An autonomous research institute under the Ministry of Finance


Exploring a Design of Carbon Tax for Coal and Lignite based Thermal Power Sector in India

Publication date

Apr, 2022


NIPFP Working Paper No. 382


Sacchidananda Mukherjee


According to India’s Third Biennial Update Report to the United Nations Framework Convention on Climate Change, electricity production contributes half of India’s total carbon dioxide (CO2) emission (without LULUCF) and 40 per cent of CO2e (CO2 equivalent) emission in 2016. Coal and lignite based thermal power sector is the predominant source of electricity generation in India and contributes 74 per cent in 2019-20. In COP26, India has committed to achieve net-zero (in CO2e emission) target by 2070. Therefore, any strategy to reduce total CO2e emission in India cannot spare emission reductions from coal and lignite based thermal power plants (TPPs).
To accelerate achieving India’s emission intensity reduction target to 45 per cent, we explore a design of carbon tax for coal and lignite based TPPs. Given the constraints involved to design a carbon tax based on Pigouvian tradition, we estimate a revenue neutral rate of tax on CO2e emission by converting taxes on coal and lignite. To make the proposed carbon tax system less disrupting for tax administrations, we propose adjustments of input tax credits with carbon tax liability. The proposed carbon tax will be incentive-compatible, as carbon efficient TPPs will face lower carbon tax burden.
Key Words: Emissions of Green House Gases (GHGs), Carbon Tax, Revenue Neutrality, Thermal Power Generation, Coal and Lignite, India.
JEL Codes: H23, Q54, Q4, P43
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