Simultaneously achieving development and environmental goals: An application of carbon taxation in India

Date of Completion

January 2009


Economics, Agricultural




Developing countries are concerned that policies to reduce greenhouse gas (GHG) emissions might adversely affect their development performance. They are thus reluctant to commit to GHG mitigation targets. Despite this, it may be possible to find ways to enlist their support for international agreements designed to manage climate change. Previous research suggests that some GHG mitigation policies have co-benefits (e.g. improvement in human health and productivity and 'double dividend') that are beneficial for economic growth. I investigate the use of carbon tax revenue to promote a specific development goal. In particular, I explore the possibility of setting aside the carbon tax revenue to meet an important development target — increase in the level of education. I find that such a targeted use of the proceeds of the carbon tax has the potential to address the concerns of the developing countries. I employ a Computable General Equilibrium (CGE) model of India's economy to estimate the net changes in some economic indicators induced by the implementation of carbon tax and its use for improving educational outcomes. When the carbon tax revenue is used only for a lump sum transfer to the households, real Gross Domestic Product (GDP) and household income decline (relative to the baseline) along with CO2 emissions. However, when carbon tax revenue is allocated to public expenditure on education, real GDP and household income improve (relative to the baseline) while stabilizing carbon emissions. This result points to a "win-win" solution because an environmental and a development goal are achieved simultaneously. ^