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Developing a Green Tax Policy:

Enhancing Economic Security and Addressing Environmental

Problems

Minor Term Paper

Submitted by

Srusti Mahakud

2300397LLM

For the partial fulfilment of the

Degree of LL.M. in Environment and Natural Resources Law/ Infrastructure and

Business Law

Submitted to

Mr. Souvik Bhattacharjya

Economic Foundations of Environmental and Infrastructure Law (MPL 141)

TERI SCHOOL OF ADVANCED STUDIES

Session 2023-2024
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DECLARATION

This is to certify that the research that forms the basis of this Term Paper titled
Developing a Green Tax Policy: Enhancing Economic Security and
Addressing Environmental Problems is an original work carried out by me and
has not been submitted anywhere else for the award of any degree.

I certify that, to the best of my knowledge, all sources of information and data have
been fully acknowledged in the report.
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ACKNOWLEDGMENT

I would first like to express my deepest gratitude to my Mentor Mr. Souvik

Bhattacharjya, who assisted me in the completion of the term paper and also
guided me through the doubts that I had during research and drafting. Sir, your
expertise and insightful feedback pushed me to sharpen my thinking and brought
my work to a higher level.

I would like to thank particularly my father Mr. Prasant Kumar Mahakud who has
played an integral role in structuring my research, stimulating discussions and his
valuable guidance throughout my life and studies.

I would also like to thank all the other teaching staff at TERI for always being
there for students and the non-teaching staff for their excellent management
throughout the course.

In addition, I would like to thank my sister Ishaa Mahakud who is student of M.Sc.
ESRM (1st Year) at TERI SAS for her wise counsel and sympathetic ear.
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Table of Content Page

1. Abstract…………………………………………………….……….…..5
2. Introduction………………………………………………………….…6
3. What is Green Tax…………………………………………….…….....6
4. What all needs to be considered before introducing a Green Tax….7
5. The Green Tax scenario in India…………………………………..….8
6. Determination of Green Tax Rate in India…………………….….….10
7. Benefit of Green Tax on Old Vehicles…………………………..….…11
8. Principles for levy of Green Tax………………………………………11
9. Examining the Public Reaction in acceptance of Green Tax
regime…………………………………………………………...………12
10. Suggested Changes in Green Taxation in India……………………..13
11. Conclusion…………………………………………………………......14
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ABSTRACT

Taxation is a ubiquitous aspect of fiscal systems worldwide, encompassing various categories

such as income, goods, and services. In the Indian tax landscape, alongside conventional levies,
there exists a unique system known as green tax, specifically applied to vehicles, and a carbon
tax on carbon emissions. This study focuses on the dynamics of green tax implementation in
India evaluating its efficacy, challenges, and the level of awareness among the public.

Green tax, essentially an environmental tax, is imposed on the emission of harmful gases,
including carbon dioxide, and other greenhouse gases detrimental to the environment. The
primary objective is to curtail the release of harmful gases, thereby exercising control over
pollution. This tax can be levied on industries emitting such gases, on petrol and other fuels
based on their CO2 content, and on vehicles surpassing a specified age limit as mandated by law.

On a global scale, the Organisation for Economic Co-operation and Development (OECD)
oversees matters related to environmental taxation. India, as a key partner with 67 member
countries, aligns its policies with OECD directives to minimize pollution by taxing emissions of
poisonous gases. The introduction of environmental or green taxes in nearly all countries
emphasizes holding responsible parties accountable for environmental pollution, compelling
them to contribute financially for the damages caused.

This study delves into the intricate balance between the objectives and challenges of
implementing green tax in India, shedding light on its role in environmental protection. The
research also investigates public awareness regarding green tax and explores its effectiveness in
promoting responsible environmental practices in the country.

Keywords: Green Tax, Pollution, OECD, Environment, Challenges, Effectiveness, Awareness.

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“The only solution to pollution is a people's humane revolution!” – Bobby Seale

1. Introduction

Sustainable Development is a relatively new and constantly evolving concept in today’s modern
world. With the rise in people’s awareness about the severely negative impacts of environmental
pollution and subsequent climate change, federal governments worldwide seem to have woken
up to fight for this cause. Of late, there has been a rising interest in enacting governance policies
of sustainable development to mitigate environmental degradation and the ever-rising rates of
pollution. These policies aim to strictly regulate environmental laws and apply them to industries
that discharge pollutants or produce goods that are not environmentally friendly.

To complement this, countries worldwide are trying to bring about a Green Revolution in their
Taxation Regime for strict control over such environmental hazards. The objective is to
discourage industries and businesses from engaging in activities that may pose a serious threat to
the environment.

2. What is Green Tax?

To achieve this, a tax known as the Green Tax (synonymous with Environmental Tax) must be
introduced and popularized, especially in developing countries like India, where stricter
implementation of environmental protection norms is required. The main aim of implementing
the Green Tax is to closely monitor and regulate the production and use of non-environmentally
friendly products and services so that their negative impact can be offset. When the Green Tax
regime charges firms and people almost the same amount as the value of the damage done by the
externality, the government compels them to internalize the negative impacts that their activities
may have on the environment.

The imposition of a Green Tax is expected to ensure environmental and economic stability and
efficiency and also address issues concerning waste disposal, and water and air pollution.
However, it is undeniable that such measures have their drawbacks. Socio-economic barriers like
political considerations, increased prices of goods, and unfair and improper utilization of revenue
generated often create major obstacles to such tax reforms.
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Through the design and introduction of such Green Tax reforms, consumers and businesses can
finally understand the environmental impact that their operations have on the environment and
subsequently make changes in the prices. Green Tax also helps them decide on how to curb such
practices and develop machinery for the making of products that end up polluting less. Further,
consumers are also encouraged to spend their money on or utilize products that are more
environmentally friendly. Thus, Green Tax reforms consist of: (a) the adaptation of existing
taxation systems to adhere to an environmentalist agenda; and (b) the introduction of new taxes
with a financial, environmental, or mixed nature. For example, making changes in fuel taxation
from the current specific tax to one that considers the environmental impact of different kinds of
fuels on the environment or introducing a new tax on harmful emissions by industries and
vehicles alike.

3. What all needs to be considered before introducing a Green Tax?

Before a Green Tax system is incorporated, public opinion on the same must be considered. To
raise awareness about the amount of regulation that is essential to combat environmental
problems, it’s important to know and invite suggestions from the public about the kind of
reforms they would like. Incorporating public opinion into the new tax system would ensure that
the public has confidence in the government and instill a notion that the reforms are not enacted
simply to generate revenue but to achieve environmentally friendly outcomes 1. However, one of
the major questions that may arise is why a Green Tax needs to be imposed when there are
already laws and regulations enacted by the government to keep pollution in check. Let’s delve
deeper into the subject matter to answer this question.

First, taxes are often considered more flexible than regulations/statutes as taxes offer consumers
and businesses better opportunities to prevent environmental harm. This is mainly because
regulations focus on specifying the ways of reducing emissions and prescribe stricter reduction
rates, leading to higher costs compared to taxes. Hence, regulations do not leave it to the firm’s
and consumers’ prerogative to resort to cheaper options. However, the government, via such
regulations, suggests certain environmentally friendly products for which subsidies and
incentives are granted. Both the above approaches turn the economy in a direction which is very
prescriptive of favoring certain environmental solutions over others. Hence, if the Green Tax

1
Wallace E. Oates, Green Taxes: Can We Protect the Environment and Improve the Tax System at the Same.
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regime is imposed on certain petroleum and diesel products that contribute to global warming by
their usage, it allows businesses to manufacture vehicles that use or emit less of the same or
encourages the latter to use more fuel-efficient vehicles or opt for other alternatives like cycling,
walking, and public transport. In the same situation, if there was a normal regulation/statute
present, it would already set the minimum levels of fuel efficiency or provide subsidies that
would privilege certain electric vehicles, and subsequently, all of that would only provide very
incommodious solutions, denying people the choice they would get under a Green Taxation
system2.

Apart from this, we also see that environmental policy decisions have vastly changed over the
years. Previously, regulations were strictly targeted whereby certain products were either banned
or their usage was limited, and once that target was achieved, there was no need to further
recede. As opposed to this, when a Green tax is imposed, it increases the price of a product or
activity in proportion to the environmental harm that it causes. This not only induces businesses
and consumers to take these excess prices into consideration while manufacturing or using that
particular product but also provides continuous impetus to reduce at all levels of emissions.

4. The Green Tax Scenario in India

In India, the concept of an Environmental Tax has undergone many stages. Although the concept
may have been well received, the impact needs to be more powerful and popularized among the
masses. People need to be made aware of their ability to protect the environment even at the
grassroots levels, for example, by reducing the open burning of non-biodegradable wastes.
Hence, educating the masses about Environmental (Green) Taxes will help them better
understand the consequences of their actions and help them contribute towards sustainable
development via the payment of Environmental Taxes.

During the proposal of the Thirteenth Finance Commission in India, it was strongly suggested
for levying a non-negotiable excise on all environmentally polluting goods, which is indeed a
challenging process and attracts huge research work for evaluating it. However, on the imposing
of a Green Tax on natural gases, a final decision was not taken. Further, the Commission put
forth the proposal of three specific grants for the promotion and conservation of the environment
with the aim of increasing forest cover, better management of water resources, and promoting
2
Carsten Daugbjerg, New Policy Ideas and Old Policy Networks: Implementing Green Taxation in Scandinavia.
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connectivity of renewable energy to the national energy grid. It does paint a reassuring picture
for the future and that India is ready to join the ranks of “environmentally sound” nations.

Even though it can be argued that the word ‘pollution’ does not find any space in the Indian
constitution, it can be related to ‘Public Health’ which comes in the State list and of the VIIth
schedule, and the “Right to Clean Environment,” which is an intrinsic part of the Indian
constitution under Article 21 of the Indian Constitution. Pollution control laws are passed in the
national interest under Article 249 of the Indian Constitution. The effective tax rates for selected
polluting goods and industries were also examined to see their impact on the continuous increase
and escalation effect over Indirect Taxes.

Apart from the above measures, it is seen that the Tax Reforms Committee of 1992 prescribed
that higher rates of taxes on some raw materials could be levied to induce the economy in the use
of those materials in production and consumption, to conserve and protect the environment.
Further, it was also recommended that excise taxes could be a useful instrument in dealing with
externalities in the form of social costs.

The Environment Protection Act of 1986, the Water Act of 1974, the Air Act of 1981, and other
environmental legislations in India focus on safeguarding the environment through restrictions
and bans rather than imposing taxes on environmentally harmful products. This lack of fiscal
mechanisms limits the ability to influence the behavior of businesses and consumers, despite
legal frameworks targeting the reduction of harmful practices.

Compared to other countries, India faces a significant gap in fiscal reforms, leading to minimal
impact on behavioral patterns despite laws aimed at reducing harmful products and practices.
The absence of explicit provisions for environmental taxes in key legislation contributes to this
disconnect.

The urgent global concern over climate change and environmental degradation necessitates the
translation of international treaties into actionable policies. Implementing Green Taxation
becomes crucial for aligning economic activities with environmental sustainability. While
different countries adopt varied carbon tax models based on unique socio-economic and political
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contexts, proposing a uniform Environmental Taxation System for worldwide implementation

may not be practical. However, cross-border adjustments of taxes, facilitated by initiatives like
the World Trade Organization (WTO), offer a potential solution3.

Though complex, achieving this requires collective political determination. Additionally,

Corporate Social Responsibility (CSR) initiatives in sectors and industries contributing
significantly to pollution can play a pivotal role. Incorporating CSR practices not only reduces
hazardous emissions but also provides financial incentives through tax mechanisms, aligning
ethical considerations with the preservation of the planet for the sake of humanity.

An integrated approach, combining environmental conservation and financial gains through tax
incentives, holds immense potential for achieving the dual objective of safeguarding the
environment while generating revenue through Environmental Taxes4.

5. Determination of Green Tax Rates in India

Talking specifically about Vehicle exhaust is one of the major sources of air pollution. Further,
the commercial vehicle segment - trucks, buses, taxis, and three-wheelers - which constitutes
only about 5% of the total vehicle fleet, contributes about 65-70% to total vehicular pollution.
The older fleet, typically manufactured before the year 2000, or even before the emission norms
were implemented, constitutes less than 1% of the total fleet but contributes about 15% to the
total vehicular pollution. These older vehicles pollute 10-25 times more than modern vehicles.

Therefore, phasing out older vehicles generates a negative externality, and the cost of such
pollution is not borne by individuals but by society at large. Hence, levying a Green tax on the
use of old vehicles is intended to discourage the overuse of such vehicles by imposing the
economic cost of creating additional pollution on the vehicle owner.

6. Benefit of Green Tax on Old Vehicles

3
Andrew Leicester, The UK Tax System and the Environment.
4
Samuel Y.S. Chan, New Green Tax incentive in Hong Kong.
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a) Levying such Green Tax will discourage people from continuing to use vehicles
detrimental to the environment.
b) Levying such tax will also motivate vehicle owners to switch to newer, less-polluting
vehicles.
c) Green Tax increases the overall well-being of society by reducing pollution and
increases welfare by ensuring that the cost of pollution is borne by the polluter. d.
Revenue collected through such tax may be used for implementing measures to tackle air
pollution.

Since older vehicles lead to much more pollution than newer vehicles, hence, as a disincentive
measure on phasing out such vehicles and in line with the principle that the "polluter must pay,"
it is proposed to issue guidelines to States / UTs to impose a "Green Tax" on the operation of
such older vehicles.

Certain states have already taken initiatives in this regard and are levying such taxes on older
vehicles. Further, levying such Green Tax is not uniform across the country. Such sporadic
measures do not produce the desired outcome, as vehicles may be registered in a state without
Green Tax but may be plying across the country. Further, the rate of application of such taxes is
very low and does not serve as an adequate disincentive for phasing out older vehicles.
Therefore, the impact of the levy of this tax is not discernible within the country.

The Ministry, therefore, proposes to issue the following principles in this regard, which may be
used by States / UTs to formulate rules to levy Green Tax on older vehicles:

7. Principles for levy of Green Tax

 Transport vehicles older than 8 years may be charged Green Tax at the time of renewal of
fitness certificate. Such Green Tax may be charged at the rate of 10-25% of Road Tax
annually, over and above the regular taxes collected.
 Public transport vehicles, like city buses, inter-state buses, school buses, may be charged
a lower proportion of Green Tax, compared to other modes of road transport. However,
Luxury buses are to be taxed like any other transport vehicle.
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 Non-transport (personal) vehicles may be charged Green Tax at the time of renewal of
registration certification (RC) after 15 years. Such Green Tax may be charged for 5 years
as a lump sum over and above the regular tax collected.
 The rules may impose a much higher Green Tax (50% of the road tax) for vehicles being
registered in highly polluted cities.
 The rules may impose differentiated Green Tax, depending on fuel (Petrol / Diesel) and
vehicle type.
 Vehicles like strong hybrids, plug-in hybrids, electric vehicles, hydrogen fuel cell
vehicles and powered by alternate fuels like CNG, LPG, LNG, Ethanol blends, Methanol
blends, HCNG, etc., may be exempted from the Green Tax.
 Motor vehicles, like agricultural tractor, power tiller, combine harvester, used in
agriculture, may be exempted from Green Tax.
 The revenue collected from such Green Tax may be kept in a separate account and used
to tackle pollution or implement measures to reduce pollution. Part of the Green Tax so
collected may be utilized by States in setting up state-of-the-art, on-road emission
monitoring units for efficient fleet screening. Remote sensing or centralized inspection
centers need to be leveraged for identification of unfit gross polluters for fleet renewal.
 The tax structure for such Green Tax may be kept simple. Adequate publicity measures
need to be adopted to educate people to switch over to cleaner fuels and fuel-efficient
vehicles.
 State Governments must take proactive measures to modernize their own fleet, including
public transport vehicles.

8. Examining the Public Reaction in Acceptance of Green Tax Regime in India

After considering the aforementioned provisions, it's time we looked at how well the people of
the country accept the new system of Green Taxation and how accommodating they are to the
new reformation. However, certain things must also be kept in mind while assessing the same.

Firstly, an environmental tax/green tax may require adaptation of entirely new business
operations and consumer habits to accommodate a more environmentally friendly behavior. This
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change often requires high adjustment costs; for example, many products like a particular kind of
automobile or vehicle or fuel might be rendered uneconomic after the new levy. Hence, the
public in some instances may be mistrustful of the new tax reform.

Secondly, a higher tax burden leads to an automatic increase in the higher cost of production,
which may subsequently result in the shutting down of operations of many firms and businesses.
However, this depends on how well the environmental tax is designed, how it is recycled, and
the broad effects it has on the provincial economy's output. It may also be that firms which fear
being negatively affected by such change naturally are not motivated to accept such a tax reform.
Hence, this raises another concern regarding the functioning of the new tax reform.
Apart from this, a high rate of Environmental Tax may have concentrated effects on low-income
earners who end up paying more than their ability, and this works against society's income
distribution goals.

Thirdly, since there is uncertainty about the public acceptance of these taxes and subsequent
difficulty in predicting the rate at which pollution will fall if environmental taxes are
implemented, it becomes expensive for governments to pursue environmental targets, thereby
making it difficult for firms and households to plan investment, production, and consumption
activities.
Regardless of this, environmental taxes are slowly gaining momentum, not only in India but also
in countries across the world. This would not have been possible without public acceptance.
However, this acceptance is without any qualifications in cases where the taxes are directed
towards producers rather than consumers. Small taxes provide many exemptions even though
they are farther away from their efficient level and hardly improve the environment 5.

9. Suggested Changes in Green Taxation In India

In order to ensure a cost-efficient system, Green Taxes should apply uniformly to all taxpayers.
Differentiated tax rates will mangle the competition in the market, reduce incentives, and make
them inefficient to lessen environmental harm.

5
Divya Datt, Green Budget Reform in India: Opportunities and Challenges.
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Industrial exemptions can be allowed in this taxation, but only for a limited time period. These
exemptions should be well-targeted and regularly reviewed. Sufficient time should be given to
industries to structurally adjust in the long run, ensuring subsequent environmental effectiveness.

Further, it is important to assess the actual impact of a tax. Therefore, regular policy monitoring
needs to be done to ensure its environmental efficiency. This monitoring should be provided the
market has adjusted to the existing rates and firms and businesses are contemplating a change in
behavior towards being more environmentally suitable.

10. Conclusion

Environmental taxes represent one of the most effective means to align the prices of goods and
services with society's ideals concerning environmental protection. This tool serves to instill
environmental awareness in both businesses and consumers, ensuring that industrialization and
technological progress do not outweigh our fundamental responsibility toward maintaining a
sustainable environment.
However, the efficacy of an environmental tax hinges not only on who should pay and when but
also on the specific context in which the tax is applied. This includes the nature and type of the
environmental issue and its interconnectedness with other environmental challenges. Interactions
with other policy instruments, such as legislations and regulations addressing similar or different
objectives, also play a crucial role and should harmonize with one another.
The primary challenge lies in designing policy objectives and instruments in a way that
minimizes social costs and ensures a fair distribution of the burden. A systematic analysis of the
policy framework is essential for the successful design and implementation of environmental
taxes.
In conclusion, while the system of environmental taxation has steered India towards sustainable
development, it is now imperative to popularize a Green Tax system to align with global
standards of environmental protection. For the greater good of humanity, the impact of
environmental taxation in India should be far-reaching and widely embraced.
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