Can India Reimagine Tax As A Climate Action Tool?

The report says if current trends of rise in global temperatures and increase in frequency of extreme weather events continue, nearly 80 per cent of India’s population could face extreme heat by 2036.

The monsoon itself has already started to change, bringing erratic rainfalls that affect everything from farming to flood risks across the nation. The report identifies that 84 per cent of districts are now vulnerable to heatwaves and 70 per cent to unpredictable rain, painting a clear picture: India’s response must be as versatile as the challenges it faces.

With India’s climate rapidly intensifying, the question looms: How do we start imagining and addressing the magnitude of this crisis?

As rising heat and unpredictable monsoons threaten millions, awareness is just the start. Moving from awareness to action requires shared intent, strong policy and strategic funding. Addressing this complex challenge will not only demand well-crafted policies, but also substantial financial backing, where targeted taxation becomes crucial.

In South Asia, Bangladesh has levied environmental taxes on plastic and fossil fuel industries to support disaster resilience, while Nepal offers tax breaks for green energy initiatives. Similarly, Chile’s carbon tax targets large emitters to curb greenhouse gases, and Colombia redirects taxes on single-use plastics to fund reforestation. Such well-targeted taxation has helped these nations fund climate solutions.

But what about India? What are some of the specific ways India could leverage targeted taxation to fund its climate resilience in the face of a warming future?

Taxing For Sustainability: Environmental Action As Welfare

Taxes form the backbone of any government's ability to deliver welfare and development programmes to its citizens. In India, taxation plays a crucial role in funding a diverse array of public services — from education and healthcare to infrastructure development and disaster relief. 

For instance, in the Union Budget for 2023-24, the Indian government allocated Rs 1.12 lakh crore (approximately US$ 13.5 billion) to the Ministry of Education, aimed at enhancing school infrastructure, teacher training and digital learning tools. Similarly, the healthcare sector received Rs 89,155 crore (approximately US$ 10.7 billion), with funds directed toward initiatives like Ayushman Bharat, the world’s largest government-funded healthcare scheme that provides health insurance to millions of vulnerable families.

Infrastructure spending is another critical area funded through taxes, with Rs 10 lakh crore (around US$ 121 billion) earmarked for projects including roads, railways, and urban development — all geared towards climate resilience.

Taxes also support the National Disaster Response Fund (NDRF), which received Rs 12,031 crore (US$ 1.45 billion) to aid disaster recovery, reflecting India’s growing need to manage the impacts of climate change.

However, as climate change accelerates and its impacts intensify, governments are increasingly relying on taxes not only for development, but also to tackle the escalating environmental crisis. According to the Climate Risk Index 2021, India ranks among the top 10 countries most affected by extreme weather events. 

In recent years, floods, cyclones and heatwaves have devastated large parts of the country, resulting in billions of dollars in damages. The Kerala floods of 2018 alone caused an estimated Rs 31,000 crore (US$ 4.3 billion) in damages, highlighting the financial burden of climate-induced disasters.

Recognising this reality, India is beginning to weave climate considerations into its fiscal policy. The Clean Environment Cess, introduced in 2010, exemplifies how taxes can discourage pollution, while raising funds for climate mitigation. 

Initially set at Rs 50 per tonne of coal produced or imported, the cess was raised to Rs 400 per tonne, generating over Rs 86,440 crore (US$ 10.5 billion) by 2020. This revenue is funneled into the National Clean Energy Fund (NCEF), which finances renewable energy projects, illustrating how taxation is increasingly being harnessed to combat climate change.

Multiple Ways To Think About Climate Action Through Taxation

India's climate-focused tax strategy is multi-pronged, targeting fossil fuel reduction, green energy promotion and resilience funding through specific tax measures:

1. Carbon-Linked Levies And Trade Programmes

India’s Clean Environment Cess on coal, functions as a quasi-carbon tax, funneling revenue into the NCEF for renewable projects. Meanwhile, the Perform, Achieve and Trade (PAT) scheme promotes energy efficiency by allowing industries to trade energy-saving certificates, indirectly cutting carbon emissions.

2. Green Subsidies And Incentives

Tax incentives drive renewable energy and electric vehicle (EV) adoption. Section 80-IA of the Income Tax Act offers tax breaks for renewable energy businesses, while the FAME scheme reduces GST on EVs and subsidises manufacturers, encouraging a shift from fossil fuels to clean transport.

3. Pollution Deterrents Via Taxation

High taxes on polluting goods, like luxury and older vehicles, push consumers toward greener alternatives. States like Kerala impose “green taxes” on older vehicles, reflecting efforts to reduce pollution and encourage sustainable choices.

4. Climate-Responsive Property Taxes

Given the rising threat of climate-related disasters, vulnerable coastal cities like Mumbai and Chennai are considering increased property taxes to finance climate-resilient infrastructure, such as flood prevention systems.

5. Sin Taxes On Pollutants

Taxes on harmful goods like coal and plastic, based on a “polluter pays” principle, discourage consumption of environmentally damaging products, while revenues support environmental cleanup efforts.

6. Disaster Relief Funding

With climate-induced disasters on the rise, taxes fund the National and State Disaster Response Funds (NDRF and SDRF), helping India prepare for and recover from natural disasters.

Balancing Climate Action And Economic Fairness

India's evolving tax policies to address climate change still face significant hurdles, with some experts pointing out that certain taxes, intended to promote sustainability, can inadvertently burden lower-income households.

Prateek Joshi, head of public policy at a renewable energy company, notes, “The key issue with environmental taxes is designing them to encourage sustainable choices, without overtly burdening economically vulnerable groups.” He emphasises that redirecting revenue from these taxes into social welfare could offset these impacts.

Rajesh Malhotra, vice-president (operations) at a electric vehicle (EV) major, agrees that support for green initiatives is crucial, but stresses that slow adoption of these technologies remains a challenge.

“While subsidies for EVs and renewable energy projects are encouraging, the lack of charging infrastructure for EVs, and high initial costs for solar installations, hinder widespread adoption,” Malhotra explains, adding that a stronger infrastructure backbone is essential for making green technology more accessible.

Swati Verma, senior tax advisor at an environmental consultancy, suggests a progressive approach, proposing that taxes should be adjusted based on income or business scale.

“A progressive carbon tax could reduce emissions without harming lower-income groups,” said Verma, adding that “larger industries could be taxed at a higher rate, while lower-income households could receive rebates to help them transition to cleaner energy sources.”

Vikram Shah, head of renewable investments at a clean energy firm, supports Verma’s view, highlighting that expanding tax incentives specifically for renewable projects is a powerful way to drive change. “Expanding benefits under Section 80-IA of the Income Tax Act could encourage residential solar installations, making renewable energy more accessible to everyday homeowners,” he notes. 

Shalini Gupta, an environmental economist and manager at a policy think tank, adds that adjusting GST rates to reflect environmental impact could also drive sustainable consumer choices, noting, “By setting lower GST rates for eco-friendly products, consumers can be nudged towards greener options.”

Arjun Mehta, policy analyst at a nonprofit environmental organisation, emphasises that dedicated funding is also essential to achieve these goals. He advocates for a Green Tax Fund, suggesting that a specific percentage of carbon tax revenue be allocated to this fund to directly finance climate resilience initiatives.

“Channeling these revenues into a focused Green Tax Fund would ensure that they support vulnerable communities and build climate resilience,” he says, echoing other experts’ calls for targeted spending.

On the infrastructure front, Nisha Rao, infrastructure lead at engineering consultancy Atkins Realis, concurs with Mehta and proposes further tax incentives to attract private investments in climate-resilient infrastructure. She argues, “Offering tax credits for investments in sustainable infrastructure could draw private capital into essential climate-resilient projects.”

In line with improving energy efficiency, Amit Sharma, director of programmes at Schneider Electric's prestigious Energy & Sustainability Services (ESS), brings up the potential of energy audits. “Implementing a rebate programme linked to energy audits could offer immediate tax relief for households and businesses, promoting widespread adoption of energy-saving technologies,” he notes, reinforcing Rao’s emphasis on private-sector involvement in sustainable development.

Disaster management consultant Vikas Patil points out that with India facing increasing climate-induced disasters, it’s vital to boost the NDRF. He suggests, “Allocating a specific portion of environmental tax revenues to the NDRF can enhance India’s response to climate-related emergencies.” He further underscores the importance of safeguarding vulnerable communities during extreme events.

Rina Sinha, director of outreach at an environmental NGO, adds that beyond tax adjustments and incentives, educating the public on the purpose and benefits of green taxes is essential. She emphasises, “A well-informed public is more likely to support environmental taxes and policies. Education is key to building a culture of sustainability that can support long-term climate action.”

Towards Climate-Conscious Taxation

India stands at a crossroads, where its taxation system can be transformed into a powerful tool for climate action. By embracing a progressive, equitable approach to environmental taxes, not only can the government generate revenue, but also drive sustainable development, combat climate change and uplift marginalised communities.

While challenges remain, the growing recognition of the interconnectedness of taxation and environmental sustainability suggests that India’s journey toward climate-conscious taxation is just beginning. With concerted efforts from policymakers, industry leaders and citizens alike, India can chart a course towards a greener, more sustainable future, where taxation is a driver of positive change rather than a burden.