Effectiveness of Carbon Taxes on Emission Reduction and Economic Growth

Mitigating climate change remains a global policy priority, with carbon taxation as a viable market-based approach for reducing greenhouse gas (GHG) emissions. This study investigates the prospects of carbon taxation as a two-fold approach to reduce CO₂ emissions and foster economic growth, specifically within the changing climate and fiscal situation in India. Based on international examples in Sweden, Ireland, and British Columbia, where carbon taxes have been instituted effectively, this paper points out some of the consequential outcomes of carbon taxation, including emission reductions, economic performance, and sectoral transformation. Using secondary data from international organizations (the World Bank, IEA, OECD) and Indian government sources (MOSPI and RBI), the research explores India’s CO₂ emissions and GDP growth trajectory from 2000-2022, employing time-series visualizations, trend analysis, correlations, and single-variable regression. The study finds that India’s GDP growth and emissions relationship has a weak negative correlation, suggesting that India’s trajectory related to emissions may have more to do with structural or sectoral change than gross economic output. Using the literature on impact investing, the research argues that carbon tax revenues could be recycled through a structured government process to deliver environmental outcomes and improve social acceptability of the policy if spent on developing sustainable development projects and greening public infrastructure. The report ends with policy suggestions for how to design a carbon tax in India that is equitable and effective, while also considering India's net-zero targets and other socio-economic development objectives.