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Climate change is something we are worried about. There have been targets set for various countries and India is a front-runner here. Companies are working towards net-zero, which means that as their business operations emit carbon-laden gases, they will either reduce these pollutants to nil or fully compensate for them by absorbing the same quantity from the atmosphere. Awareness of this has spread. Good. But another question is whether the government can do something to earn revenue here.

The government has been looking at different ways of augmenting its revenues, as mere tax buoyancy cannot be relied upon; growth levels can vary and abnormal situations seem to arise almost every year. As options are explored, existing taxpayers usually end up being taxed even more. Given that climate action is a big thing today, there is room to think of taxing companies that pollute the environment. With the country going digital and most business units GST-registered, we have records of what each firm does. This universe of companies can serve as the taxable base on which a green tax can be levied. Even for a rudimentary activity like farming, we have knowledge of the pollution caused, and this tax can be imposed at the mandi level, the official point of sale.

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There are different ways of arriving at the amount of pollution emitted by every business activity. Manufacturing and construction top the list, broadly, with services next. More specifically, fuel-based industries top the list of polluters. Think of coal, oil, gas and petro-products, and of energy suppliers that use fossil-fuel inputs. Other large polluters include industries like transport, chemicals (especially fertilizers), technology, processed food and fashion. Services with no factories add to ecological atrophy with their buildings and servers that add to global warming. The fancy glass-front edifices of modern commercial complexes that use much energy to keep cool are other examples.

In short, every economic activity adds its bit to pollution and can be brought under the tax net. The Centre only needs to commission research agencies to independently evaluate the emissions of all industries and set standards for the same. This done, there is scope for taxing industries on the basis of the pollution caused by their business activity.

India’s top 4,000 odd companies had a combined turnover of roughly 100 trillion in 2021-22. Intuitively, all these sales can be linked to pollution. Our green tax rate can then be defined along a scale and imposed on all industries. On an average, if the green tax rate is, say, 0.5% of turnover, the government can rake in an amount of 50,000 crore annually, which can then be used to finance budget spending. Since the government has already spoken of issuing green bonds for projects that are environmentally compliant, a green tax would actually complement this effort.

The green tax need not be uniformly applied, and its rate could vary from 0.1% to 2%, depending on the industry concerned. As the sales of these companies or industries grow, they would automatically yield higher revenues to the government. In a way, this would make businesses pay for the damage caused to the environment. The tax, hence, would be a levy based on the status of the company and defined by the industry to which it belongs. Once a green tax is imposed, it would be fair to dispense with the mandatory corporate social responsibility (CSR) expenditure that firms currently bear. Presently, there is a net worth/sales/net profit criteria, by which companies must spend 2% of net profit on activities defined under CSR. The 2% of profit-after-tax norm in existence is not fair, it may be argued, as the purpose of any company is to produce goods or services. It is not ethically right to force them to take up CSR activity. It takes up a lot of bandwidth, as it involves having separate staff to administer the same.

Addressing social causes like health, education, open spaces, etc, is the job of the government and passing on such tasks to commercial entities makes little sense. Businesses do not have the core competence to do social good and invariably end up passing on the funds to non-profit entities, which defeats the purpose. Several Indian companies have long been involved with philanthropy on their own volition, which is how it should be.

Some companies have been observed to indulge in ‘greenwashing’ just to meet CSR obligations. This again defeats the purpose.

Ideally, India’s green tax should be levied on a company based on emissions that can be measured. As this is difficult to assess with accuracy, using broad industry averages as the norm would be a good start. Companies can be slotted into industry groups based on how their production or sales are classified. A cut-off level of 50% product sales or production can be used for classification, or alternatively, the product with the largest share in a company’s overall production or sales can determine its industry assignment. Assessment of pollutant emissions can be reviewed periodically, as firms would be expected to do their utmost to induct new technologies and reduce their emissions over time.

One consequence could be that companies will pass this cost onto their customers. At the individual level, this would not be very significant and can be absorbed. Moreover, consumers of products and services that are environmentally unfriendly would also be made accountable to the world at large (and to pay for the same). In a zero-sum game, the cost has to borne by somebody. But the government is sure to be a big beneficiary .

These are the author’s personal views.

Madan Sabnavis is chief economist, Bank of Baroda, and author of ‘Lockdown or Economic Destruction?’

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