framework provided could be used for extending this database as and when the disaggregated data for these sectors is made available. This E-SAM, thus constructed, provided vital coefficients for understanding the amount of pollution generated by these sectors. Thereafter, direct pollution coefficients were computed with details about the amount of pollution generated due to production of one unit of the sectoral output. Since this is a share of output, it could be utilised for comparing the levels of pollution across the core sectors of air, water and land. These coefficients were further used to rank the sectors in terms of their levels of pollution, and five most polluting sectors in each of the three environmental categories were identified. Thereafter, a final list of five sectors was prepared by using statistical modal value as a measure; i.e. those sectors which appear the most in the three types of pollution were selected, and these were: thermal (NHY—non-hydro), fertilisers (FER), iron and steel and non-ferrous basic metals (MET), paper and paper products (PAP) and textile and leather (TEX). This procedure led to a comprehensive selection of the polluting sectors because all these sectors were a part of the five most polluting sectors in all the types of pollution, i.e. air, water and land. After identifying the tax base and successfully attempting in answering the question of where to levy the tax, the immediately following query is “how to levy the tax?”. Mulling over this question results in understanding two important aspects which ought to be addressed; first, whether such a tax will be levied on the output or input of these products? And second, how can such a levy be incorporated into the existing framework of indirect taxation? The first question could be answered easily

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through the framework of E-SAM as this matrix is a model representation of the interactions among various agents of the economy. And, when the productive sectors of the economy are considered, i.e. industries, output of one industry becomes inputs of the other sectors. For example, output of the NHY sector is electricity, this is utilised as a core input in every other industry, including NHY sector as well, and the fact that an output of a sector becomes an input for other sectors is incorporated. It points to the relation between the sectors which is quantitatively depicted by a SAM. This fundamental concept has been utilised in this study to answer the question of where to levy the tax, i.e. ‘outputs’ of the five polluting sectors. While levying ecotaxes on the output of these sectors, other sectors are also affected implicitly through the inputs of taxed products into these sectors and thus this results in a framework of general equilibrium. What is also essential in answering this question is the matter of equity in the Pigouvian sense. This implies that the sectors which generate relatively more damage to the society through their emissions should be taxed more. For incorporating this into the model, the pollution coefficients were again utilised and weights were assigned to the five polluting sectors such that higher the pollution generated higher would be the tax levied. This was done by taking weights as the proportion of total pollution by the core sectors in all three categories.

7.2.3 Optimal Rates Optimal rate of an ecotax could be defined simply as the rate which is equal to the difference between the marginal social cost (MSC) of producing an environmentally polluting product and marginal private cost (MPC) of the producer (Pigou, 1920). This rate however will not be simply defined as the difference between these two costs but will be a weighted average of the Ramsey5 and Pigouvian forms of taxation when other forms of distortionary taxes also exist (Sandmo, 1975). This is the scenario of second best outcome in which taxes such as income tax, corporation tax and sales tax are levied along with environmental taxes, a situation as opposed to the Pigou’s first best scenario. The weight is a function of marginal cost of public funds which measures the cost of raising an additional rupee from the tax. Higher the distortions in the tax system, higher would be the MCPF and the optimal rate of ecotax will be closer to Ramsey’s taxation and vice versa. Theorising the idea of optimality seems fascinating, but pragmatically these rates are difficult to achieve because of the computational problems associated with MSC and MCPF which has been documented in the literature extensively. This is the underlying idea for theorising the idealistic scenario of the optimal rate in the first best outcome as Ramsey’s notion of taxation is plagued with minimising the MCPF which emanates from the philosophy of maximising revenue from a levy of tax. Environmental taxes, on the other contrary, are levied with the idea of minimising the environmental 5 Ramsey’s tax is based upon the principle of inverse elasticity which implies that the tax rate should

be higher for a good having lower elasticity and vice versa.

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damage by maximising the rate of profit which is socially sustainable; thus, revenue maximisation is not the objective of these taxes. This led to the formulation of issues in achieving optimal rate/s in a first best setting. The problem was viewed from the producer’s side who is attempting to maximise her/his sustainable rate of profit (SRPt ) in time period t which is primarily a function of rates of ecotax (Rt ) at various time periods t. A producer can attain an environmentally sustainable rate of profit only when this profit is observed as an inverse function of the value of output (Rt /V ot ). Here, the assumption is that pollution increases with the level of output and therefore to make it sustainable a producer must visualise value of output as a constraint in order to produce a socially optimum level. The rate of ecotax is a function of rate of pollution, cost of environmental damage, revenue for correction of system and any other parameters which is likely to affect this rate.6 Through a mathematical derivation and visualising the suppliers as large and small scale, it was shown that the optimal rates are a theoretical construct which depict a point of inflection. This rate, even though desirable, could not be achieved and is therefore an idealistic scenario.

7.3 Implementation Aspects Proposing a levy of new tax would not only necessitate an in-depth understanding of the issues relating to the design of such a tax but also require analysing the issues in implementing the tax. Implementation of any tax would primarily require two questions to be addressed: first who ultimately pays the tax? This question could also be reframed as to whether the tax is equitable; i.e. ability to pay is one of the factors determining the levy, and second, does the tax negatively affect certain agents of the economy (Smith, 1904)? And if yes, then how it can be minimised? These two primary questions, i.e. issues related to the incidence or equity and effect of a tax and its solutions, have been examined in the context of ecotaxes in India. This section has been categorised on the basis of these two research questions. Before analysing the implementation issues related to ecotaxes, the concerns in implementing CAC policies were also examined. Environmental regulations were holistically defined to constitute economic, CAC and social policies, as opposed to the literature which defines it only as CAC measures. Further, it was important to examine the role of legislative, executive and judiciary for critically understanding the limitations of the CAC policies as the government cannot successfully implement these measures without utilising its above three branches. It was found that the legislative and executive are both plagued with issues related to design and enforcement, thus leading to inadequate implementation of these measures. The Supreme Court had to intervene and surpass its powers by utilising the power granted to it under the Article 32 of the Constitution of India for protecting the ‘Right to Life’ of the citizens of India. This judicial activism, even though, was essential but has been 6 Please

refer to Sect. 4.7 for a detailed understanding of this theoretical construct.

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criticised on several grounds. Sahu (2007) points out several issues; the Supreme Court has exercised its power which has resulted in interference with the working of the pollution control boards. Further, the Court is constrained with the technical knowledge on several issues and this has resulted in truncated verdicts that had consequences for other stakeholders whose rights were traded off.7 Therefore, the review of literature suggests several issues with the CAC policies; therefore, it was important to examine implementation issues which could be attributed to ecotaxes.

7.3.1 Incidence of Ecotaxes Primarily, equity is one of the basic concerns relating to any tax because if a tax is not equitable then it will cause a disproportionate burden on those whose ability to pay is relatively lesser as compared to others, in which case tax is also termed as to be ‘regressive’. This issue is quite pertinent in the Indian context as the majority of population lives in deprived conditions and their standard of living is way below other comparable countries. Further, the issue of ecotax being regressive is even more important since it is believed that the environmental effect is borne more by the poor in the society because they do not have the means to protect themselves from natural calamities. On the top of that if a measure meant for preserving environment is also imposing disproportionate burden on this section of the society, then that would put them in extremely worse-off situation. Here, an attempt was made to study the impact of environmental taxes on the rural and urban household categories which have been categorised into five and four groups based upon their occupational structure. Using the framework of E-SAM described above, the impact of ecotax on these household categories was simulated for 5 and 10% tax rates. These tax rates were chosen because it is easier to index the actual tax rates to these rates, and also as it would be observed below, the choice of the tax rates does not matter as the effect on the economy proportionately changes and in this case almost doubles. Further, this analysis attempted to address the research gaps in the literature since the studies so far did not examine the effect of such a tax by incorporating all the three environmental components. The studies have either concentrated on carbon tax or some modified form of that. A price vector model has been used to examine these research questions by altering the methodology used by Datta (2010). This has been done by designing the ecotax as a component of the value-added matrix, unlike the author’s method of explicitly including it in the model. Thus, the change in the price occurs due to the change in the value-added component of the matrix. It is through this that the effect of ecotax can be depicted on the households as increase in the prices of the taxed commodity affects the entire economy through the SAM framework and thus increases the burden on the households.

7 For

further details, please refer to Sect. 3.4.1 (B.) of Chap. 3.

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Further, per capita expenditure has been taken as a measure for computing per capita tax burden for analysing the effect of ecotaxes on the nine household categories (rural and urban put together) (The formula used: Per Capita Tax Burden = {Initial Expenditure . Tax Burden-Initial Expenditure}/Population]. In order to find the expenditure by the households post the levy of ecotax, the product of initial expenditure with the tax burden is computed because tax burden takes into consideration the effect of the tax through change in price and thus would depict the effect of the tax. The change in total expenditure has been normalised with population because normally higher the population of a region higher would be the total expenditure of that region. To compare the impact of ecotaxes across different regions, it was necessary to take the ratio. ‘Range of incidence’ has been taken as a measure to understand the overall incidence of ecotaxes on the households. This is a simple yet effective manner of inferring whether a tax is regressive or progressive. It is calculated by subtracting the per capita tax burden of the lowest income class from the per capita tax burden of the highest income class. As a result, a negative value would indicate that the tax is regressive and vice versa. An important outcome of this exercise was that the ecotaxes are overall progressive in both rural and urban household classes for both 5 and 10% tax rates and this is depicted from the positive sign of the range of incidence which implies that the highest income category pays more than the lowest income category. However, in the case of rural household categories, the tax was found to be regressive for the household class of Rural Agricultural Self-Employed (RASE). Revenue generated from this levy could be utilised for making the tax progressive, and it was found that to make this tax progressive for the household class RASE it is necessary to transfer revenue in the range of 2–10% of the revenue that has been generated from the levy of this tax. This result holds true for both the rates of taxation. Thus, revenue transfer could be seen as an important measure that addresses minor equity concerns of ecotax.

7.3.2 Double Dividend and Competitiveness Issues The issue of negative effect on the economy or a few of its agents is also an important question to ponder over. Environment is beyond doubt a matter of extreme importance, and it sustains the living beings but at the same time for a developing and populous country such as India, the pressing question is also regarding sustaining its growth. In this context, environmental Kuznets curve (EKC) depicts an inverted U shape between environmental quality and economic growth, implying that there exists a trade-off between the two. This could as well be a cause of concern, while the environmental quality is been attempted to be preserved through the levy of environmental tax. This is the research question which has been delved in the sixth chapter. Cost on the economy and its agents have been studied at two levels, first the impact on the economy as a whole for which three indicators have been utilised: GDP (a measure for the economy), wages of the workers and emissions/degradation into/of

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the environmental resources, i.e. air, water and land. Second, the effect on the taxed sectors has also been studied which has been examined through the change in their export competitiveness. For attaining both these objectives, E-SAM framework was utilised with two tax rates 5 and 10%. Methodology of Grottera et al. (2015) was adopted after altering it to meet the need of the study. The method of arriving at the tax base and usage of weights has already been detailed upon in the last section. Here, an output tax has been modelled for the five polluting sectors, which is again slightly different from the method adopted by Grottera et al. (2015). Ecotax is imposed as a weighted proportion to their emissions; higher the pollution generated higher will be the tax imposed on that sector. Thus, the model is not only flexible, as the rates could be fixed every year but it could also be used for analysing the impact in short to medium run because the weights will not be expected to change every year as the ratio of emissions shall not change much in short to medium run. The impact of the tax could be modelled in the same E-SAM framework by considering an output matrix which is defined as the ratio of the change in value of output post-tax to the value of output pre-tax. This incorporates the net value of output for the taxed sectors post a levy of ecotax. This is how one can obtain the change in the output ratio and that could then be multiplied by the original technical coefficient matrix A to obtain the new coefficient matrix Anew . Once the new technical coefficients have been computed, then the final step is to take the product of the matrix of exogenous vector and the new multiplier matrix.8 Effect of various policy scenarios could be modelled through the change in exogenous vector. Three policy scenarios of revenue transfer were examined: i. direct transfer to the households, ii. reduction in household taxes and iii. reduction in corporate taxes of the taxed sectors if industries commit to invest in environmentalfriendly technologies. A closely associated notion with the utilisation of revenue is the hypothesis of double dividend which postulates that ‘an environmental tax provides twin benefits; first is the environmental gain, and second is the economic efficiency through reduction in existing taxes’. There are two commonly used forms of this hypothesis: first is termed as ‘weak form’ and the second as ‘strong form’ (Goulder, 1995). The former postulates that the revenue could be used for reducing the existing tax rates, whereas the latter proposes that the second benefit could be reaped with complete replacement of these taxes with green taxes. This study examined the existence of the ‘weak form’ of the hypothesis by comparing the results of revenue transfer in the policy scenarios of reduction in household taxes and reduction in corporation taxes with the scenario of direct revenue transfer (Goulder, 1995). The major outcomes of the simulating exercise are: first, it was noted that there exists a trade-off between environmental improvement and economic growth which is evident from the fact that if an ecotax is imposed at 5% rate then the GDP declines by 0.22% and correspondingly there is environmental improvement. Computing the imputed value of these will provide more than compensatory value to the GDP lowered due to ecotax. Second, double-dividend hypothesis seems to be valid in the Indian context as second dividend in terms of cost savings is achieved because 8 For

a detailed understanding of the methodology, please refer to Sect. 6.4 of Chap. 6.

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environmental pollution is reduced vis-à-vis the policy scenario of ‘direct transfer’. Third, the trade-off between the environment and growth could also be overcome via such transfers of revenue. Fourth, the effect on the wages is similar to the effect on the GDP in every scenario. Further, revenue transfer in both the scenarios of reduction in taxes leads to a relatively higher increase in the wages of the unskilled workers as compared to that of semi-skilled and skilled labour force. In this context, ecotaxes could be called as progressive. This inference could also be made because even in the ‘no recycling’ scenario the reduction in the wages of unskilled workers is relatively less than that of other two relatively richer categories of workers. Further, we attempted an analysis of the effects of ecotaxes on the taxed sectors and this was understood using export competitiveness as a measure. Export competitiveness was chosen as an indicator because primarily ecotaxes raise the cost of production of not only the taxed sectors but also the other sectors which are dependent either directly or indirectly on these sectors. Due to this, the competitiveness in relation to the other similar industries in the world would be at stake and thus export competitiveness becomes an appropriate measure to examine the effect of ecotax on the taxed sectors. This again has been analysed under the E-SAM framework, and three policy scenarios of revenue transfers have been used. Further, the effect on the employment of workers has also been probed into. For this, wages of the workers have been taken as the proxy and it has been assumed that the employment level is not ‘sticky’; i.e. the firms can fire the workers whenever they wish to do so. This may not be an entirely realistic scenario, but this has significance when the results are interpreted only as upper bound, i.e. the worst-case scenario in terms of loss of employment in these sectors. Export competitiveness has been measured using the concept provided by Mikic and Gilbert (2007) who defined it as the ratio of exports of a commodity by a country to the total world exports of that commodity. Thus, post-tax if this ratio falls, it implies a decline in the export competitiveness of the sectors. Non-hydro (NHY) sector, which is primarily electricity generation through thermal power plants, could not have been analysed because the electricity is not exported to other countries and thus the question of its export competitiveness does not arise. In order to obtain sectoral exports, Harmonised System (HS)-2007 was utilised for mapping the sectors in the E-SAM to those of HS four-digit level codes. The method described above has also been used for obtaining the pre- and posttax outputs of these four sectors (TEX, PAP, FER and MET). Some of the major outcomes of the analysis are: first, the effect of tax on export competitiveness of all the sectors is almost negligible, and the percentage change for all the sectors is either at two/three decimal places. Metals and textiles sectors witness the maximum change, and this could be easily explained by the ratio of their post- to pre-tax technical coefficients which is the least for the former sector and a bit higher for the latter. This leads to further change in the metal sector which is followed by textile sector. Second, the three revenue transfer scenarios depict that the competitiveness does not change much for paper and fertiliser sectors at both 5 and 10% tax rates. The competitiveness, however, declines for textile and metal sectors in all the revenue transfer policy scenarios at both 5 and 10% rates except in direct transfer scenario,

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but the competitiveness relatively increases than ‘no recycling’ scenario. The decline is even more in the case of 10% tax rate when compared with 5% which could be attributed to smaller technical coefficient for 10% rate than at 5% tax rate. Third, the effect on the wages of the workers is again minimal. The sectors in their decreasing order of the effect are textile and leather, metal, paper and fertiliser sectors. Fourth, the revenue transfer scenario depicts similar pattern as in the case of export competitiveness, wherein even though the relative decline in the wages of the workers is less when compared to the ‘no recycling’ scenario, yet there is a decline. Direct transfer is the only exception to this where the wages increased but at the cost of environmental deterioration.

7.4 Major Findings 7.4.1 Understanding Ecotaxes and Definitional Aspects Existing definitions of ecotaxes in the literature are contradictory to each other and are inadequate on the three fundamentally important attributes of any tax, that are: unambiguous definition of tax base, the principle of equity and the scope of ecotaxes, i.e. clarity on the definition of the place of the levy. The proposed definition incorporated that either polluting production, consumption or extraction processes could be considered as the tax base. Tax base was comprehensively defined by incorporating polluting input or output as a potential tax base and progressivity in terms of pollution to be a necessary component of the design of ecotax while arriving at the tax rates. Reviewing the environmentally related taxes in India using the proposed definition resulted in identification of only two of the fifteen existing taxes in India as ecotaxes in the strict public finance discipline. ‘Vehicles tax (on old automobiles)’ levied in the states of Andhra Pradesh, Tamil Nadu, Rajasthan, Karnataka, Goa and Maharashtra, and ‘vehicles entry tax’ in Himachal Pradesh and Uttarakhand could be called as environmental taxes because apart from having a polluting tax base their rate structures were also progressive.

7.4.2 Data Issues and Experiences from Developed World There were two major shortcomings of the OECD-EEA database; first, it listed environmentally related taxes and not ecotaxes in the strict Pigouvian sense. Second, its list of these taxes was acutely incomplete in the Indian context. Taxes such as Forest Developmental Tax and Sikkim Ecological Fund were not mentioned. Extensive review of EFIs in fifteen countries using this database resulted in an understanding of certain commonly used forms of environmentally related taxes, subsidies and tax

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expenditure. Energy and transport taxes are the most common types of environmentally related taxes that are used in the eleven OECD countries. However, examples of pollution taxes are extremely rare which could be due to the difficulty in its implementation. Tax reductions, grants, soft loans, etc., are examples of subsidies and tax expenditure. India can learn from these experiences and design energy, transport and resource taxes in ecotax framework.

7.4.3 Revenue Utilisation Revenues from environmentally related taxes were a significant part of the GDP and total tax revenue of the OECD countries which ranged from 2 to 4% and 5 to 10%, respectively. However, these ratios only ranged from 0 to 1% and 1 to 10% for the four emerging countries. This could be due to relative recent levying of these instruments in these countries (Verma, 2016). Revenue transfer in the scenarios of reduction in taxes of households and that of polluting industries leads to a relatively higher increase in the wages of the unskilled workers as compared to that of semi-skilled and skilled labour force. In this context, ecotaxes could be called as progressive. All the three revenue transfer scenarios depict that the competitiveness does not change much for paper and fertiliser sectors at both 5 and 10% tax rates. However, the competitiveness declines for textile and metal sectors in all the three policy scenarios at both 5 and 10% rates, but the competitiveness relatively increases than ‘no recycling’ scenario. The effect on the wages of the workers is observed to be the highest in textile sector and, thereafter, metal, paper and fertiliser sectors, respectively. The revenue transfer scenario depicts similar pattern as in the case of export competitiveness, wherein even though the relative decline in the wages of the workers is less when compared to the ‘no recycling’ scenario yet there is a decline. Direct transfer is the only exception to this where the wages increased but at the cost of environmental deterioration.

7.4.4 Attempts at E-SAM The pollution coefficients computed from the E-SAM for India also resulted in the five most polluting industries in India which were consistent with the literature: thermal (NHY—non-hydro), fertilisers (FER), iron and steel and non-ferrous basic metals (MET), paper and paper products (PAP) and textile and leather (TEX). These industries reflected pollution levels in all the three kinds of pollution in India, and thus a comprehensive list was generated. Tax base for the potential levy of ecotaxes was identified as the value of output of these five polluting sectors. Since the tax was designed in the Social Accounting Matrix (SAM) framework, thus these output taxes would implicitly be inputs of the other sectors which have not been taxed directly.

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This was proven through the change in the price of every 33 core sectors of the economy depicted in E-SAM. Simulating the ecotaxes in a Social Accounting Matrix framework at 5 and 10% rates of taxes depicted that these taxes are overall progressive in both rural and urban households. However in the case of rural household categories, the tax was found to be regressive for the household class of Rural Agricultural SelfEmployed (RASE). Revenue transfer was examined as a mechanism for reducing the regressivity of these taxes. It was found that for a revenue transfer in the range of 2–10% these taxes could be made progressive even for the household class of RASE. The trade-off between environment and economic growth was evident from the simulation exercise. However, this could be corrected using transfer of revenue in various ways. It was seen that under the three policy scenarios of direct transfer, reduction in household taxes and reduction in corporation taxes, the trade-off does not exist. This however does not hold true for the case of direct transfer. Doubledividend hypothesis was found to be valid in the Indian context as second dividend in terms of cost savings is achieved because environmental pollution is reduced visà-vis the scenario ‘direct transfer’. Revenue transfer in the scenarios of reduction in taxes of households and that of polluting industries leads to a relatively higher increase in the wages of the unskilled workers as compared to that of semi-skilled and skilled labour force. In this context, ecotaxes could be called as progressive. Metals and textiles sectors are affected the most, and this could be easily explained by the ratio of their post- to pre-tax technical coefficients which is the least for the former sector and a bit higher for the latter. Table 7.1 summarizes the findings of the study by relating them to the imperative research issues/questions that were examined in this book.

7.5 Conclusions Environmental taxes play a significant role in preserving environment which is evident from the experiences of the Nordic countries, and therefore this should be considered as a vital instrument in reducing further damage of the environment in India. The proceeds from this levy could also be utilised for restoring the existing damage to the environment. Such taxes find relevance in the Indian context due to the failure of CAC measures in curbing environmental degradation. Proposing the levy of ecotaxes requires an in-depth understanding of the issues related to the design of these taxes whose effects on environment, economy as a whole and the taxpayers are also required to be studied. These issues are fundamental and will thus be similar across countries, but specificities with the effect of these levies are needed to be examined and those may vary depending on intrinsic characteristics of the countries. Ecotaxes in the Indian context should be potentially levied on the value of output of the five polluting industries (thermal (non-hydro), fertilisers, iron and steel and non-ferrous basic metals, paper and paper products and textile and leather). Value of output as a tax base was identified so as to balance between the theoretical aspects and the administrative ease of levying such taxes.

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Table 7.1 Summary of the issues, questions and findings Research issues/questions

Findings

Literature does not have a comprehensive definition of ecotaxes

1. Comprehensive definition was constructed 2. Two taxes could be called as ecotaxes—‘vehicles tax (on old automobiles)’ and ‘vehicles entry tax’

Issues in identifying tax bases: Where the tax should be levied?

1. Output of the polluting goods could be taxed 2. Environmentally extended social accounting matrix was constructed with three environmental sectors: air, water and land 3. Five polluting sectors were identified—thermal (non-hydro), fertilisers, iron and steel and non-ferrous basic metals, paper and paper products and textile and leather

Optimal rates of ecotaxes: What is an optimal rate? Is it feasible to arrive at this rate?

1. Theoretical model constructed for analysing the optimal rates underscored the idea of redundancy arriving at specific numbers of tax rates as these numbers are ideal scenarios which are desired but difficult to be attained

Incidence of ecotaxes: Whether the tax is equitable?, i.e. is the tax designed according to the ability to pay of the taxpayers?

1. Ecotaxes were found to be overall progressive using price vector model 2. For RASE category, tax was made progressive through 2–10% transfer of the revenue generated

Double-dividend hypothesis: 1. Double dividend exists: cost savings in Does the tax negatively affect certain agents of terms of environmental improvement and the economy? Can revenue transfers mitigate E-SAM methodology used at 5 and 10% tax this effect? rates 2. Revenue transfer is progressive 3. Effect on export competitiveness of four polluting sectors is negligible 4. Effect on wages of workers is small Source Author’s representation

The concept of optimality of the rates of ecotax is a theoretical construct which is plagued with the problems of computing these rates, and thus it was theoretically deduced. It was found to be difficult to arrive at these rates which depict an ideal scenario. These taxes did not cause any disproportionate burden on the households except for the category of Rural Agricultural Self-Employed (RASE) which could be corrected through transfer of revenue. Further, these taxes reduce environmental pollution in all the three components of environment: air, water and land. The revenue collected from these taxes could then be transferred to the households or polluting firms9 through reduction in their respective taxes, so as to mitigate the cost on the 9 The

condition for the transfer is that these firms invest the proceeds in technologies that are pro-environment.

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gross domestic product and wages of the workers. The importance of revenue transfers and verification of the existence of double-dividend hypothesis comes out clearly in the Indian context. The effect on export competitiveness of these firms is minimal. It can be inferred that ecotaxes have a vital role in reducing environmental pollution and restoring the environmental quality in India without causing any disproportionate burden on the agents of the economy.

7.6 Policy Implications Command and control policies which are the major instruments used in the Indian context have not been successful in arresting environmental degradation. This underscores the need for alternative fiscal instruments such as ecotaxes along with subsidies and tax expenditure to correct for environmental externalities. The necessity of such effective fiscal instruments is strongly felt. In this study there was a sincere attempt to probe into the application of these instruments specifically ecotaxes in the Indian context by delving into the design and implementation issues. Therefore, certain imperative policy correctives have been proposed which have been categorised into the following sections.

7.6.1 Experiences from Other Countries Experiences of EFIs in the Nordic and other OECD countries show that these instruments help in mitigating environmental degradation. Taxes such as fuel tax (tax on coal in Netherlands), tax on electricity production (UK) and plastic shopping bag levy10 (South Africa) could be adopted. Clean environment cess is already levied in India (although now it is submerged into GST and the associated Fund is abandoned), but its design is inappropriate, and lessons from Netherlands, UK, Finland and Denmark having similar levies could be utilised effectively. To begin with, the rate of taxation can be made progressive by the ash content in the coal used, i.e. tax rate being proportional to the ash content of the coal. This could be designed considering ecotax outside the purview of GST. Subsidies or tax expenditures or a mix of both, such as support programme for hybrid buses in public transport (Germany), income and corporate tax exemptions on maintenance of forests (Iceland) could be implemented. There is a need to restructure the existing environmentally related taxes in India by focusing on the tax base and progressive rate structure so as to reap the results effectively. Thirteen of such taxes have been identified which require restructuring; some of these are Clean Environment Cess, Forest Development Tax, Ecology Fund and Environment Cess, etc. 10 A tax on plastic will be useful because Indian experience shows that policies such as blanket ban on plastics just do not work.

238

7 Summary and Conclusions

7.6.2 Restructuring Ideally, ecotaxes should be levied at a graded scale with the high polluting sectors facing higher rates relative to the less polluting sectors. Based on such a method, the five polluting industries, whose value of output could be considered as the tax base for a potential levy of ecotax in India, are: thermal (non-hydro), fertilisers, iron and steel and non-ferrous basic metals, paper and paper products and textile and leather. These sectors have been arranged in order of their decreasing pollution levels. The graded optimal tax rates should be worked out with the help of the framework developed here. The list by OECD/EEA database on the ecotaxes in India is incomplete, and several taxes identified in this study could help in addressing this shortcoming.

7.6.3 Approaching Legal Framework Environmental legislations are inadequately designed. This brings forth need to restructure these legislations, and following amendments could be made to the Environmental (Protection) Act/Rules, 1986, which is the umbrella act for other environmental legislations: a.

b.

c. d.

The Water and the Air Act could be merged with the Environmental (Protection) Act because these two mainly give the powers to the CPCB and SPCBs for laying standards which could also be given under the EPA. The central government shall restrict its role in framing legislations for effective functioning of the executive, the responsibility for laying the standards should be given to CPCB and SPCBs. Further, standards for GHG emissions should be standardised across all SPCBs as GHG is a global pollutant and thus its affect would be same all throughout. Quarterly publication of the information of the polluters should be made compulsory for the polluters so as to create environmental awareness across the consumers which would give an additional incentive to the polluters for abatement. The fines and penalties should be levied in proportion to the violations. This would give incentives for the firms to comply with the standards. Specific standards should be detailed under the Rule 5 of the EPA for the prohibition and restriction on the location of industries. Public should have the right to appeal against the location of the industries even in a ‘not notified’ area since lobbying by the industrialists may propel the union government to permit the installation of industries near a residential area.

7.6.4 Revenue Generation and Utilisation Revenue mobilised from ecotaxes needs to be used for addressing environmental degradation which is currently inadequately done. Framing of specific guidelines for

7.6 Policy Implications

239

the use of the funds and making the system transparent by publishing the details of these funds so utilised could help in resolving the issues related to management of these funds. Ecotax should be equitable and that is a fundamental requirement. Thus, it is imperative to use a part of revenue generated for making it progressive across the households. Overall, this tax was found to be progressive, but it was regressive in the household category of Rural Agricultural Self-Employed. Thus, it could be made progressive by just transferring 2–10% of the revenue generated to this household category. This transfer could be processed using the Aadhaar-linked bank accounts or through the Jan Dhan Yojana of the union government. Double-dividend hypothesis implied that the revenue generated from the levy of such taxes could be used to reduce the already existing taxes. The allocation of revenue could be attempted through a reduction in household taxes which ensures that the transfer is not at the cost of environmental degradation. Such a transfer would ensure that the wages of the unskilled workers increases the most vis-à-vis semi-skilled and skilled workers, ensuring progressivity. Further, this policy scenario was a revenue-positive policy option. Thus, the proceeds from these taxes could also be earmarked for environmental restoration.

7.6.5 Research Requirements There is an urgent need to study the implications of ecotaxes for their adequacy in the Indian context. This can be achieved by initiating a detailed study analysing the effect of such taxes on the environment and other stakeholders. Such a review can further help in initiating policy correctives in the context of the taxes which are already in place but are ineffective majorly due to their inadequate design, as also argued in the previous subsection. E-SAM as a database is extremely helpful for understanding the interrelationship between sectors of production, households and environment. This could also be used for analysing issues relating to ecotaxes and other aspects of environment. Thus, there is an urgent requirement for constructing an updated matrix for India at a disaggregated level and ensuring the timely publication of the input–output tables that forms the fundamental basis for the construction of social accounting matrices and its environmental extension. The environmental extension would require the government to publish data in the public domain on the sectoral level of pollution as done in the MOEF (2010) publication. It would be useful if the wastewater discharge and land degradation data estimates are also the part of the report.

240

7 Summary and Conclusions

References CAG. (2014). Retrieved May 29, 2014 from http://saiindia.gov.in/english/home/Our_Products/ state_account/state_account.html CPCB. (2010). Air quality monitoring emission inventory and source apportionment study for Indian cities. New Delhi. Datta, A. (2010). The incidence of fuel taxation in India. Energy Economics, 32, S26–S33. Goulder, L. (1995). Environmental taxes and the double dividend: A reader’s guide. International Tax and Public Finance, 2, 157–183. Government of India. (1986). The Environment (Protection) Act, 1986. Retrieved March 10, 2021, from India Code: https://www.indiacode.nic.in/bitstream/123456789/13112/1/08_environment_ protection_act_1986.pdf Government of India. (2015). India’s intended nationally determined contribution: Working towards climate justice. New Delhi: Government of India. Government of India. (2017). The Goods and Services Tax (Compensation To States) Act, 2017. New Delhi: Government of India. Government of India. (n.d.). The Environment (Protection) Act, 1986. Retrieved March 10, 2021 from India Code https://www.indiacode.nic.in/bitstream/123456789/13112/1/08_environment_ protection_act_1986.pdf Grottera, C., Pereira Jr, A. O., & Rovere, E. L. (2015). Impacts of carbon pricing on income inequality in Brazil. Climate and Development. Gupta, S. (2002). Environmental benefits and cost savings through market based instruments: An application using state level data from India. Bangalore. Karpagam, M., Thiyagarajan, S., & Jaikumar, G. (2012). An appraisal of India’s policy to control industrial water pollution. International Journal of Environment and Development, 9(1), 45—61. Mandal, K., Rangarajan, R., & Bandopadhyay, C. (2013). Fiscal instruments for environment and climate change: Experience from Indian States. Mikic, M., & Gilbert, J. (2007). In Trade statisticsin policymaking. United Nations. MoEF. (2009). In State of environment report India. Government of India. Nihal. (2013). Mininig in bellary-A policy analysis. Retrieved October 6, 2014 from http://adrindia. org/sites/default/files/EPW_Mining_Article.pdf OECD. (2002). In Environmentally related taxes in OECD Countries: Issues and strategies. Paris: OECD. OECD. (2006). In The political economy of environmentally related taxes. France :OECD. Paliwal, A., & Goyal, A. (2013, October 5). Crores to Gamble. Retrieved October 5, 2015 from Down to Earth: http://www.downtoearth.org.in/coverage/crores-to-gamble-41356 Pandey, R. (2005). Estimating sectoral and geographical industrial pollution inventories in India: Implications for using effluent charge versus regulation. Journal of Development Studies, 33–61. Pigou, A. C. (1920). In The Economics of Welfare (Vol. 4). Macmillan and Co. Rosencranz, A., Divan, S., & Noble, M. L. (1991). In Environmental law and policy in India: Cases materials and statutes. Bombay: N.M Tripathi Pvt Ltd. Sahu, G. (2007). In Environmental Governance and role of judiciary in India. Thesis Submitted to University of Mysore. Sandmo, A. (1975). Optimal taxation in the presence of externalities. Swedish Journal of Economics, 77, 86—98. Smith, A. (1904). In E. Cannan (Ed.), An inquiry into the nature and causes of the wealth of nations (5th ed.,) Methuen & Co., Ltd. Srivastava, D. K., & Kumar, K. K. (2014). Environment and fiscal reforms in India. New Delhi: SAGE. Verma, R. (2016). Ecotaxes: A comparative study of India and China. ISEC Working Paper Series, WP353. World Bank. (1999). Annual Report, World Bank. World Bank. (2014). India: Green growth—Overcoming environment challenges to promote development. World Bank

Appendix A

Analysis of Major Environmental Laws and Acts in India

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8

241

1

General

S. No.

The Environment (Protection) Act

Name

1986

Year

1. Protect and improve environmental quality 2. Control and reduce pollution from all sources 3. Prohibit or restrict the setting and/or operation of any industrial facility on environmental goods

Focus

Shortcomings Execution

Rosencranz et al. (1991): NA 1. There is not much difference between the Water Act, Air Act and the Environmental (Protection) Act 2. Environmental (Protection) Rules of 1986 do not have any rule that would make polluters publish information of their pollution levels 3. Schedule III of EPA provides standards for noise pollution in the ‘silence zone’ which are 50 and 40 dB levels in the daytime and night-time, respectively. But this is contradictory as in the silence zone usage of vehicular horns, loudspeakers and crackers is prohibited 4. Public under Rule 5 can only challenge industries’ location in the case where the industries are situated in the ‘notified’ areas but not otherwise. Thus, this limits the power of the citizens to access their right to a clean air 5. Though EPA levies higher penalties than other acts, Section 24 nullifies this power. It says, in the cases of other acts also levying penalties under the same offence committed, then fine has to be levied in accordance with other acts (Divan & Rosencranz, 2001)

Design

(continued)

242 Appendix A: Analysis of Major Environmental Laws and Acts in India

Name

1991—The Public Liability Insurance Act and Rules and Amendment

The National Environmental Tribunal Act

The National Environment Appellate Authority Act

National Green Tribunal Act

S. No.

2

3

4

5

(continued)

2010

1997

1995

1991

Year

Shortcomings Design

1. Section 11 of the act has following problems (Divan & Rosencranz, 2001): i. It restricts the appellate jurisdiction only in the cases of an objection against the environmental clearance given, but it does not entertain an objection in the cases of clearance not provided ii. It stipulates a time frame of an objection filed within 30 days of the clearance order, but it does not make mandatory for publishing environmental clearance order

NA

To provide establishment of National Green NA Tribunal for (NGT Act, 2010): A. effective and expeditious disposal of case relating to environmental protection, conservation of forests and other natural resources, B. enforcement of legal right relating to environment and C. for giving relief and compensation for damages to persons and property

To hear appeals with respect to restrictions of areas in which classes of industries, etc., are carried out or prescribed subject to certain safeguards under the EPA

To award compensation for damages to persons, property and the environment arising from any activity involving hazardous substances

To provide for public liability insurance for 1. Utilisation of the Environmental Relief the purpose of providing immediate relief Fund created under the act is unclear to the persons affected by accident while handling any hazardous substance

Focus Execution

(continued)

1. In D. B. Nevatia v State of Maharashtra (2013), the State Pollution Board delayed the meeting for framing regulations for an year, thus notwithstanding the NGT’s ruling 2. Even though Section 26 of Chapter IV of the act gives power for levying penalty on the offenders who do not comply with the ruling of the tribunal, still no penalty is imposed on the government and their agencies for non-compliance

Rosencranz et al. (2009) 1. No technical members in the composition of NEAA led to lack of technical expertise in the judgement and also non-impartial judgements 2. Chair and vice-chairpersons have not been appointed since 2000 and 2005, respectively 3. Inconsistency in consideration of various rules

1. This act was never implemented

NA

Appendix A: Analysis of Major Environmental Laws and Acts in India 243

The Air (Prevention and Control of Pollution) Act

1981

Provides for the control and abatement of air pollution. It entrusts the power of enforcing this act to the CPCB

‘To establish a framework with governing principles for protection, conservation and regulation of waters’ (National Water Framework Act, 2013)

Provides for the levy and collection of cess or fees on water-consuming industries and local authorities

Establishes an institutional structure for preventing and abating water pollution. It establishes standards for water quality and effluent. Polluting industries must seek permission to discharge waste into effluent bodies. The Central Pollution Control Board (CPCB) was constituted under this act

Focus

Source http://edugreen.teri.res.in/explore/laws.htm and as mentioned in the table

9

Air

The National Water Framework Act (Draft)

8

2013

The Water 1977 (Prevention and Control of Pollution) Cess Act

7

Year

The Water 1974 (Prevention and Control of Pollution) Act

Name

6

Water

S. No.

(continued) Shortcomings

NA

NA

Murty and Kumar (2011): 1. Aim is to generate revenue than to reduce its industrial consumption 2. Focuses majorly on the control of industrial water pollution 3. Tax rate is way below the optimum level for various pollutants when compared with the prevailing rates (Murty & Kumar, 2004, Gupta et al., 1989 in Murty & Kumar, 2011) CAG (2011): 4. The max. penalty levied is non-deterrent for the offenders

CAG (2011): 1. Concerns only with reduction of pollution of water bodies and not with their restoration 2. The penalty is non-deterrent 3. In case of violation, Section 49 gives public right to approach Court but its access is debatable

Design

NA

NA

CAG (2011): 1. Failure of the state in strictly enforcing the act

CAG (2011): 1. Failure of the state in strictly enforcing the act

Execution

244 Appendix A: Analysis of Major Environmental Laws and Acts in India

Appendix B

Analysis of National Green Tribunal Act, 2010, Using a Brief Literature

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8

245

Inadequate Resources: ‘National Green Tribunal should be equipped with all the resources required for scrutinizing and reviewing petitions and investigating the intentions of petitioners who seek its attention’ (Rosencranz & Sahu, 2014)

1 insightsonindia.com/2016/06/13/insights-editorial-one-institution-time

‘its five benches have wide ranging powers to adjudicate upon any dispute that involves questions of importance to the environment’ (Rosencranz & Sahu, 2014)

‘the NGT, with only It does not cause two judicial members, delay in resolving the is an independent cases before it statutory panel and consists of eight experts from the fields of physics, chemistry, botany, zoology, engineering, environmental economics, social sciences and forestry’ (Rosencranz & Sahu, 2014)

‘The technical expertise has exponentially strengthened the environmental protection regime in the country which would also ensure objectivity’1

‘NGT and its four regional offices ensures easy accessibility & less cost’ (Rosencranz & Sahu, 2009)

Independence from political constraints

Time limit

Available resources

Objectivity of members

Accessibility

Power

Execution parameters

Design parameters

In D. B. Nevatia v State of Maharashtra: ‘while the NGT wanted the pollution regulators to frame guidelines for sirens and multi-tone horns at the earliest opportunity, the pollution regulators failed to respond within the stated timescale. Instead, they delayed their first meeting for a year. This finally took place on 14 January 2014’ (Gill, 2014)

Enforcement of the order

(continued)

‘NGT and its four regional offices ensures easy accessibility & less cost’ (Rosencranz & Sahu, 2009)

Costs of litigation

Both (design and execution)

246 Appendix B: Analysis of National Green Tribunal Act, 2010, Using a Brief Literature

‘the ministry asked – the tribunal to limit its jurisdiction, but the proposal was rejected’ (Rosencranz & Sahu, 2014)

–

2 insightsonindia.com/2016/06/13/insights-editorial-one-institution-time

Source As mentioned in the table

‘The courts have gone to the people rather than expecting the people to travel to the courts’ (Gill, 2014)

‘a number of decisions, the Tribunal has proved its efficiency in resolving environmental disputes’2

–

–

Enforcement of the order

–

–

‘One feature of the – NGT is its ability both to fast track and to decide cases within six months of application or appeal. This contrasts with the historic and contemporary levels of delay’ (Gill, 2014 and Moog, 1992, in Gill, 2014)

‘The benefit of this multi-faceted, multi-skilled body… is [sic] to apply complex laws and principles in a uniform and consistent manner’ (Gill, 2014)

‘The PILs and the relaxation of the conditions of locus standi by the NGT/ its regional benches shows accessibility to the NGT’ (Rosencranz & Sahu, 2014)

Independence from political constraints

Time limit

Available resources

Objectivity of members

Accessibility

Power

Execution parameters

Design parameters

(continued)

–

–

Costs of litigation

Both (design and execution)

Appendix B: Analysis of National Green Tribunal Act, 2010, Using a Brief Literature 247

Appendix C

A National Accounting Matrix Including Environmental Accounts (NAMEA) For The Netherlands, 1 Account 1-1 0 in Million Guilders

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8

249

2.a

3

4

5

Production (branches of industries)

Income generation (primary input categories)

Income distribution and use (sectors)

2

Consumption of households (purposes)

2.b

1.b

Other goods and services

Other purposes

1.a

Environmental cleansing services

Environment

1

Goods and services (product groups)

Account (classification)

Output, basic prices

Trade and transport margins

1

7627

1a

994,861

1b

Goods and services (product groups)

2

Household consumption

710

24

2a

Environment

321,727

2b

Other purposes

Consumption of households (purposes)

Net domestic product, factor cost 429,115

501,763

6305

Intermediate consumption

3

Production (branches of industries)

Net national generated income factor cost 430,650

4

Income generation (primary input categories)

Primary distribution of income (institutional sectors)

Property income and current transfers 573,920

321,727

734

Consumption of households

76,837

1410

Consumption of government

5

Income distribution and use (sectors)

114,818

Gross capital formation

6

Capital

Taxes

VAT not handed over to the government

8

3982

8a

137,516

1880

8b

Other taxes

(continued)

Environmental taxes

Taxes (tax categories)

250 Appendix C: A National Accounting Matrix Including Environmental Accounts …

8b

10

Rest of the World (capital)

8a

Environmental taxes

9

8

Taxes (tax categories)

Rest of the World (current)

7

Financial balance

Other taxes

6

Capital

Account (classification)

(continued)

Import (oil)

Taxes’ less subsidies on products

112

267,386

45,787

907

Goods and services (product groups)

Environment

Other purposes

Consumption of households (purposes)

2887

855

Other taxes’ less subsidies on production

Consumption of fixed capital 81,560

Production (branches of industries)

Wages to the Rest of the World 1170

Income generation (primary input categories)

Primary distribution of income (institutional sectors)

Property income and current transfers to the Rest of the World 67,720

88,730

2220

Taxes on income and wealth

Net saving 72,960

Income distribution and use (sectors)

Capital transfers to the Rest of the World 2350

992

VAT on land and taxes on investment

Net lending to the Rest of the World 17,340

Capital

Taxes to the Rest of the World 160

Other taxes

(continued)

Environmental taxes

Taxes (tax categories)

Appendix C: A National Accounting Matrix Including Environmental Accounts … 251

11f

11g

11h

11i

11j

11k

SO2

NH3

P

N

Waste

Gas

12a

11e

NOx

Greenhouse effect (GWP)

11d

CFCs and halons

11l

11c

CH4

12

11b

N2 O

Global environmental themes

11a

CO2

Oil

11

Substances (CFCs and halons in 1000 kg, gas in pj, oil in tj and other substances in million kg)

Account (classification)

(continued)

Goods and services (product groups)

Environment

Other purposes

Consumption of households (purposes)

138

2595

2645

Absorption of substances in production

Production (branches of industries)

Income generation (primary input categories)

Primary distribution of income (institutional sectors)

Income distribution and use (sectors)

188,890

Environmental indicators

Capital

Other taxes

(continued)

Environmental taxes

Taxes (tax categories)

252 Appendix C: A National Accounting Matrix Including Environmental Accounts …

2.a

2

1.b

1.a

1

1,308,941

Consumption of households

293,086

Export (fob)

10

7739

9

Supply, market prices

321,727

Other purposes

Costs, basic prices 1,002,488

Production (branches of industries)

Allocation of generated income 431,820

Income generation (primary input categories)

Primary distribution of income (institutional sectors)

Current outlays 135,500

Income distribution and use (sectors)

Capital outlays 135,500

−759

23,761

287

156

3816

Capital

Emission of pollutants from households

11

36,372

11a

CO2

2

11b

N2 O

4

11c

CH4

656

11d

CFCs and halons

156

11e

NOx

5

11f

SO2

Substances (CFCs and halons in 1000 kg, gas in pj, oil in tj and other substances in million kg)

734

Environment

Consumption of households (purposes)

Rest of the World (capital)

14

Total

Goods and services (product groups)

Rest of the World (current)

13c

13b

Eutrophication (EEQ)

13d

13a

Acidification (AEQ)

Loss of natural resource (PJ)

13

National environmental themes

Waste (KG)

12b

Ozone layer depletion (ODP)

Account (classification)

(continued)

11g

NH3

15

11h

P

Tax receipts

115

11i

N

6663

11j

Waste

3982

11l

Oil

139,558

Other taxes

(continued)

11k

Gas

Environmental taxes

Taxes (tax categories)

Appendix C: A National Accounting Matrix Including Environmental Accounts … 253

Trans boundary pollution to the Rest of the World

11

488

159

113

24

581

11e

11f

11g

11h

11i

11d

11c

11b

11a

Current external balance − 18,710

1050

10

9

8b

8a

8

7

Taxes from the Rest of the World

Property income and current transfers from the Rest of the World 50,190

5

6

Wages from the Rest of the World 820

4

3

2.b

Rest of the World (current)

(continued)

Net lending from the Rest of the World −17,340

Capital transfers from the Rest of the World 980

Rest of the World (capital)

Transborder pollution from the rest of the world

Emission of pollutants from production

128,040

CO2

59

N2 O

724

CH4

4375

CFCs and halons

93

397

NOx

99

191

SO2

Substances (CFCs and halons in 1000 kg, gas in pj, oil in tj and other substances in million kg)

27

220

NH3

20

155

P

415

1257

N

19,742

Waste

138

Oil

(continued)

1836

Gas

254 Appendix C: A National Accounting Matrix Including Environmental Accounts …

61

13

13a

Acidification

National environmental themes

164,412

5031

13b

13c

Waste

CFCs and halons

Eutrophication

726

CH4

295

SO2

247

NH3

190

P

13d

Loss of natural resources

646

NOx

14

Total

1787

N

26,405

Waste

1836

Gas

Generated income 431,820 Current receipts 1,206,258 Capital receipts 135,500

4

5

6

(continued)

321,727 Production, basic prices 1,002,488

3

734

2.a

2.b

1,308,941 Consumption of households

2

138

Oil

1.b

7739

12b

Ozone layer depletion

Origin of substances

N2 O

1.a

12a

Greenhouse effect

Capital receipts from the Rest of the World −16,360

CO2

Substances (CFCs and halons in 1000 kg, gas in pj, oil in tj and other substances in million kg)

Commodity use, market prices

12

Global environmental themes

Current receipts from the Rest of the World 338,436

Rest of the World (capital)

1

13d

13c

13b

13a

13

12b

12a

12

11l

11k

11j

Rest of the World (current)

(continued)

Appendix C: A National Accounting Matrix Including Environmental Accounts … 255

Total

728

11b

11c

Theme equivalents (global) 188,890 3816 Theme equivalents (national) 156 287

12a

12b

13

13a

13b

(continued)

136

12

1836

25,405

1787

190

247

295

646

5031

728

61

11l

11k

11j

1206

11i

134

11g 166

135

11f

11h

158

11e

−759

61

11a

23,780

164,412

11

5031

Destination of substances

Allocation to global environmental themes

10

11d

Capital payments to the Rest of the World −16,360

9

164,412

139,558 Current payment to the rest of the world 338,436

8b

Allocation to national environmental themes (accumulation of substances)

Loss of natural resources

3962

Waste

Tax payments

Eutrophication

8a

Acidification

National environmental themes

0

Ozone layer depletion

8

Greenhouse effect

7

Global environmental themes

(continued)

256 Appendix C: A National Accounting Matrix Including Environmental Accounts …

Source Borrowed from Haan and Keuning (1996)

188,890

3816

Theme equivalents (national)

156

287

Eutrophication

23,760

Waste

−759

Loss of natural resources

Total

−759

Theme equivalents (global)

Acidification

National environmental themes

23,760

Ozone layer depletion

13d

Greenhouse effect

13c

Global environmental themes

(continued)

Appendix C: A National Accounting Matrix Including Environmental Accounts … 257

Appendix D

Consolidated Social Accounting Matrix Including Environmental Accounts for the Netherlands 1990 (account 1–12 in million guilders)—Keuning and Timmerman (1995)

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8

259

1.a

2.a

2.b

3

Environment

Other purposes

Production (branches of industries)

Generation of 4 income (primary input categories)

2

Consumption of households (purposes)

Other goods and 1.b services

Environmental cleansing services

Goods and 1 services (product groups)

Account (classification)

Output, basic prices

Trade and transport margins

6342

946,428

Consumption of households

2

1.b

1

1.a

Consumption of households (purposes)

Goods and services (product groups)

693

24

2.a

Environment

Other purposes

302,379

2.b

Gross domestic product, factor cost 466,663

477,664

5174

Intermediate consumption

3

Production (branches of Industries)

4

Generation of income (primary input categories)

5

(continued)

Primary distribution of income (institutional sectors)

260 Appendix D: Consolidated Social Accounting Matrix Including Environmental …

5

6

7

8

9

10

10a

Primary distribution of income (institutional sectors)

Secondary distribution of income (institutional sectors)

Use of disposable income (institutional sectors)

Capital

Financial balance

Tax account (categories of taxes and subsidies)

Environmental taxes

Account (classification)

(continued)

Taxes’ less subsidies on products

Goods and services (product groups)

609

Consumption of households (purposes)

819

Other taxes’ less subsidies on production

Production (branches of Industries)

Primary distribution of income (institutional sectors)

Consumption of fixed capital 582,30

(continued)

Net national income, market prices 457,129

Net national Property generated income income factor cost 205,490 409,770

Generation of income (primary input categories)

Appendix D: Consolidated Social Accounting Matrix Including Environmental … 261

CO2

13d

13e

13f

13g

13h

13i

Halons

NOx

SO2

NH3

P

N

13b

13a

Substances (CFCs and halons in 1000 kg, gas in pj, oil in tj and other substances in million kg)

13c

13

Rest of the World (capital)

CH4

12

Rest of the World (current)

N2 O

10b

11

Other taxes

Account (classification)

(continued)

Import of goods and services (cif)

Goods and services (product groups)

84

44,584 255,830

Consumption of households (purposes)

Absorption of substances in production

2450

Production (branches of Industries)

Primary distribution of income (institutional sectors)

(continued)

Compensation of Property employees to income to RO Rest of the World 50,090 1130

Generation of income (primary input categories)

262 Appendix D: Consolidated Social Accounting Matrix Including Environmental …

14a

Greenhouse effect (GWP)

15a

15b

Acidification (AEQ)

Eutrophication (EEQ)

Natural resource 15d depletion (PJ)

Waste 15c production (KG)

15

National environmental themes

Ozone layer 14b depletion (ODP)

13l

14

Global environmental themes

Gas

Oil

13j

13k

Waste

Account (classification)

(continued)

Goods and services (product groups)

Consumption of households (purposes)

150

2310

2829

Production (branches of Industries)

Generation of income (primary input categories)

(continued)

Primary distribution of income (institutional sectors)

Appendix D: Consolidated Social Accounting Matrix Including Environmental … 263

1

1.a

1.b

2

2.a

2.b

Goods and services (product groups)

Environmental cleansing services

Other goods and services

Consumption of households (purposes)

Environment

Other purposes

302,379

717

Consumption of households

73,567

1228

Consumption of government

7

717

113,406

Gross capital formation

8

Capital

Consumption of households

6

1,247,450

Use of disposable income (institutional sectors)

6426

Consumption of households (purposes)

Secondary distribution of income (institutional sectors)

Supply, purchasers prices

Total

Account (classification)

Goods and services (product groups)

Account (classification)

(continued)

10

Tax account (categories of taxes and subsidies)

302,379

10.a

Environmental taxes

Input, basic prices 948,960

Production (branches of Industries)

Primary distribution of income (institutional sectors)

10.b

Other taxes

(continued)

Exports of goods and services (fob)

11

Rest of the World (current)

Allocation of Destination of generated income quid-pro-quo 469,130 income 712,710

Generation of income (primary input categories)

264 Appendix D: Consolidated Social Accounting Matrix Including Environmental …

8

9

Capital

Financial balance

Net lending of the total economy 18,550

7

Use of disposable income (institutional sectors)

Net disposable national income 453,876

Taxes on income and wealth and social contribution

VAT not handed over to the government

Tax account (categories of taxes and subsidies)

6

Net national saving 75,980

Capital

Secondary distribution of income (institutional sectors)

Unrequited current transfers n.e.c 237,425

Use of disposable income (institutional sectors)

Taxes’ less subsidies on production

4

Generation of income (primary input categories)

Secondary distribution of income (institutional sectors)

Primary distribution 5 of income (institutional sectors)

3

Production (branches of industries)

Account (classification)

(continued)

2030

1428

175,220

46,562

1614

(continued)

Unrequited current transfers from Rest of the World 9510

Property income from Rest of the World 49,460

Compensation of employees from Rest of the World 850

Rest of the World (current)

Appendix D: Consolidated Social Accounting Matrix Including Environmental … 265

13d

13e

13f

Halons

NOx

SO2

13b

13a

CO2

13c

13

Substances (CFCs and halons in 1000 kg, gas in pj, oil in tj and other substances in million kg)

CH4

12

Rest of the World (capital)

N2 O

10b

11

Rest of the World (current)

10a

Environmental taxes

Other taxes

Taxes on income and wealth and social contributions

10

Tax account (categories of taxes and subsidies)

Unrequited current transfers to Rest of the World 13,700

174,283

2030

Secondary distribution of income (institutional sectors)

Account (classification)

(continued) Use of disposable income (institutional sectors)

Unrequited capital transfers to Rest of the World 2090

1054

VAT on land and other levies on investment

Capital

Taxes paid to the Rest of the World

Tax account (categories of taxes and subsidies)

130

164

492 (continued)

Trans boundary pollution to the Rest of the World

Balance of payment of the Rest of the World −19,750

1070

Taxes received from the Rest of the World

Rest of the World (current)

266 Appendix D: Consolidated Social Accounting Matrix Including Environmental …

14a

14b

15

15a

15b

15c

Greenhouse effect (GWP)

Ozone layer depletion (ODP)

National environmental themes

Acidification (AEQ)

Eutrophication (EEQ)

Waste production (KG)

13k

Gas

13l

13j

Waste

14

13i

N

Global environmental themes

13h

P

Oil

13g

NH3

Account (classification)

(continued)

Secondary distribution of income (institutional sectors)

Use of disposable income (institutional sectors)

22,890

294

160

4756

182,591

Environmental indicators

Capital

Tax account (categories of taxes and subsidies)

584

25

110

(continued)

Rest of the World (current)

Appendix D: Consolidated Social Accounting Matrix Including Environmental … 267

7

6

5

4

3

2.b

2.a

2

1.b

1.a

1

Total

Capital expenditure 135,100

Emission of pollutants from industries

Emission of pollutants from households

13

Current expenditure 453,880

7438

Capital

12

Destination of secondary income 881,320

Use of disposable income (institutional sectors)

Substances (CFCs and halons in 1000 kg, gas in pj, oil in tj and other substances in million kg)

15d

Secondary distribution of income (institutional sectors)

Rest of the world (capital)

Natural resource depletion (PJ)

Account (classification)

(continued)

223,522

2

13b

690

3

13c

5331

800

13d

394

164

13e

202

6

13f

213

13g

120

6783

13j

Waste

(continued)

163 1258 18,936

15

13h 13i

N

Current receipts from the Rest of the World 320,880

Rest of the World (current)

N2 O CH4 Halons NOx SO2 NH3 P

124,579 59

33,919

13a

CO2

Taxes’ less 3458 subsidies and social contribution

Tax account (categories of taxes and subsidies)

268 Appendix D: Consolidated Social Accounting Matrix Including Environmental …

13l

13k

13j

13i

13h

13g

13f

13e

13d

13c

13b

13a

13

12

11

10b

10a Transboundary pollution from the Rest of the World

Net lending of the Rest of the World − 18,550

9

10

Unrequited capital transfers from Rest of the Other changes in natural resources World 890

Substances (CFCs and halons in 1000 kg, gas in pj, oil in tj and other substances in million kg)

8

Rest of the world (capital)

(continued)

96

111

27

20

(continued)

417

Appendix D: Consolidated Social Accounting Matrix Including Environmental … 269

14a

14b

15

15a

Acidification

15b

Eutrophication

693

15c

Waste

6131

654

240

15d

16

Total

198 1795 25,719

Natural resource depletion

319

717

2

2.a

(continued)

1,247,450 Final consumption of households

1.b

6426

14

Ozone layer depletion

158,498 61

1.a

13l

13k

Greenhouse effect

National environmental themes

Origin of substances

Use purchaser prices

Oil

Gas

Global environmental themes

Capital flows from the Rest of the world − 17,660

Substances (CFCs and halons in 1000 kg, gas in pj, oil in tj and other substances in million kg)

1

15d

15c

15b

15a

15

14b

14a

14

Rest of the world (capital)

(continued)

270 Appendix D: Consolidated Social Accounting Matrix Including Environmental …

Quid-pro-quo income 712,710 Secondary income 881,320 Disposable income 453,880 Capital income 135,100

5

6

7

8

3458 223,522 Current payment to the Rest of the World 320,880

10a

10b

11

(continued)

Taxes’ less subsidies and social contributions

10

9

Generated income 469,130

4

9748

302,379

Total

Output, basic prices 948,960

National environmental themes

3

Global environmental themes

2.b

(continued)

Appendix D: Consolidated Social Accounting Matrix Including Environmental … 271

61

693

13b

13c 6131

22,890 −150

13l

14

7438

13k

13j

1211

13i

130

13g

173

155

13f

13h

162

13e

13d

158,498

13a

Allocation to national environmental themes (emission of substances)

(continued)

Theme equivalents (global)

9748

25,719

1795

198

240

319

654

6131

693

61

158,498

Destination of substances

Allocation to global environmental themes

Total

13

National environmental themes

Capital flows to the Rest of the World −17,660

Global environmental themes

12

(continued)

272 Appendix D: Consolidated Social Accounting Matrix Including Environmental …

294

22,890

7438

Institutions

Factors

Activities

6

5

Environment

Household

3

4

Labour

2

Abatement

Capital

1

Production

2

1

Environmental tax/fee

Factor payment

Pollution clean-up payment

Intermediate input (use)

Labour

Production

Factor payment

3

Factors Abatement

Activities

4

Capital

5

Environment

(continued)

Household purchase

Household consumption

6

Household

Institutions

7438 160

15d Theme equivalents (national)

22,890

15c 4756

294

15b

182,591

160

15a

Theme equivalents (global)

Theme equivalents (national)

15

9748

4756

Total

182,591

National environmental themes

14b

Global environmental themes

14a

(continued)

Appendix D: Consolidated Social Accounting Matrix Including Environmental … 273

Factors

Activities

3

4

Capital

2

Abatement

Labour

1

Capital account

Total value added

9

11

12

Total sales

13

Total

15

(continued)

Pollution Resource generated in depletion production and consumption

14

Resources

Total household expenditure

Transfer to Rest of the World

Household saving

Household subsidies

Income and environment tax

Institutions

Pollutants

Environment tax transfer

Factor Total value payment added from Rest of the World

Non-environment Environment Exports investment investment

10

8

Total cost

Payment to Rest of the World

7

13

Total

Imports

Abatement subsidies

Allocation matrix

Factors

Government Government Non-environment Environment Rest of the subsidies World

12

Rest of the World

Consumption of fixed capital

Production subsidies

Production tax and tariff

Activities

Enterprise

11

Environment

9

Government subsidies

10

8

Government

Non-environment

7

Enterprise

Production

Capital account

(continued)

274 Appendix D: Consolidated Social Accounting Matrix Including Environmental …

Environment

Capital account

8 Corporate tax

9

Government

Government subsidies

Total investment

13 Total Total enterprise government expenditure expenditure

Total

Environmental investment Balance with Rest of the World

11

Government saving

Capital account

Rest of the World 12

Environment

Non-environment 10 Enterprise saving

7

6 Transfer to household

5

Enterprise

Institutions Household

(continued)

Total environment investment

Rest of the World expenditure

Saving by Rest of the World

Rest of the World income

Total environment investment

Total saving

Government revenue

International Corporate transfer income

Household income

Appendix D: Consolidated Social Accounting Matrix Including Environmental … 275

Appendix E

Framework of an Environmentally Extended Social Accounting Matrix—Xie (2000)

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8

277

Capital account

Institutions

Factors

Activities

12

13

Rest of the World

Total

Enterprise

11

Environment

9

Government subsidies

10

8

Government

Non-environment

6

7

Household

5

Environment

Enterprise

3

4

Labour

2

Abatement

Capital

1

Production

Factor payment

Capital account

Total value added

Payment to Rest of the World

Allocation matrix

Capital 4

Government Government Non-environment Environment Rest of the subsidies World

Total cost

Imports

Consumption of fixed capital

Production subsidies

Production tax and tariff

Environmental tax/fee

Factor payment

Pollution clean-up payment

Abatement subsidies

1 Intermediate input (use)

Labour

Abatement 2

Production 3

Factors

Activities Environment

Total

Household

(continued)

Resources

Total household expenditure

Transfer to Rest of the World

Household saving

Household subsidies

Income and environment tax

Household purchase

Household consumption

6

Pollutants

Environment tax transfer

5

Institutions

278 Appendix E: Framework of an Environmentally Extended Social Accounting …

4

5

Capital

Environment

Capital account

7

8 Corporate tax

9

Government

Government subsidies

Environment

11

Non-environment 10 Enterprise saving

7

Enterprise

6 Transfer to household

3

2

Abatement

Labour

1

Production

Institutions Household

Factors

Activities

(continued)

Government saving

8

9

11

12

Environmental investment

13 Total sales

Saving by Rest of the World

Total environment investment

Total saving

Government revenue

International Corporate transfer income

Household income

Factor Total value payment added from Rest of the World

Non-environment Environment Exports investment investment

10

Capital account 15

(continued)

Pollution Resource generated in depletion production and consumption

14

Appendix E: Framework of an Environmentally Extended Social Accounting … 279

(continued)

Total investment

Total

13 Total Total enterprise government expenditure expenditure

Balance with Rest of the World

Rest of the World 12

Capital account

Total environment investment

Rest of the World expenditure

Rest of the World income

280 Appendix E: Framework of an Environmentally Extended Social Accounting …

Appendix F

Environmentally Extended Social Accounting Matrix for India-2007–08 (Monetary Transactions in Rs. Lakhs and Others in Physical Units)

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 R. Verma, Fiscal Control of Pollution, India Studies in Business and Economics, https://doi.org/10.1007/978-981-16-3037-8

281

0

3

42,417

86,397

Crude petroleum (oil)

MIN

FBV

TEX

Wood and 134 wooden product (WOD)

0

Natural gas

7

Forestry and logging

1408

Animal 974,584 husbandry and livestock (ANH)

18

39

85,273

CER

Coal and lignite

174,556

1335

Cash crop (CAS)

Fishing

232,797

214,365

Wheat

774

41,442

23,398

17

0

0

104

8108

12,653

1,863,387

45,702

6,144,819

Paddy

Wheat

Paddy

Sectors

4289

1206

70,575

0

0

0

230

5

0

1,430,941

39,121

904,549

472

3869

Cash crop (CAS)

461

52,997

15,197

8

0

0

50

3455

16

1,767,950

2,342,103

36,870

592,228

860,739

CER

0

165,988

697,480

0

0

0

0

0

6974

21,488

5,392,202

55,130

78,834

242,090

Animal husbandry and livestock (ANH)

394

55,156

0

0

0

0

0

0

92,627

0

2320

0

0

0

Forestry and logging

0

0

0

0

0

0

2595

166,903

23,113

0

0

0

0

119,274

Fishing

17,327

3461

0

0

0

0

103,429

0

0

0

0

0

0

0

Coal and lignite

1

0

0

0

0

5

0

0

1550

1596

2

0

0

1236

Natural gas

(continued)

0

8191

0

0

12,994

0

0

0

0

0

0

0

0

0

Crude petroleum (oil)

282 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

110,037

524,654

107,917

109,369

281,879

895,992

0

0

52,037

3258

164,835

11,014

1916

78,893

310,134

32,906

3110

PET

Fertiliser (FER)

Cement (CEM)

Metals (MET)

MCH

OMN

Construction (CON)

Thermal (NHY) 380,155

78,194

CHM

Hydro (HYD)

Nuclear (NUC)

Water supply (WAT)

Final RLY

Final LTR

Final SEA

Final AIR

2623

11,924

139,034

17,998

1568

15,200

3118

43,445

0

0

599,423

112,828

97,968

3556

1394

Paper, paper products (PAP)

Wheat

Paddy

Sectors

(continued)

3031

8205

228,938

17,681

1861

1964

13,951

67,828

97,534

4405

9818

0

0

906,854

135,029

89,456

3925

Cash crop (CAS)

4882

15,726

327,133

37,636

2398

2532

17,980

87,410

375,904

24,812

83,852

0

0

1,114,803

466,068

72,429

2423

CER

14,434

9540

652,925

29,117

0

24

166

808

8389

0

15,853

0

0

0

0

46,047

0

Animal husbandry and livestock (ANH)

512

2443

376,411

13,421

623

39

251

1187

74,384

115,130

43,484

553

15

2948

139,410

46,009

37,048

Forestry and logging

0

285

1338

49,222

1330

0

5

41

199

0

154,281

0

2314

0

0

62,144

4867

Fishing

3677

4307

166,705

44,837

1184

9746

69,202

336,433

15,248

98,610

164,776

0

0

0

113,453

150,378

3665

Coal and lignite

1542

824

23,479

9888

961

4408

31,291

152,142

22,666

19,237

56,830

0

0

0

13,949

30,802

325

Natural gas

(continued)

6569

3517

80,254

48,255

4927

811

5753

27,972

229,802

108,866

274,256

0

0

0

101,438

106,156

1667

Crude petroleum (oil)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 283

382,342

3,106,408

905,786

0

0

0

0

0

0

0

0

0

0

Skilled labour

Capital

Land

RNASE

AGL

RNAL

RASE

ROH

USE

USC

UCL

UOH

Pvt.

0

0

0

0

0

0

0

0

0

0

676,669

2,322,238

285,825

838,577

1,121,747

589,837

Semi-skilled labour

1,192,592

SER

0

2,742,743

0

Medical and health (HLM)

Wheat

Unskilled labour 3,668,909

Paddy

Sectors

(continued)

0

0

0

0

0

0

0

0

0

0

1,025,700

3,979,934

477,235

1,400,151

4,579,493

678,468

0

Cash crop (CAS)

0

0

0

0

0

0

0

0

0

0

2,590,838

9,354,985

1,138,703

3,340,824

10,926,866

1,394,798

0

CER

0

0

0

0

0

0

0

0

0

0

0

7,834,948

749,292

2,198,333

7,190,111

3,398,264

0

Animal husbandry and livestock (ANH)

0

0

0

0

0

0

0

0

0

0

0

3,737,486

325,308

954,418

3,121,625

390,627

0

Forestry and logging

0

0

0

0

0

0

0

0

0

0

0

0

1,503,818

176,815

518,755

1,696,700

77,007

Fishing

0

0

0

0

0

0

0

0

0

0

0

2,372,038

402,194

358,521

368,244

323,415

0

Coal and lignite

0

0

0

0

0

0

0

0

0

0

0

0

821,333

139,285

124,161

127,528

47,941

Natural gas

(continued)

0

0

0

0

0

0

0

0

0

0

0

2,106,332

357,200

318,413

327,049

240,242

0

Crude petroleum (oil)

284 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

−1,055,798

0

42

19,277,877

Ind-tax

Capital a/c

ROW

Total

Grassland (Mha)

Crop land (Mha)

Forest land (Mha)

Coal (mt)

Oil (mt)

Wastewater disposed

N2 O (000’tons)

CH4 (000’tons)

CO2 (000’tons)

0

−713,060

0

Govt.

11,193,736

256,637

0

0

0

Pub.

Wheat

Paddy

Sectors

(continued)

15,948,801

100,421

0

−338,341

0

0

Cash crop (CAS)

37,530,674

1,034,630

0

−559,034

0

0

CER

28,027,922

49,391

0

−829,903

0

0

Animal husbandry and livestock (ANH)

10,150,167

514,837

0

101,500

0

0

Forestry and logging

0

0

4,594,954

18,663

0

15,283

Fishing

361

7,221,344

2,006,366

0

84,128

0

0

Coal and lignite

0

0

3,451,500

1,797,490

0

21,029

Natural gas

(continued)

34

30,000,977

25,510,069

0

120,243

0

0

Crude petroleum (oil)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 285

59,619

Land degradation (in square Km)

36,952

Wheat

86,711

Cash crop (CAS)

61,535

CER

Animal husbandry and livestock (ANH)

Forestry and logging

Fishing

Coal and lignite

Natural gas

Crude petroleum (oil)

Source Based on author’s calculations using MOEF (2010), Department of Land Resources and National Remote Sensing Centre (2011), Ministry of Statistics and Programme Implementation (2008), DES (2012) and TERI (2009)

Net land degraded (square Km)

Net wastewater disposed (million L/Day)

Net GHG emissions (000’tons)

Paddy

Sectors

(continued)

286 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

30

29

3

6

0

Cash crop (CAS)

CER

Animal husbandry and livestock (ANH)

Forestry and logging

Fishing

425

3774

1888

FBV

TEX

Wood and wooden product (WOD)

696

0

Crude petroleum (oil)

MIN

64

Natural gas

2055

0

Coal and lignite

0

Wheat

MIN

Paddy

Sectors

156,568

84,620

4,678,792

2865

0

8694

23,719

722,800

82,525

1,600,917

4,201,892

7,951,681

742,625

587,171

FBV

13 177

85,161

9,211,011

72,532

5129

171

80,958

58,397

19

13,214

759,128

18,231

3,426,820

TEX

31,748

11,987

2545

427

0

12

13,896

34

892,822

964

2772

590

2

6

Wood and wooden product (WOD)

63,165

48,506

33,338

2444

1

109

84,791

0

510,605

199

20,638

2132

43

356

Paper, paper products (PAP) 6424

241,034

762,929

929,641

117,757

656,331

358,990

162,782

28,835

176,706

287,212

224,270

736,510

11,812

CHM

0

69

1002

3978

6704

348

0

5786

6922

21,333

4037

28,490,475

1,187,193

179,143

PET

5678

4212

11,936

62,419

335,621

260,110

25,015

94

134

51,012

8907

6614

23

11

Fertiliser (FER)

0 0

12,912

15,243

2929

278,414

0

164,156

390,771

0

9

8

57

49

Cement (CEM)

731

890

0

0

(continued)

15,363

20,433

66,239

1,824,624

134

822,126

3,691,116

11

3005

1397

Metals (MET)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 287

1205

2238

Final AIR

276

Water supply (WAT)

Final SEA

2829

Nuclear (NUC)

59,927

20,082

Hydro (HYD)

19,018

97,632

Thermal (NHY)

Final LTR

32,505

Construction (CON)

Final RLY

48,740

OMN

185

Metals (MET)

95,299

568

Cement (CEM)

MCH

0

94,500

Fertiliser (FER)

137,177

1008

PET

MIN

CHM

Paper, paper products (PAP)

Sectors

(continued)

33,603

82,020

1,470,543

98,973

3501

3253

23,098

112,295

270,092

67,391

99,256

2293

281

47,704

299,651

663,768

443,333

FBV

57,091

20,811

2,794,616

91,749

3563

11,985

85,090

413,685

553,966

236,206

526,370

23,505

25

506

424,503

2,908,802

226,465

TEX

9789

8597

135,028

11,950

18

5725

40,663

197,716

3192

38,033

18,497

8549

0

6433

13,061

108,890

48,995

Wood and wooden product (WOD)

5725

8224

293,440

21,147

23

12,350

87,672

426,235

34,383

26,567

28,594

11,798

0

24

89,230

510,064

976,255

Paper, paper products (PAP)

165,824

43,542

2,136,060

198,147

8429

8317

59,044

287,053

373,545

545,438

556,734

421,761

13,471

583,464

1,105,665

17,164,321

1,212,936

CHM

126,622

26,772

336,563

276,935

139

4874

34,601

168,221

37,729

10,185

25,521

10,598

3881

498,811

2,208,661

451,925

14,395

PET

13,690

9473

288,816

37,565

743

6443

45,741

222,383

8656

6513

43,363

556

37

1,445,926

441,874

837,470

371

Fertiliser (FER)

20,252

14,579

229,895

99,814

3

29,299

208,004

1,011,256

15,011

182,363

3303

776

83,645

0

322,124

417,770

24,828

Cement (CEM)

(continued)

203,642

62,385

1,336,061

743,025

203

28,483

202,218

983,126

59,406

1,031,015

448,864

12,716,435

6379

97

1,403,369

533,932

18,168

Metals (MET)

288 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

511,195

Skilled labour

0

0

0

0

0

0

0

0

0

0

0

0

Land

RNASE

AGL

RNAL

RASE

ROH

USE

USC

UCL

UOH

Pvt.

Pub.

3,014,401

455,688

Semi-skilled labour

Capital

253,805

468,045

0

Unskilled labour

MIN

SER

Medical and health (HLM)

Sectors

(continued)

0

0

0

0

0

0

0

0

0

0

0

0

4,373,396

289,356

468,721

957,743

7,154,461

0

FBV

0

0

0

0

0

0

0

0

0

0

0

0

0

5,572,759

599,384

1,594,499

2,218,312

7,177,131

TEX

0

0

0

0

0

0

0

0

0

0

0

0

669,210

26,283

96,306

238,871

341,952

0

Wood and wooden product (WOD) 0

0

0

0

0

0

0

0

0

0

0

0

0

702,813

150,022

119,805

68,497

489,024

Paper, paper products (PAP) 0

0

0

0

0

0

0

0

0

0

0

0

0

8,610,022

1,097,098

872,194

786,637

5,329,084

CHM

0

0

0

0

0

0

0

0

0

0

0

0

0

6,160,109

157,794

90,693

37,232

1,312,856

PET

0

0

0

0

0

0

0

0

0

0

0

0

456,228

93,740

48,502

42,972

407,854

0

Fertiliser (FER)

0

0

0

0

0

0

0

0

0

0

0

0

0

1,055,100

30,398

75,889

222,396

563,798

Cement (CEM)

0

(continued)

0

0

0

0

0

0

0

0

0

0

0

0

7,346,736

764,755

432,506

245,368

6,086,119

Metals (MET)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 289

0

Land degradation (in square Km)

Grassland (Mha)

Crop land (Mha)

Forest land (Mha)

coal (mt)

Oil (mt)

Wastewater disposed

N2 O (000’tons)

CH4 (000’tons)

CO2 (000’tons)

594

4,845,613

10,254,116

Total

0

83,210

MIN

ROW

Capital a/c

Ind-tax

Govt.

Sectors

(continued)

6

38,676,366

1,283,418

0

−416,651

0

FBV

0

7

40,790,440

1,474,563

0

43,890

TEX

3,110,737

90,375

0

34,800

0

Wood and wooden product (WOD) 0

2

5,807,877

800,382

0

179,273

Paper, paper products (PAP) 0

11

57,183,088

8,870,814

0

2,032,255

CHM

0

5

48,739,055

4,986,931

0

1,850,021

PET

6,764,661

1,787,981

0

−254,022

0

Fertiliser (FER)

0

5,671,133

17,727

0

178,356

Cement (CEM)

0

(continued)

14

57,551,857

13,867,466

0

2,586,029

Metals (MET)

290 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

MIN

FBV

TEX

Wood and wooden product (WOD)

Paper, paper products (PAP)

CHM

PET

Fertiliser (FER)

Cement (CEM)

Metals (MET)

Source Based on author’s calculations using MOEF (2010), Department of Land Resources and National Remote Sensing Centre (2011), Ministry of Statistics and Programme Implementation (2008), DES (2012) and TERI (2009)

Net land degraded (square Km)

Net wastewater disposed (million L/Day)

Net GHG emissions (000’tons)

Sectors

(continued)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 291

187,542

TEX

89,495

15,994

FBV

Wood and wooden product (WOD)

135,613

MIN

769

66,840

Crude petroleum (oil)

Natural gas

38

173,582

Coal and lignite

Fishing

16,594

Forestry and logging

1960

22,829

CER

Animal husbandry and livestock (ANH)

8925

Cash crop (CAS)

9

15

Wheat

MCH

Paddy

Sectors

1715

1081

210,861

378,640

179,950

1,564,878

15,558

112,446

734,347

1868

821,212

31,829

27,629

31,196

OMN

1,283,870 1865

340,061 6102

1086 10,116

1,557,405 0

0 33,784

1441 281,606

5007 1,431,916

63 1012

2,569,299 589

35,023 3879

265,829 8901

2133 13,849

56 1883

36 1083

Construction Thermal (CON) (NHY)

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Hydro (HYD)

0

0

0

646

0

0

0

0

0

0

0

0

0

0

27

0

0

2

88

0

0

0

27

1139

95

0

0

308

Nuclear Water (NUC) supply (WAT)

0

22

0

0

0

0

0

69

568

0

0

0

0

6216

Final RLY

1082

936,128

8289

0

0

0

0

0

0

0

1,179,334

0

354

5

Final LTR

0

28

16

26

8445

1151

0

0

0

6

0

0

0

2573

Final SEA

(continued)

35

15,190

0

0

0

0

0

0

0

0

1

6

0

0

Final AIR

292 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

190,602

1,468,607

13,428

172,357

Final SEA

Final AIR

1037

Water supply (WAT)

Final LTR

4910

Final RLY

34,858

Nuclear (NUC)

169,470

Thermal (NHY)

Hydro (HYD)

555,333

3,067,237 13,626,468

OMN

Construction (CON)

12,057,452

MCH

219,681

285,200

86,052

3,602,833

1,001,105

13,132

6250

44,376

215,741

966,720

5,655,375

8,292,305

5206

9,207,317

Metals (MET)

6531

1.200350

2,609,953

198,684

OMN

Cement (CEM)

7214

301,546

Fertiliser (FER)

1,364,324

PET

121,606

MCH

CHM

Paper, paper products (PAP)

Sectors

(continued)

61,241 43,542

130,606 3926

4,518,785 322,326

462,057 427,230

190,882 18,181

5379 136,506

38,186 969,129

185,651 4,711,606

13,248,957 293,470

9,759,249 299,416

1,162,716 661,873

11,022,320 31,287

5,014,933 26

41,314 2701

2,667,842 1,372,013

1,122,663 97,450

147,388 22,698

Construction Thermal (CON) (NHY)

419

895

12,037

12,264

0

161

1164

5667

22,736

12,610

41,893

4750

25

0

0

0

7407

Hydro (HYD)

80

9

608

800

33

8625

61,241

297,726

570

566

1273

0

0

0

0

178

52

282

81

161,363

2066

107,458

8616

61,185

2,199,842

277,653

Final LTR

423,985

990,033

28,083

244

0

0

766

1398

89,346

8099

200

36,894

261,931

25,186

132,845

1,697,092

111,506

10,173

299

2125

10,331

448,581

1,742,840

1,295,583

929

0

0

104,763 12,725,433

15,335

7959

Final RLY

297,438 1,273,424

97,262

6204

9606

2050

0

14,898

2992

8456

2167

Nuclear Water (NUC) supply (WAT)

617

438

84,035

1692

10,902

1613

11,466

55,716

16,336

212,489

20,666

3

0

0

35,402

102,216

5352

Final SEA

(continued)

871

2352

201,965

4189

2305

1238

8734

42,432

74,790

205,363

18,124

5

0

0

194,974

251,429

8418

Final AIR

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 293

0

0

0

0

0

0

0

0

0

0

0

0

0

0

RNASE

AGL

RNAL

RASE

ROH

USE

USC

UCL

UOH

Pvt.

Pub.

6,275,443 11,510,365

Land

Capital

0

0

0

0

0

0

0

0

0

0

0

0

980,631

1,161,613

Skilled labour

1,464,894

1,725,358

8,450,257

OMN

1,085,996

649,250

6,189,995

MCH

Semi-skilled labour

Unskilled labour

SER

Medical and health (HLM)

Sectors

(continued)

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

6,885,017 2,219,510

3,661,349 117,015

8,493,809 138,038

20,405,347 38,069

12,582,609 1,741,999

0 0

Construction Thermal (CON) (NHY)

0

0

0

0

0

0

0

0

0

0

0

0

1,507,452

449,912

530,745

146,371

144,917

0

Hydro (HYD)

0

0

0

0

0

0

0

0

0

0

0

0

24,886

1146

1352

373

3400

0

0

570,287

853,908

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

342,754 1,385,729

110,158

0

Final LTR

0

0

0

0

0

0

0

0

0

0

0

0

8,448,891

2,300,811

6,308,223

6,146,746

327,956 12,385,858

82,276

Final RLY

221,785 1,138,498

54,244

88,549

Nuclear Water (NUC) supply (WAT) 0

0

0

0

0

0

0

0

0

0

0

0

0

367,627

100,112

274,483

267,456

182,909

Final SEA

(continued)

0

0

0

0

0

0

0

0

0

0

0

0

437,549

119,154

326,689

318,327

372,411

0

Final AIR

294 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

0

0

Land degradation (in square Km)

Grassland (Mha)

Crop land (Mha)

Forest land (Mha)

coal (mt)

Oil (mt)

Wastewater disposed

N2 O (000’tons)

CH4 (000’tons)

5

8

66,879,587 84,035,617

CO2 (000’tons)

Total

0

2,980,870

OMN

19,288,310 14,779,276

0

2,766,271

MCH

ROW

Capital a/c

Ind-tax

Govt.

Sectors

(continued)

0

Hydro (HYD)

112,218,287 13,932,346

300,350 0

0 0 0

0

91

0

0

0

0

3602

Nuclear Water (NUC) supply (WAT) 0

47,113

0

54,169

Final RLY 0 0

17,802

Final SEA

0

119,014

0

Final AIR

455,788 1,906,193 2,156,803

0

4,897,866

0

Final LTR

(continued)

2,865,752 403,653 1,604,902 7,709,270 63,749,793 3,687,771 4,882,367

0

0

4,048,328 −1,532,250 −35,673

0 0

Construction Thermal (CON) (NHY)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 295

Net land degraded (square Km)

Net wastewater disposed (million L/Day)

Net GHG emissions (000’tons)

Sectors

(continued)

MCH

OMN

Construction Thermal (CON) (NHY)

Hydro (HYD)

Nuclear Water (NUC) supply (WAT)

Final RLY

Final LTR

Final SEA

Final AIR

296 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

3783

Wheat

0

0

0

0

0

0

0

94,656

Fishing

Coal and lignite

Natural gas

Crude petroleum (oil)

MIN

FBV

TEX

19,024

Animal husbandry and livestock (ANH)

Forestry and logging

65,220

CER

0

8059

Paddy

Cash crop (CAS)

Medical and health (HLM)

Sectors

576,142

3,632,464

22,157

30,705

19,710

26,248

69,209

94,979

2,993,626

2,140,599

206,465

318,220

506,655

SER

Unskilled Labour

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Semi-skilled Skilled labour labour

0

0

0

0

0

0

0

0

0

0

0

0

0

Capital

0

0

0

0

0

0

0

0

0

0

0

0

0

Land

0

0

0

0

0

0

0

0

0

0

0

0

0

1,787,958

2,311,352

0

0

86

8004

479,333

611,322

1,685,220

2,093,426

246,895

857,157

1,295,177

RNASE

1,596,181

3,111,285

0

0

21

3982

476,563

1,099,212

1,694,381

2,972,191

366,334

865,625

1,744,874

AGL

(continued)

1,164,697

2,271,894

0

0

21

6564

364,137

642,049

1,306,000

1,818,810

253,371

716,615

921,699

RNAL

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 297

688

776

Nuclear (NUC)

Water supply (WAT)

23,763

Thermal (NHY)

4887

116,432

Construction (CON)

Hydro (HYD)

181,597

OMN

0

Metals (MET)

133,229

0

Cement (CEM)

MCH

0

47,656

1,948,120

15,045

0

Medical and health (HLM)

Fertiliser (FER)

PET

CHM

Paper, paper products (PAP)

Wood and wooden product (WOD)

Sectors

(continued)

86,025

83,470

1607

11,406

55,454

3,261,240

3,455,212

3,211,529

481,115

1710

21,177

1,449,003

1,478,779

627,264

SER

Unskilled Labour

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Semi-skilled Skilled labour labour

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Capital

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Land

0

0

0

0

0

0

0

0

0

0

0

0

0

0

11,991

2765

19,631

95,440

23,974

1,139,217

265,675

0

0

0

867,135

753,342

55,968

27,477

RNASE

15,806

4164

29,560

143,710

34,151

609,673

158,315

0

0

0

406,152

802,945

28,174

57,184

AGL

(continued)

8588

3637

25,823

125,544

25,475

526,337

145,331

0

0

0

407,590

534,796

23,613

8885

RNAL

298 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

1510

8418

Final SEA

Final AIR

0

0

0

0

0

0

0

0

RNASE

AGL

RNAL

RASE

ROH

USE

USC

2,082,073 110,562,367

Land

Capital 0

0

0

0

0

0

0

0

0

0

0

5,384,539

7,018,997

4,829,527

0

0

0

0

0

0

0

0

0

0

0

4,358,256

0 31,866,529

22,430,993

9,087,232

3,067,796

0

0

0

0

0

0

0

0

0

0

0

25,604,803

10,373,004

3,501,865

8,829,248

6,146,409

8,012,130

5,512,868

Semi-skilled Skilled labour labour

10,988.465 7,734,831

7,649,529

9,971,518

6,861,055

Unskilled Labour

0 12,909,751

0

0

0

0

0

0

50,735,489

3,586,657

Skilled labour

26,829,192

19,254,677

22,668,195

1,125,114

408,304

1,349,177

422,872

198,426

72,393

5,904,740

274,476

SER

Semi-skilled labour

Unskilled labour

SER

0

225,716

Final LTR

Medical and health (HLM)

12,488

Medical and health (HLM)

Final RLY

Sectors

(continued)

0

0

0

0

0

0

0

0

0

0

0

Land

0

0

0

0

0

0

0

0

0

0

0

0

0

0

4,868,492

32,852,398

28,874,526

0

0

0

31,851,987 5,198,993

1,098,176

75,172

13,187,150

Capital

0

0

0

0

0

0

0

0

0

0

0

0

6,231,916

1,013,687

35,886

79,200

2,315,173

124,213

RNASE

0

0

0

0

0

0

0

0

0

0

0

0

2,122,250

955,140

6359

95,199

2,766,352

89,031

AGL

(continued)

0

0

0

0

0

0

0

0

0

0

0

0

2,892,267

714,133

4695

114,434

2,314,741

79,349

RNAL

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 299

0

0

0

Pvt.

Pub.

Govt.

15,991,112

0 0

0

0

0

0

0

1,925,536

3,397,499

Unskilled Labour

0

48,569,978

0

9,867,990

11,420,700

29,207,124

12,390,466

1,141,503

Land

0

0

0

0

0

0

0

0

0.45

72,257,395 225,405,661 5,198,993

0

0

0

0

0

0

1,547,172

2,729,896

Capital

Crop land (Mha)

63,300,824

0

0

0

0

0

0

1,355,394

2,391,515

Semi-skilled Skilled labour labour

0.16

11,701,635 279,730,752 89,928,139

8117

0

0

0

0

0

0

1,954,645

SER

Forest land (Mha)

coal (mt)

Oil (mt)

Wastewater disposed

N2 O (000’tons)

CH4 (000’tons)

CO2 (000’tons)

Total

ROW

Capital a/c

231,126

0

UOH

Ind-tax

0

Medical and health (HLM)

UCL

Sectors

(continued)

0

0

0

0

0

0

0

0

0

0

6,258,015

440,811

AGL

0

0

0

0

0

0

3,387,539

247,813

RNAL

(continued)

34,881,639 28,953,640 21,056,450

0

7,473,406

467,905

2,501,710

RNASE

300 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

Medical and health (HLM)

SER

Unskilled Labour

Semi-skilled Skilled labour labour

245,469

91,818

1,769,099

Capital

Land

0.01

RNASE

AGL

RNAL

Source Based on author’s calculations using MOEF (2010), Department of Land Resources and National Remote Sensing Centre (2011), Ministry of Statistics and Programme Implementation (2008), DES (2012) and TERI (2009)

Net land degraded (square Km)

Net wastewater disposed (million L/Day)

Net GHG emissions (000’tons)

Land degradation (in square Km)

Grassland (Mha)

Sectors

(continued)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 301

4,679,846

4,548,268

FBV

TEX

1,333,891

2,066,283

0

0

MIN

101

0

263

Natural gas

3178

315,564

305,682

1,214,792

1,366,575

215,292

470,235

685,843

ROH

Crude 0 petroleum (oil)

597,620

5598

Coal and lignite

1,501,911

Forestry and logging

Fishing

4,988,708

526,623

Cash crop (CAS)

4,768,922

2,013,211

Wheat

Animal husbandry and livestock (ANH)

2,384,396

Paddy

CER

RASE

Sectors

2,624,724

3,230,878

0

0

528

10,211

353,399

199,368

2,754,876

2,783,685

350,774

1,085,537

1,100,775

USE

3,021,813

3,901,840

0

0

355

6490

430,889

85,569

2,621,970

2,871,717

410,729

952,483

1,130,378

USC

351,350

889,192

0

0

15

5157

118,914

160,318

501,636

682,207

125,447

226,799

348,681

UCL

562,851

1,198,347

0

0

31

1146

108,031

25,061

429,202

508,373

73,874

144,665

195,829

UOH

0

0

0

0

0

0

0

0

0

0

0

0

0

Pvt.

0

0

0

0

0

0

0

0

0

0

0

0

0

Pub.

549,766

367,977

0

0

46,533

14,306

0

41

222,208

424,583

0

190,111

176,599

Govt.

0

0

0

0

0

0

0

0

0

0

0

0

0

Ind-tax

(continued)

2,115,122

1,708,866

−344,121

−4368

7012

24,693

12,343

104,768

512,932

−104,703

−176,422

−164,707

−245,425

Capital a/c

302 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

156,602

Final RLY

109,621

9938

18,824

22,289

19,345

Hydro (HYD)

91,519

Water supply (WAT)

94,051

Thermal (NHY)

34,469

2651

82,315

Construction (CON)

784,876

172,284

Nuclear (NUC) 2725

1,874,510

OMN

0

Cement (CEM) 0

0

Fertiliser (FER)

443,750

0

1,634,396

0

PET

MCH

0

1,537,770

CHM

Metals (MET)

651,515

Paper, paper 82,147 products (PAP)

764,878

80,174

Wood and wooden product (WOD)

ROH

51,885

RASE

58,730

Sectors

(continued)

USE

361,832

81,294

2928

20,787

101,064

40,281

1,400,269

627,507

0

0

0

2,461,981

1,149,352

115,017

127,312

USC

856,686

87,280

1807

12,827

62,361

62,648

2,763,847

1,085,850

0

0

0

2,671,611

1,222,060

133,764

66,620

43,741

13,414

4436

31,486

153,074

8886

134,479

92,796

0

0

0

271,725

228,812

9854

152,344

UCL

110,679

18,945

2532

17,970

87,366

19,288

175,967

113,998

0

0

0

375,921

294,130

40,307

3093

UOH

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Pvt.

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Pub.

Govt.

279,347

864,470

3923

27,852

135,406

1,212,278

1,184,013

888,498

0

0

0

782,204

1,247,250

361,145

56

Ind-tax

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Capital a/c

(continued)

468,946

0

0

0

0

88,084,897

30,336,843

31,665,645

10,171,494

275,437

554,726

3,147,709

6,036,634

262,213

199,192

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 303

0

0

0

0

0

0

0

0

Skilled labour

Capital

Land

RNASE

AGL

RNAL

RASE

ROH

0

Semi-skilled labour

1,691,888

Medical and health (HLM)

7,348,959

332,543

Final AIR

0

94,917

Final SEA

Unskilled labour

4,827,510

Final LTR

SER

RASE

Sectors

(continued)

1,385,863

443,269

78,057

3,657,220

USE

1,682,069

636,507

89,505

5,180,962

USC

432,130

1134

31,181

875,931

UCL

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

10,317,781 25,296,821 29,575,869 2,093,437

869,914

33,572

53,877

2,205,411

ROH

0

0

0

0

Pvt.

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

10,481,147 0

597,342

63,784

63,970

987,551

UOH

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Pub.

3,387,907

10,791,121

748,793

3,144,477

3,954,343

0

0

0

0

0

37,277,824

1,854,319

312,447

44,576

1,486,831

Govt.

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Ind-tax

0

0

0

0

0

0

0

0

0

0

(continued)

5,096,144

3

98,954

65,214

2,623,190

Capital a/c

304 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

0

75,821,151 45,166,771 75,643,205 96,638,785 10,326,662 22,231,706 48,495,600 11,420,700 87,605,592

ROW

Total

Wastewater disposed

N2 O (000’tons)

CH4 (000’tons)

CO2 (000’tons)

24,303,737 19,007,759 18,548,751 28,771,307 2,212,751

0

410,875

3512

0

1,091,048

3308

0

1,292,269

1078

0

125,334

0

0

474

0

4,543,552

254,337

732,417

0

0 0

1,204,847

0

0

Ind-tax

0

0

0

Capital a/c

0

0

0

0

0

0

0

0 0

(continued)

40,500,493 190,192,796

0

7,659,561

40,500,493 0

0

0

0

0

0

0

29,294,461 11,420,700 −19,987,862 0

0

19,201,139 0

0

19,288,476

1,291,387

485,801

8,013,111

1,019,767

4,948,702

0

0

0

0

0

Capital a/c

4,157,797

0

0

0

0

0

Govt. 5,328,629

Ind-tax

1,517,510

0

0

0

0

0

Pub. 0

4,177,834

0

0

0

0

Pvt. 0

0

0

0

0

0

UOH 0

Govt.

0

0

0

0

UCL 0

Pub.

0

0

0

0

USC 0

0

UCL

USE

0

0

0

USC

ROH

0

Pvt.

0

USE

UOH

RASE

0

Sectors

(continued)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 305

RASE

ROH

USE

USC

UCL

UOH

Pvt.

Pub.

Govt.

Ind-tax

Capital a/c

Source Based on author’s calculations using MOEF (2010), Department of Land Resources and National Remote Sensing Centre (2011), Ministry of Statistics and Programme Implementation (2008), DES (2012) and TERI (2009)

Net land degraded (square Km)

Net Wastewater disposed (million L/day)

Net GHG emissions (000’tons)

Land degradation (in square Km)

Grassland (Mha)

Crop land (Mha)

Forest land (Mha)

Coal (mt)

Oil (mt)

Sectors

(continued)

306 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

3,451,500

30,000,977

10,254,116

30,538

Crude petroleum 428,803 (oil)

5,018,698

2,397,566

7,836,232

37,776

153,044

Natural gas

MIN

FBV

TEX

Wood and wooden product (WOD)

Paper, paper products (PAP)

4,594,954

5,807,877

3,110,737

40,790,440

38,676,366

7,221,344

381,859

19,147

10,150,167

132,479

Forestry and logging

Coal and lignite

28,027,922

Fishing

37,530,674

854,921

Animal 135,234 husbandry and livestock (ANH)

11,193,736

19,277,877

CER

5984

Wheat

15,948,801

1,130,905

Paddy

Total

Cash crop (CAS) 157,104

ROW

Sectors

5223

350.6996

1861.11

27,625.53

1460.26

1.178451

0

49,425.91

18,239.84

3615.156

8477.17

11,588.65

CO2 (000’tons)

25

0.01

25.99

6.82

0.06

71.21

708.19

730.00

0.00

0.00

10,215.62

0.30

0.06

0.14

3327.19

CH4 (000’tons)

0

0.01

0.02

0.22

0.01

0.00

0.00

1.04

40.19

24.80

35.29

40.54

N2 O (000’tons)

1881

2038

424

Wastewater disposed (million L/day)

20

Oil (mt)

8410

Coal (mt)

Forest land (Mha)

(continued)

Crop land (Mha)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 307

ROW

7,038,137

7,016,944

13,114

45,814

5,138,714

4,332,381

6,822,132

575,927

0

0

0

0

623,271

4,784,284

2,063,370

1,436,670

0

Sectors

CHM

PET

Fertiliser (FER)

Cement (CEM)

Metals (MET)

MCH

OMN

Construction (CON)

Thermal (NHY)

Hydro (HYD)

Nuclear (NUC)

Water supply (WAT)

Final RLY

Final LTR

Final SEA

Final AIR

Medical and health (HLM)

(continued)

11,701,635

4,882,367

3,687,771

63,749,793

7,709,270

1,604,902

403,653

2,865,752

13,932,346

112,218,287

84,035,617

66,879,587

57,551,857

5,671,133

6,764,661

48,739,055

57,183,088

Total

10,122

1416

121,211

6109

715,829.8

88.95297

41,821.81

17,661.59

119,687

129,920

31,513.79

33,788

27,888.86

CO2 (000’tons)

0.10

0.13

23.00

0.34

979.51

0.01

0.70

0.29

15

2.78

4

14.01

CH4 (000’tons)

0.28

0.04

6.00

2.35

10.66

0.00

0.82

0.35

1

0.62

0

17.33

N2 O (000’tons)

72,219

210

155

143

231

Wastewater disposed (million L/day)

Oil (mt)

Coal (mt)

Forest land (Mha)

(continued)

Crop land (Mha)

308 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

3,721,752

0

UOH

Pvt.

7,616,859

180,447

UCL

Ind-tax

3,854,856

USC

0

5,092,192

USE

0

1,976,420

ROH

Govt.

426,506

RASE

Pub.

731,345

536,697

RNASE

29,004

0

Land

RNAL

225,405,661

−1,744,294

Capital

AGL

72,257,395

−74,785

Skilled labour

40,500,493

87,605,592

11,420,700

48,495,600

22,231,706

10,326,662

96,638,785

75,643,205

45,166,771

75,821,151

21,056,450

28,953,640

34,881,639

5,198,993

63,300,824

−66,698

Semi-skilled labour

279,730,752

89,928,139

37,058,832

SER

Total

Unskilled labour −92,008

ROW

Sectors

(continued)

2414

2492

22,105

8403

17,461

49,358

8866

29,861

16,306

1568.047

CO2 (000’tons)

197

284

1454

919

320

602

124

323

190.189

0.17

CH4 (000’tons)

1

1

12

4

5

9

2

5

3

0.04

N2 O (000’tons)

1296

2946

9044

9602

Wastewater disposed (million L/day)

Oil (mt)

Coal (mt)

0

Forest land (Mha)

(continued)

1

Crop land (Mha)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 309

6,388,701

0

124,246,877

Capital a/c

ROW

Total

Net GHG emissions (000’tons)

Land degradation (in square Km)

Grassland (Mha)

Crop land (Mha)

Forest land (Mha)

Coal (mt)

Oil (mt)

Wastewater disposed

N2 O (000’tons)

CH4 (000’tons)

CO2 (000’tons)

ROW

Sectors

(continued)

124,246,877

190,192,796

Total

10,490

CO2 (000’tons)

CH4 (000’tons)

N2 O (000’tons)

Wastewater disposed (million L/day)

Oil (mt)

Coal (mt)

67,800

Forest land (Mha)

(continued)

207,520

Crop land (Mha)

310 Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

Net land degraded (square Km)

Net wastewater disposed (million L/Day)

Sectors

(continued)

ROW

Total

CO2 (000’tons)

CH4 (000’tons)

N2 O (000’tons)

Wastewater disposed (million L/day)

Oil (mt)

Coal (mt)

Forest land (Mha)

Crop land (Mha)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– … 311

312

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

Sectors

Paddy

Grassland (Mha)

Land degradation (sq. Km)

Net GHG emissions (000’tons)

Net wastewater disposed (million L/day)

Net land degraded (sq. Km)

94,028

Wheat

19,420

Cash crop (CAS)

11,305

CER

30,705

Animal husbandry and livestock (ANH)

264,278

Forestry and logging

0

Fishing

1

Coal and lignite

15,330

Natural gas

14,872

Crude petroleum (oil)

1495

MIN

1465

FBV

27,837

TEX

2413

Wood and wooden product (WOD)

353

Paper, paper products (PAP)

5780

CHM

33,555

231

PET

33,886

143

Fertiliser (FER)

31,765

155

Cement (CEM)

129,920

Metals (MET)

119,703

MCH

17,776

OMN

42,092

Construction (CON)

90

Thermal (NHY)

739,704

Hydro (HYD)

0

Nuclear (NUC)

0

Water supply (WAT)

0

Final RLY

6845

Final LTR

123,554

424 2038

1881

210

72,219

(continued)

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

313

(continued) Sectors

Grassland (Mha)

Land degradation (sq. Km)

Net GHG emissions (000’tons)

Final SEA

1431

Final AIR

10,211

Medical and health (HLM)

0

SER

1583

Unskilled labour

0

Semi-skilled labour

0

Skilled labour

0

Capital

0

Land

0

Net wastewater disposed (million L/day)

Net land degraded (sq. Km)

0

RNASE

21,216

AGL

38,226

RNAL

12,056

RASE

64,877

ROH

25,598

USE

29,074

6090

USC

56,212

5736

UCL

8858

1869

UOH

6943

822

Pvt. Pub. Govt. Ind-tax Capital a/c ROW Total CO2 (000’tons)

38

−275,358

CH4 (000’tons) N2 O (000’tons) Wastewater disposed Oil (mt) Coal (mt) Forest land (Mha) (continued)

314

Appendix F: Environmentally Extended Social Accounting Matrix for India-2007– …

(continued) Sectors

Grassland (Mha)

Land degradation (sq. Km)

Net GHG emissions (000’tons)

Net wastewater disposed (million L/day)

Net land degraded (sq. Km)

Crop land (Mha) Grassland (Mha) Land degradation (in square Km) Net GHG emissions (000’tons) Net wastewater disposed (million L/day) Net land degraded (square Km) Source Based on author’s calculations using MOEF (2010), Department of Land Resources and National Remote Sensing Centre (2011), Ministry of Statistics and Programme Implementation (2008), DES (2012) and TERI (2009)