The year 2024 has marked a significant milestone as the warmest year on record globally since 1850. This alarming statistic underscores the immediate and substantial challenges posed by climate change. The Economic Survey 2024-25 identifies India as the seventh most vulnerable nation to climate change impacts, highlighting the country’s susceptibility to extreme weather events, rising sea levels, biodiversity loss, and escalating water insecurity. India stands at a critical juncture, balancing economic growth with environmental sustainability. As the third-largest emitter of greenhouse gases, India faces an urgent need to implement effective climate strategies.
The recent Union Budget for 2025-26 signals a commitment to align fiscal measures with national and international climate goals, fostering a synergy between economic growth and sustainability. India’s pledge to reduce carbon emissions intensity by 33-35% from 2005 levels by 2030, as outlined in the Paris Accord, emphasizes the importance of tax incentives in achieving this ambitious target.
Mitigation and Adaptation: A Dual Approach to Climate Action
Addressing climate change requires a two-pronged strategy: mitigation, which focuses on reducing greenhouse gas emissions, and adaptation, which prepares communities for unavoidable impacts. India’s commitment to this framework gained momentum with its Nationally Determined Contributions (NDCs) announced in 2015, preceding COP21 in Paris. India has achieved two of its targets by 2023, with 47.10% of its total installed electricity generation capacity coming from non-fossil fuel sources as of December 2024, slightly short of the 50% target for 2030.
Additionally, India has established an additional carbon sink of 2.29 billion tonnes since 2005, aiming for 2.5 to 3.0 billion tonnes by 2030 through enhanced forest and tree cover. A significant allocation of Rs 26,549 crore (approx. 3.20 billion USD) towards solar energy underscores the government’s commitment to diversifying energy sources. A notable report by the RBI suggests that transitioning from fossil fuels to renewable energy could mitigate approximately 40% of India’s annual carbon emissions, with an additional 15% reduction possible through the adoption of electric vehicles (EVs) and energy-efficient appliances.
Encouraging Clean Mobility and Energy Transition
The focus on expanding the EV ecosystem, supported by domestic battery manufacturing initiatives, highlights the government’s aspiration for a cohesive energy transition. Tailored taxation policies can make EV adoption more accessible while supporting sustainable infrastructure growth. The 2025-26 budget proposal also encourages startups through alternative investment funds (AIFs), fostering innovation. India aims to achieve 30% EV penetration by 2030, a crucial milestone in its clean mobility journey.
The current GST framework is fragmented, with varying rates for electric vehicles and related items. Unifying the GST rate for all EV-related items to a consistent 5% could significantly reduce costs and foster greater consumer adoption. Additionally, raising the deduction cap under Section 80EEB of the Income Tax Act from ₹1.5 lakh to ₹3 lakh could incentivize individuals to embrace cleaner transportation options.
The Indian government has launched various subsidies to promote EV adoption, with the FAME II scheme being a notable initiative. Enhanced by state-level subsidies, affordability is further improved. The government also supports the development of essential infrastructure through subsidies for charging stations and has introduced a battery-swapping policy alongside the Production Linked Incentive (PLI) scheme to bolster domestic manufacturing.
The Panchamrit Goals and the Union Budget: A Framework for Sustainability
At COP26 in 2021, India articulated its Panchamrit goals, setting forth a plan for sustainable development in five pivotal areas: achieving 500 GW of non-fossil fuel energy capacity by 2030, sourcing 50% of energy from renewable sources by 2030, reducing projected carbon emissions by one billion tonnes, lowering the carbon intensity of GDP by 45% from 2005 levels, and achieving net-zero emissions by 2070. These ambitious targets reflect India’s dedication to a sustainable future.
Aligning with these goals, India’s Union Budgets have introduced significant initiatives to foster green growth, including allocations for clean air, green bonds, solar power, energy efficiency, and circular economy initiatives. The 2025-26 budget supports domestic industries in making solar panels, EV batteries, and clean tech through the ‘Make in India’ initiative, along with investments in small modular nuclear reactors (SMRs) and high-yielding seeds.
Environmental Taxes: Crucial Tools for Sustainability
While the budget has taken key steps, environmental taxes (or eco-taxes) are crucial tools the government ought to consider. These taxes target activities deemed harmful to the environment, encouraging shifts towards sustainability. Key eco-taxes include:
- Carbon Taxes: Aim to reduce fossil fuel use and curb greenhouse gas emissions. India’s current carbon pricing through the Compensation Cess on coal is relatively low compared to global standards. Incorporating a carbon tax into the prevailing tax frameworks, such as GST, could facilitate the process and diminish compliance expenses.
- Import Duties: Changes in duties on imported goods, particularly environmentally damaging items, can be implemented based on current needs.
- Severance Taxes: Imposed upon the extraction of minerals, energy, and forestry resources, these taxes are prominent in various nations. India employs a range of taxes and royalties that fulfil a similar function, supporting land reclamation, pollution abatement, and habitat restoration efforts.
Strengthening Green Financing Initiatives
As India continues its journey toward climate resilience, enhancing green financing mechanisms will play a critical role. The current budget recognizes the importance of alternate investment funds aimed at promoting green technologies. Broadening the scope of these funds and ensuring they are adequately subsidized through taxation can motivate more investors to participate.
Introducing a framework that encourages environmental, social, and governance (ESG) investments would significantly boost investments targeting climate-positive outcomes. Public-private partnerships (PPP) stand as a viable mechanism for achieving significant advancements in green infrastructure, incentivizing private sector collaboration through tax breaks.
Developing Carbon Markets: A Gateway to Financial and Environmental Gains
The Bureau of Energy Efficiency (BEE) anticipates unveiling comprehensive regulations for the voluntary offset mechanism by the close of 2025, with India aiming to have its compliance carbon market fully functional by 2026. Establishing a well-defined and regulated Carbon Credit authority is essential for facilitating effective carbon markets. This authority should provide clear guidelines outlining the mechanisms for trading carbon credits and implement tax provisions that encourage the transaction and trading of carbon credits.
Conclusion: A Vision for the Future
While the Union Budget 2025-26 has taken commendable steps toward establishing a roadmap for a green transition, opportunities for improvement remain. Enhancing focus on climate adaptation, alongside mitigation strategies, will be essential to fostering a holistic approach to climate action. Strategic investments, supported by taxation measures, can provide the impetus for rapid advancements in India’s sustainability agenda.
Considering the shifting geopolitical landscape, India has a unique opportunity to recalibrate its trade and economic strategies. Fostering deeper ties with the EU—India’s largest trading partner—can be a strategic pivot. The EU’s commitment to stringent climate and sustainability mandates presents an avenue for collaboration, positioning India as a key player in the global supply chain.
Effectively harnessing tax policy to achieve environmental stability requires a multifaceted approach. Sweden’s pioneering carbon tax and Germany’s Energiewende serve as guiding frameworks, illustrating that a comprehensive tax policy can be a powerful tool for creating a greener economy. The path to achieving India’s ambitious climate commitments requires collaborative action, a forward-thinking approach to financial strategies, and unwavering dedication to promoting an eco-friendly economy.