The concern for environ­ment has, in the recent past, manifested itself from being a

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matter of minority interest to a ‘mainline’ issue of pervasive involvement that has been extensively debated and reported upon. With growing awareness and the need for radical climate change, voices are being heard to bring developing countries like India and China under reasonable limits of emis­sion levels. One obvious way to do this is to follow in the footsteps of many developed nations by introd­ucing environ­mental taxes aka green taxes or eco taxes.

To start with, the key issue to be determined is whether India should follow a stick (taxes) or carrot (exemptions) approach to protect the environment. At present, the Indian tax regime does not have any clearly laid down envir­onmental ‘taxes’ or ‘sub­sidies’ legislation except for a few traces of tax con­cessions allowed to those working on environment-friendly projects. In fact, the industry is now demanding tax exemption in relation to the income arising on account of carbon credits under the Kyoto Protocol, where India has a major role to play.

For the future, however, these limited relief measures may not hold as significant a place for envir­onment protection. This is because it may be easier to deter tax payers from environmental harmful beh­avior than to attract them to beneficial behaviour.

Introducing environ­mental taxes as a part of our environmental policy may thus seem like the next logical step. However, there are several challenges along this path.

The first challenge would be to determine the correct level at which such taxes should be levied. It is difficult to set taxes at a level which accurately reflects the real environmental costs of economic activity.

Secondly, en­vironmental taxes have an effect of increasing prices on con­sumers because of which they can often be regressive. If the demand for such goods is inelastic, then the producer would simply pass on the burden of taxation to the consumers.

Consequently, the ultim­ate brunt of such taxes would be faced by the lower-income groups in society.

On the contrary, positive aspects of environmental taxes have a compelling story. Evidently enough, environmental taxes, unlike traditional taxes, do not have the sole purpose of raising revenues but also have a considerable impact on the government’s socio-economic policies.

Many countries have implemented taxes on environmentally-destructive products and activities.

Germany, a leader in tax shifting, has implemented environmental tax reform in several stages by lowering income taxes and raising energy taxes.

One part of the United Kingdom’s environmental tax reform involved a steadily increasing fuel tax known as a fuel duty escalator, which was in effect from 1993 until 1999. As a result, fuel consum­ption in the road tran­sport sector dropped, and the average fuel efficiency of trucks increased by 13 per cent.

Thus far, tax shifts have been limited in scope and have produced positive, if modest, results.

The energy coordination committee headed by the prime minister has proposed imposing a carbon tax on polluting power stations in India. This is to be based on the efficiency targets to be developed under the energy efficiency initiative of the national action plan and is envisaged to be supplemented by a similar emission trading regime. In addition, lately, the government has indicated its willingness to voluntarily take on unila­teral mitigation measures with broadly indicative targets as part of its response to climate change.

For this, the government is considering a law on the lines of the Fiscal Respo­nsibility and Budget Mana­gement Act.

Thus, businesses who take concerted action now to become more energy efficient, are likely to be far better prepared when the tax is finally imposed.