Recycling carbon tax for inclusive green growth: A CGE analysis of India

In this decade, India has been pursuing a low carbon inclusive growth strategy. However, carbon tax, the most direct price instrument to reduce carbon emissions, has not found favour with policymakers because of its supposed detrimental effects on economic growth and income distribution. In the Indian context, the literature indicates that though carbon tax is extremely effective in abating carbon emissions, it simultaneously leads to reductions in GDP. There is, thus, an undesirable trade-off between economic growth and climate change mitigation. However, in trying to overcome this trade-off through a double-dividend from carbon tax, these studies have not really explored all possible options. Whether the carbon tax will yield a double-dividend or not, will depend upon how the carbon tax revenue is recycled. The present paper fills this gap in the literature on recycling carbon tax for inclusive green growth by exploring the consequences of using carbon tax revenue for investment to build capacity in all sectors or exclusively in the clean energy sectors and to execute transfers to households to improve the distribution of income. This analysis has been done with a recursively dynamic India-specific CGE model having a disaggregated energy sectors and an endogenous income distribution module.