CONTEXT 

• In present times the COVID-19 pandemic has forced countries all over the world to rethink climate change and the need for preservation of the environment.
• The government have been forced to bear dual burden due to pandemic:
  • Increased fiscal deficit, due to large decline in tax revenue
  • Increased expenditure, to sustain health financing amidst this health crisis

NEED FOR ALTERNATE SOURCE OF HEALTH FINANCING

• According to the World Health Organization (WHO) data on the percentage of the total population:
  • 17.33% of the population in India made out-of-pocket payments on health exceeding 10% of the total household expenditure or income in 2011.This percentage was higher in rural areas compared to urban areas.
  • The global average was 12.67%. This means that 12.67% of the population spent more than 10% of their income (out of their pocket) on health.
  • Similarly, 3.9% of the population in India made more than 25% of out-of-pocket payments on health, with 4.34% in the rural areas.
• The Economic Survey of India 2019-20 has outlined that an increase in public spending from 1% to 2.5-3% of GDP, as envisaged in the National Health Policy of 2017, can decrease out-of-pocket expenditure from 65% to 30% of overall healthcare expenses.
• Hence, this is where the importance of alternate sources of health financing in India needs to be stressed.

FIXING THE ECO RATE CAN BE AN OPTION

Environment regulation, may take several forms:

Command and control approach

• This is an approach wherein the government places strict regulations on pollutant emissions and there are fines on non-compliance.

Economic planning/urban planning approach

• This approach involves inculcating sustainable management practices in policy making.

Environmental tax (eco tax)/subsidies approach

• This approach involves taxing the polluters to disincentivize the use of high carbon footprint processes or products and also providing subsidies to encourage the adoption of green technology.

Cap and trade approach

• This approach involves the government setting limits for emissions and the establishment of carbon trade markets.

India currently focuses majorly on the command-and-control approach in tackling pollution.

ECO TAX

• Ideally, the eco tax rate ought to be equal to the marginal social cost arising from the negative externalities associated with the production, consumption or disposal of goods and services.
• This requires an evaluation of the damage to the environment based on scientific assessments, which would include the adverse impacts on the health of people, climate change, etc.
• Environmental tax reforms generally involve three complementary activities:
  • eliminating existing subsidies and taxes that have a harmful impact on the environment;
  • restructuring existing taxes in an environmentally supportive manner; and
  • initiating new environmental taxes.

SCOPE OF ECO TAX IN INDIA

In India, eco taxes can target three main areas:

• one, differential taxation on vehicles in the transport sector purely oriented towards fuel efficiency and GPS-based congestion charges;
• two, in the energy sector by taxing fuels which feed into energy generation;
• three, waste generation and use of natural resources.

Thus, tax revenues can be generated through eco taxes and can be used to a greater extent for the provision of environmental public goods and addressing environmental health issues.

BENEFITS OF ECO TAX

• The implementation of an environmental tax in India will have three broad benefits: fiscal, environmental and poverty reduction.
• Environmental tax reforms can mobilise revenues to finance basic public services when raising revenue through other sources proves to be difficult or burdensome.
• Revenue from environmental tax reforms can also be used to reduce other distorting taxes such as fiscal dividend.
• Further, it can help internalise the externalities, and the said revenue can finance research and the development of new technologies.

NEGLIGIBLE IMPACT ON THE GDP

• Environmental regulations may have significant costs on the private sector in the form of slow productivity growth and high cost of compliance.
• This can result in the possible increase in the prices of goods and services.
• However, the European experience shows that most of the taxes also generate substantial revenue and there is no evidence on green taxes with sustainable development goals leading to a ‘no growth’ economy.
• Instead, most countries’ experiences suggest negligible impact on the GDP.
• Hence, this is the right time for India to adopt environmental fiscal reforms as they will reduce environmental pollution and also generate resources for financing the health sector.

RECOMMENDATIONS

• It is the right time for India to adopt environmental fiscal reforms as it will not only help reduce environmental pollution but also generate resources for financing the health sector.
• The architecture of the eco tax framework should be credible, transparent and predictable.
• The eco tax rate should be commensurate with the marginal social cost arising from the negative externalities associated with the production, consumption or disposal of goods and services. This should consider both short and long term impacts both on humans and other living beings.
• The environmental taxes must be integrated with the Goods and Services Tax framework.

Reference:

1. https://www.thehindu.com/opinion/op-ed/the-many-benefits-of-an-eco-tax/article34629283.ece