www.nareshminocha.com

Font Size

SCREEN

Profile

Menu Style

Cpanel
 (Edited Image Courtesy: climateinvestmentfunds.org)
 
With the Climate Change eclipsing all other global risk factors, its management through taxation, expenditure reforms and innovative projects finance has opened a new fiscal avenue for all the nations. And this avenue, paved with both challenges and opportunities, would become byzantine in the coming years.
The course of avenue would become clear after the Paris Climate Conference where 195 countries are set to agree on tough targets for greenhouse gases (GHGs) reductions under the UN Framework Convention on Climate Change (UNFCCC).
It would be for the first time that nations would strive to achieve a legally binding and universal agreement on climate to limit global warming below 2°C.
This 21st annual Conference of Parties (COP21) on the UNFCCC, beginning 30th November 2015, would thus leave an indelible mark on climate change-centric fiscal domain. It has grown from a diffused pollution control imposts to a web of fiscal instruments, expenditure management tools and investment options since May 1992 when UNFCCC was adopted at Rio Earth Summit in Brazil.
International Chamber of Commerce believes that all countries will benefit from a climate agreement that facilitates worldwide adoption of environmentally sound technologies and climate-friendly solutions that contribute to sustainable development.
Time has thus come for finance ministries to make climate change management (CCM) a major, integrated objective of annual budget. It should encompass tax and non-tax revenue, capital and recurring expenditure and fiscal deficit. 
Preparation of budget and its implementation with major thrust on CCM would perhaps call for refresher courses for budget and taxation staff. And the best way to start acclimatization is to begin from the top level.  It is here pertinent to find that International Monetary Fund (IMF) has already pitched for role of finance ministers in CCM. 
“To date, environmental ministries have been most involved in climate change discussions. A final lesson is that finance ministries need to be more actively involved in carbon pricing policy, given the significant amount of revenues at stake and that these instruments are a natural extension of existing fuel excise tax systems,” says IMF’s  ‘Fiscal Policy to Mitigate Climate Change - A Guide for Policymakers’ released in 2012.
Climate Change basically refers to concentration of greenhouses gases (GHGs) in upper atmosphere, resulting in global warming and its multiple adverse effects on socio-economic life. GHGs include carbon dioxide, methane, nitrous oxide and the ones such as hydrofluorocarbons (HFCs) synthesized for specified usage. 
Climate change is being managed through wide range of initiatives that can be grouped into two broad categories: 1) mitigation initiatives such as increase in taxes on carbon dioxide-emitting fuels to shift energy demand to green fuels and 2) adaptation measures such as development of technologies that help mankind cope with climate changes. 
At the mitigation front, the global focus is on controlling emission of most import GHG, carbon dioxide.  A lot, however, needs to be done in this domain to both generate tax revenue and to signal shift towards use of low-carbon products, services and development of low-carbon habitations and lifestyles.  
Carbon dioxide emissions are reduced both through taxes and emission trading systems (ETS) or a mix of both. 
For poor countries especially the ones with bulging populations, mitigation process has to be gradual lest it hurts economic growth, jobs creation and social welfare.  Affordability of energy should never be lost sight of by taxation professionals in CCM. Thus, conventional options such as reduction in subsidies on fossil fuel or fossil fuel-derived energy such as electricity has to be gradual and well-timed. 
Indian Government, for instance, has taken advantage of bearish global commodity markets to phase out liquid fuel subsidies and to mop tax revenue through hikes in tariff.
It has thus quadrupled the cess on coal to $ 3.2/tonne in 2014-15 from $ 0.8/tonne in 2010, the year in which it was imposed. The cess translates into a carbon tax equivalent, using the emission factor for coal, of around $ 2 per tonne. The cess proceeds are parked in National Clean Environment Fund, which is used for financing clean energy, technologies, and projects related to it.
According to a document titled ‘India's Intended Nationally Determined Contributions – Towards Climate Justice’ to be tabled at COP21, “Recent actions have led to an implicit carbon tax (USD 140 for petrol and USD 64 for diesel) in absolute terms. This is substantially above what is now considered a reasonable initial tax on CO2 emissions of USD 25- USD 35 per tonne. Estimates suggest that these measures will help India achieve a net reduction of 11 million tonnes of CO2 emissions in less than a year.”
The challenge for budget-makers lies in assessing trade-offs among subsidy reforms, enhancement of excise and import duties on fossil fuels, levy of carbon tax and ETS. After such an exercise, the decision-makers should opt for an optimum blend of all these options. 
They should also impart transparency in the utilization of proceeds of all imposts hiked/levied ostensibly for CCM. If the objective is to be prune down fiscal deficit, it should be quantified. Ideally, proceeds of CCM levies should be parked in dedicated funds that should be used to finance climate adaption projects such as water conservation, public transport and all initiatives that help reduce GHG emissions.
Introducing carbon taxes at a low level, then expanding coverage and price level progressively can help ease transitions to carbon pricing, while providing continuing signals for clean technology investments, according to a joint report from the World Bank and Organisation for Economic Cooperation and Development (OECD) released in September 2015.
Captioned  ‘The FASTER Principles for Successful Carbon Pricing: An approach based on initial experience’, the report says  The FASTER Principles for Successful Carbon Pricing are: 1) Fairness: Successful carbon pricing policies reflect the “polluter pays” principle and contribute to distributing costs and benefits equitably, avoiding disproportionate burdens on vulnerable 2) Alignment of Policies and Objectives: Successful carbon pricing policies are part of a suite of measures that facilitate competition and openness, ensure equal opportunities for low-carbon alternatives, and interact with a broader set of climate and non-climate policies. 3) Stability and Predictability: Successful carbon prices are part of a stable policy framework that gives a consistent, credible, and strong investment signal, the intensity of which should increase over time. 4) Transparency: Successful carbon pricing policies are clear in design and implementation. 5) Reliability and Environmental Integrity: Successful carbon pricing schemes result in a measurable reduction in environmentally harmful behaviour. 6) Efficiency and Cost-Effectiveness: Successful carbon pricing improves economic efficiency and reduces the costs of emission reduction.
The combined value of the regional, national, and sub-national carbon pricing instruments in 2015 is estimated at just under US$50 billion globally, of which almost 70 percent (about US$34 billion) is attributed to ETSs and the remainder (about 30 percent) to carbon taxes, says a World Bank report titled ‘State and Trends of Carbon Pricing’ released in September 2015.
The Report notes that the choice of carbon pricing instrument is based on national circumstances and political realities.
“In fact, what is the most suitable instrument depends on the specific circumstances and context of a given jurisdiction, and the instrument’s policy objectives should be aligned with the broader national economic priorities and institutional capacities,” it adds.
As for initiatives to adapt to climate change, the domain is vast extending from energy savings to development of drought-resistant crop varieties and all technologies that help cope with adverse effects of global warming. 
To stimulate development of new technologies, the governments have to provide a mix of tax incentives, grants, soft loans and venture capital funding. They might also have to adjust import duties of climate change-friendly products. This would obviously require tight-rope walk between protecting and promoting local production and jobs and allowing affordable market availability of innovative products. 
And for financing big-ticket CCM projects such as solar parks and road bridges and flyovers that help reduce diesel and petrol wastages, the options include regulatory framework for long-term, low-cost debt instruments, viability gap funding of projects implemented in public private partnership (PPP) mode. 
Put simply, CCM fiscal policy dynamics is going to become more vibrant and complex in the coming years.                                        
 
Published by taxindiainternational.com on 20th October 2015
You are here: Home Budget Climate Change Ferments Fiscal Policy Domain