Fiscal Instruments for Environment and Climate Change: Experiences from Indian States

This study documents experiences from Indian states that have implemented fiscal instruments to address environmental and climate issues.

Greenhouse gases (GHGs) and other pollutants impose negative externalities in the form of additional costs on the entire society. Given India’s voluntary domestic commitment to reduce emissions intensity of its GDP by 20-25% from 2005 levels by 2020, it is important for Indian States to adopt a low carbon growth path. The emissions of GHGs and other pollutants, if left to free market forces, are unlikely to be reduced on their own, thereby necessitating government intervention. Several States have adopted fiscal instruments to mobilize resources for promoting their low carbon growth plan. However, little is known about their operational mechanics and performance to date. 


This policy brief series compiles experiences from some of these states that have implemented fiscal instruments to address environmental and climate issues.


Scope of the Fund: In order to help prioritize funding among vastly different opportunities, the objectives and scope of the fund should be clearly and strictly laid out so that the guidelines and eligibility criteria permit only projects that meet the stated objectives of the fund. 

  • Fund Management Authority: The agencies/departments responsible for managing and disbursing the funds collected from the levy of the cess should be clearly delineated. 
  • Project Appraisal Process: There should be an inter-departmental committee to appraise projects and proposals seeking funding in order to ensure strict adherence to guidelines and to avoid any biases towards a particular line department. A proposal evaluation framework should be developed that goes beyond mere compliance with the requirements and gives adequate weightage to a project’s ability to meet the objectives of the fund.
  • Incidence and Rate of Tax: The tax/charge should ideally be levied equal to that of the external cost in order to internalize the externality. 

Thematic Area

Institutions and Society

Project Leads

Koyel Mandal, Rajesh Rangarajan, Chayan Badyopadhyay


Maharashtra, Karnataka, Sikkim, Goa


ClimateWorks Foundation