Greening of taxation can reduce current economic problems and alleviate future bottlenecks in South Asia, states the latest World Bank report on the macro-economic condition and the growth forecast of all South Asian economies (excluding Afghanistan).

The report mentions that "challenges are extraordinarily complicated for South Asian policymakers" in the backdrop of supply chain disruptions due to the COVID-19 pandemic and the Russia-Ukraine war. It goes on to add that "high oil prices and uncertainty in international oil markets" incentivise South Asian nations to accelerate their transition to a low-carbon development path to boost energy security.

What is greening of taxation?

Taxing carbon-intensive processes is known as greening of taxation. For instance, any procedure that uses conventional energy sources like coal, petrol, or diesel, is taxed as part of the "greening of taxation" process. This pushes the market to adopt greener (eco-friendly) technologies and renewable energy sources. Therefore, greening of taxation helps a nation pivot itself to sustainable development.

Why should nations go for greening of taxation?

The report underlines that all South Asian nations are heavily dependent on energy imports and a majority of them provide fuel subsidies. When the Russia-Ukraine war has increased uncertainty in the energy market, the balance of payments of South Asian economies is taking a major hit due to fuel imports. Further, fuel subsidies incentivise carbon-intensive processes, deplete government revenue and raise pollution levels.

Yet another advantage of greening taxation is that it makes a nation's exports more competitive. The report says that in the long run, a majority of countries (especially in the West) would impose a carbon tax. This would mean that all products that are manufactured through carbon-intensive procedures would become more expensive. If South Asian economies continue production with high carbon use, their exports would lose the competitive advantage.

Challenges to greening of taxation

As all South Asian nations are importers of energy, a tax on fossil fuels would raise commodity prices. This may lead to public discontent. Also, those working in the energy sector will need to be reskilled as companies would adopt green tech and replace the use of conventional fuels to avoid the carbon tax. Consequently, a significant amount of energy sector workers may end up losing jobs, however, new opportunities will come up in the fields of green tech and renewable energy sources.

How to shift towards greening of taxation?

The World Bank report underscored that greening of taxation would require structural changes. The report notes that rather than rolling out subsidies to provide fuel at cheaper rates, governments should develop targeted policies for vulnerable households. It adds that fuel subsidies help the rich more than they help the poorer sections. The report suggests South Asian nations to use the money they save from reducing energy imports for social welfare schemes.

A carbon tax, however, would require these nations to spend more on developing infrastructure for green tech. Also, higher fuel costs would push more people towards using public transportation, and thus, these countries would need to upgrade their public mobility infrastructure.

The World Bank report appreciated India's Union Budget for 2022-23 saying, "India’s 2022-2023 budget incorporated for the first time a long-term strategy (on elimination/reduction of inefficient fuel subsidies). Climate action was framed as one of the pillars of the Budget, including plans for low-carbon and climate-resilient development."