Carbon Emissions in India: A Computable General Equilibrium Analysis

Abstract

As the world's third-largest emitter of greenhouse gases, India stands at a crucial juncture in the global fight against climate change. Recognising the delicate balance India must strike between rapid economic growth and sustainable development, this research employs a Computable General Equilibrium (CGE) model tailored specifically for the nation. By incorporating Greenhouse Gas (GHG) emissions, the model delivers an in-depth analysis of the potential economic impacts of climate mitigation strategies, especially carbon taxation, within the intricate fabric of India's diverse economy. This endeavour fills a significant knowledge gap, offering a tool that policy analysts can use to harmonise India's developmental aspirations with its global climate commitments.
Tapping into the power of quantitative methodologies, the study leverages CGE models known for their proficiency in capturing a country's economic interconnections. For India, this model weaves in GHG emissions to holistically assess the economic ramifications of carbon taxation. Core to this research is data sourced from India's Social Accounting Matrix (SAM) (Pal et al., 2020), complemented by inputs from national databases capturing carbon intensities, labour productivity, and capital stock depreciation.
The application of the CGE model to India's context yielded pivotal insights. A deep dive into sectors revealed that five of them, led prominently by the coal-intensive energy sector, are responsible for over 95% of India's emissions. Notwithstanding the nation's push towards renewables, emissions are dauntingly high. While a modest carbon tax has limited impact, a more aggressive tax rate, although effective, disrupts income distribution, disproportionately affecting India's marginalised populations. The research thus underscores a synergistic approach, merging targeted reinvestments with a robust carbon tax as the linchpin for sustainable decarbonisation in India. While potent in emission reduction, such strategies necessitate protective measures, like subsidies, to prevent deepening India's socio-economic divides.
The study recognises intrinsic limitations that need addressing. The current model's architecture possesses constraints, particularly in its representation of export levels and wage growth. An endogenous presentation in these areas would provide a richer systemic view. While the research touched upon two primary tax rates, a broader exploration of tax rates is warranted to align more accurately with Key Performance Indicators (KPIs). The present pricing mechanism, which leans heavily on consumers bearing the entirety of the carbon tax, hints at a potential imbalance in economic impact and needs reevaluation. Additionally, using placeholder coefficients for decarbonisation offers a limited perspective, potentially glossing over the nuances of carbon reduction dynamics. Notably, the model's exclusion of simulations for extreme weather events is a critical oversight, which could affect its forecasting abilities, especially in climate change.
This research presents actionable policy recommendations, chiefly underscoring the role of targeted reinvestment coupled with a high carbon tax rate. With India's energy sector at the forefront, targeted reinvestments promise to bolster GDP and reduce emissions, providing a roadmap that aligns economic growth with climate mitigation. However, given India's socio-economic fabric, implementing such strategies mandates careful consideration of potential impacts, especially on vulnerable sectors like agriculture and the vast populace of lower-income households.