Simulating the Socio-Economy-Environment Impacts of Ecotaxes in India: An Environmentally-extended Social Accounting Matrix Analysis

Abstract

Climate mitigation strategies are on the rise across the globe to achieve national commitments to net-zero carbon emissions. Pricing carbon, either directly or indirectly, provides a price incentive to producers to reduce their greenhouse gas emissions. Therefore, it is important to examine the impact of such governmental policies on the economy, emissions, and particularly households, who will bear the incidence of such taxes. For developing countries like India, the effect of such policies on marginalised and low-income households is a pertinent question that needs examination. We aim to answer three questions in this paper: (1) what is the incidence of proposed environmental taxes (ecotaxes) on the households in India; (2) what are its impacts on the Indian economy, households, and environmental pollution; and (3) how can revenue recycling dampen the impacts on marginalised households. In this paper, we seek to analyse these issues using an Environmentally-extended Social Accounting Matrix for India 2019-20, which we have constructed (CSEP-ESAM). The disaggregation of household accounts provides a deeper understanding of how ecotaxes affect all sections of society. To the best of our knowledge, this work on the impacts of ecotaxes has not been attempted before in the Indian context using an ESAM. We analyse the incidence of a proposed carbon tax on 5 polluting sectors (fertilisers, aluminium, iron and steel, coal-powered electricity generation, and cement) by using a price-vector model. After that, the relative price changes are used to measure the tax burden on each household by category. We analyse four ecotax scenarios, determined using India’s prevailing Goods and Services Tax (GST) rates – 5%, 12%, 18% and 28% – and applied to the 5 polluting sectors. Revenue recycling scenarios have been determined based on the most-impacted household categories and modelled using the ESAM in the form of government transfers to dampen the impact of the ecotax. We find that the ecotax policy scenarios are progressive in both rural and urban India, depicting that the costs of these policies are not disproportionate across regions or social categories. These preliminary findings suggest that revenue recycling helps reduce the impact of the ecotaxes on the GDP and household expenditure and further reduces the air emissions intensity compared to a norecycling scenario.

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