The 16th Finance Commission could catalyze climate governance in India

It is widely expected that the 16th Finance Commission (FC) will look into the growing complaints of states against the Centre dipping into the tax cess and surcharge pools, which are not shared with them, while decreasing the Centre’s contribution to centrally sponsored schemes.

But there are other crucial areas too that the FC can nudge the Centre and states to look at beyond the traditional tax devolution criteria followed by most FCs (like state population, area, forest cover and tax efforts).

Given the well-known challenges facing the world and particularly India as the adverse effects of climate change assume ‘polycrisis’ proportions, with multiple points of worry, there is a pressing need to steer policies across sectors towards a low-carbon regime.

Policymakers and implementers need to believe that ‘net zero’ is actually ‘net positive,’ as India has shown so far with its high GDP growth trajectory while doing more on the climate front than most other countries.

During its presentation before the 16th FC, the Biju Janata Dal, led by former Odisha chief minister Naveen Patnaik, made a series of climate-responsive governance suggestions to the Commission on areas such as climate budgeting, climate budget tagging, sectoral climate change impact appraisals and other governance initiatives.

Create national and state carbon accounting authorities: In routine finance, individual entities—businesses and households—keep an account of the inflows and outflows of money. Financial accounting is an integrated system.

In contrast, the stocks and flows of carbon emissions are not tracked at a granular level anywhere in the world. As a result, we cannot implement a progressive carbon tax that penalizes large users of fossil fuels more than the average consumer.

A progressive carbon tax would need us to keep track of carbon ‘inflows’ and ‘outflows’ at every level, perhaps via a national carbon account. Its measurement is, therefore, the first step.

Existing carbon accounting methodologies such as those championed by Karthik Ramanna at Oxford are already capable of tracking carbon balance sheets at the corporate level.

A national carbon accounting (NCA) system is both an evolutionary and revolutionary generalization of such ideas. It could bring us all, from individuals and households to companies, under one umbrella carbon accounting framework.

An NCA could make it mandatory for businesses and individuals to report their carbon emissions and capture and maintain the country’s carbon books. Such a system will make the circulation of carbon visible.

Once we have an NCA, we will be able to set targets, make more reliable predictions about future emission reductions and track our progress against those goals.

For this purpose, the 16th FC may consider promotional sector-specific grants to the Centre and states for setting up an ecosystem of carbon accounting at the household-level, just like income and expenditure numbers are used for the calculation of GDP, and set up carbon accounting authorities at the central and state levels to arrive at a carbon count every quarter and at the end of a financial year.

Just as we track GDP, we can then track our progress towards net-zero emissions by 2070. This initiative would most likely be the first of its kind anywhere in the world and would also be in line with the LiFe approach that India espoused at CoPs and G-20 summits.

Modify the Commission’s forest cover and ecology criterion: Forest cover and ecology, with minor variations, has been adopted as a criterion for the purpose of tax devolution by successive FCs. But forest cover can’t be the only indirect proxy for such efforts by states.

The 16th FC should instead adopt ‘climate and disaster proofing initiatives” as a new criterion and include mitigation and adaptation measures undertaken by states under its ambit.

The 16th FC can subsume the earlier forest and ecology criterion within this one and provide separate sector- and state-specific grants under it. It should also raise its weight from 10% in the 15th FC to 20%.

The funds could be used for preparedness, mitigation and adaptation efforts by states to create climate-resilient infrastructure in fields ranging from power, agriculture and irrigation to roads, bridges, dams and reservoirs, as the State Disaster Response Fund is for post-disaster responses.

Grant states the power to levy a green tax: Mineral-bearing states like Odisha, Telangana, Karnataka, Jharkhand, Bihar and others should be allowed to levy a green tax to fund mitigation and adaptation measures against the environmental degradation of mining.

Stop diversion of the clean energy cess: It’s odd that the Centre’s clean energy cess, which was levied on coal production, was treated as a revenue stream and helped it pay GST compensation to states, instead of being used for investments in clean-energy technology and other adaptation measures at project sites to reduce the impact on the environment and people in the states concerned.

This cess should be disentangled from GST and distributed to coal producing states.

The big opportunity that the FC must not miss, however, is to foster climate-responsive governance in India.

The author is a former member of the Rajya Sabha and a former bureaucrat with the Comptroller and Auditor General of India.