Experts push for strong financial penalties to curb rising emissions

India is at a stage where it needs to think of new ways to raise revenue without depending too much on old methods. In recent years, both direct and indirect tax rates have been simplified, and the Budget now relies on stronger economic activity to bring in more money. But growth in nominal GDP is no longer as high as before. Several goods have seen deflation, and overall growth has stayed below earlier expectations. At the same time, government spending on welfare schemes and infrastructure continues to rise and cannot be reduced.

Given this situation, the government needs additional sources of revenue. Relying heavily on transfers from the central bank is not ideal, because such transfers can start looking like indirect monetisation. This makes it important to consider new ideas—and one promising option is a comprehensive pollution tax.

The idea of taxing pollution is not entirely new. Carbon markets already exist where companies trade carbon credits. But the proposal here is different. It is inspired by the principle of Arthur Cecil Pigou, the British economist who argued that activities which create negative effects on society should be taxed. Pollution is one of the clearest examples of such negative effects. Therefore, a pollution tax would not be based on commercial trading mechanisms like cap-and-trade; instead, it would directly tax the polluting activity itself, whether done by a producer or consumer.

Making polluters pay while encouraging cleaner choices

A pollution tax has two main goals. First, it makes sure that all those who contribute to pollution pay for the cost they impose on society. This makes the system more democratic, because every polluting entity—small or large—contributes proportionately. Second, it gives people and companies an incentive to adopt cleaner habits. If consumers switch to electric vehicles or cleaner fuels, they will pay less tax and the government’s revenue may go down slightly. But society will benefit from cleaner air and better health. The value of this improvement is far greater than the revenue lost.

There are different methods to design such a tax. One approach is to place the tax on polluting industries directly. A simple way is to look at the share of power and fuel expenses in a company’s total turnover. This assumes that pollution mainly comes from fuel and energy use, which is not always fully accurate but is still easy to implement. Profit and loss statements can be used to calculate the tax.

Another, more detailed method involves using India’s pollution index. Industries are already classified into four categories: red (highly polluting), orange (moderately polluting), green (less polluting), and white (non-polluting). The government can adjust corporate tax rates based on this classification. For example, companies in the red category could pay a higher tax rate, such as 32% instead of 30%. Orange-category companies could be taxed at 31%, while green-category companies remain at 30%.

A challenge here is that many companies produce multiple products that may fall into different pollution categories. To solve this, a rule could classify a company based on the product that makes up at least 51% of its sales. If needed, this threshold can be lowered to 33% to include companies with two or three major product lines. For highly diversified companies, the sales of the top three products can be combined to determine the category.

This type of tax would be a direct tax. It would affect profits and shareholders rather than customers directly, which makes it fair. The question may arise whether companies that carry out environmental improvements should get tax deductions. However, such allowances may lead to loopholes and tax manipulation. The main idea is simple: tax the pollution-generating activity itself and do not permit exemptions that are indirectly linked to CSR or mitigation efforts.

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Using indirect taxes to shape consumer behaviour

Another approach is to impose a pollution tax through indirect taxation, where the consumer pays at the time of purchase. For example, a small tax on every litre of petrol and diesel can be added, which would encourage people to shift to cleaner vehicles or public transport. Even a ₹1-per-litre pollution tax on fuel can generate around ₹15,000 crore annually, and any increase would raise revenue proportionately.

Similarly, a pollution tax can be added to airline tickets. If each air ticket includes a ₹100 pollution tax, and if India records around 200 million passengers a year, the government can earn nearly ₹2,000 crore. However, policymakers must be careful about inflation. Any general increase in consumer taxes can raise prices, so the tax needs to be introduced selectively and in phases.

The government cannot tax all products and services at once. A phased approach could target the most polluting sectors first. These include fuel and power, fast fashion, livestock and dairy, transportation, data centres, construction materials, plastics, and chemical industries. The tax amount can vary depending on how harmful each sector is.

There is also a sensitive question of taxing pollution from agriculture and livestock. Since these activities often belong to the unorganised sector, any tax on them must be handled carefully. Many exemptions will be necessary to protect farmers. Therefore, in the early stages, the focus should remain on industries that are easier to regulate and do not involve politically or socially sensitive groups.

A well-designed pollution tax can play a major role in India’s long-term environmental and economic strategy. It can create a steady revenue stream, promote cleaner choices, and gradually reduce pollution levels. Over time, it will make society more conscious of the environmental cost of everyday activities. If implemented thoughtfully and in phases, such a tax can help India balance environmental protection with economic needs, making the country cleaner, healthier, and more sustainable for the future.