Enforcement Officer / Accounts Officer (EO/AO) 2017 recruitment test. Transcribed from the Commission's own booklet (series A, GRS-A-TNS); answer as per the official UPSC final answer key. This question is in Part B. Answer last reviewed 24 August 2026.

Cess on coal at ₹ 100 per ton is a type of

(a)carbon tax
(b)carbon subsidy
(c)carbon incentive for technology
(d)carbon incentive for selling carbon permit

Answer

Why

Correct — A, (a) carbon tax. The levy the stem describes is India's Clean Energy Cess, and the reason it counts as a carbon tax is arithmetical rather than nominal.

A carbon tax is a levy whose base is the carbon that will be released when a fuel is burnt. It does not have to be assessed on measured emissions at a chimney; it only has to be proportional to them. Coal has a broadly fixed carbon content per tonne, so a specific duty of a fixed number of rupees on every tonne of coal is, by a simple conversion using the fuel's carbon emission factor and its calorific value, the same thing as a levy of so many rupees on every tonne of carbon dioxide that coal will emit. This is why the Economic Survey converts India's specific coal cess into an equivalent carbon tax rate whenever it discusses the country's implicit carbon pricing. The levy is 'implicit' because it is written on tonnes of coal rather than tonnes of carbon dioxide; it is a carbon tax because that is what it does.

The economics is the Pigouvian argument that Q42 has just set up. Burning coal imposes a cost on people outside the transaction, so the private cost of coal-fired power sits below its social cost and too much of it is produced. A levy per tonne of coal raises the producer's own cost by an amount that stands in for the external damage, pushing the private cost curve up towards the social one. That is internalisation, and a tax is the classic instrument for it.

The figure in the stem also dates the item. The cess began at ₹ 50 per tonne of coal, lignite and peat produced in or imported into India, was raised to ₹ 100 per tonne in the 2014-15 Budget, doubled to ₹ 200 per tonne with effect from 1 March 2015, and was doubled again to ₹ 400 per tonne in the 2016-17 Budget, when the Finance Act, 2016 also renamed it the Clean Environment Cess. Its proceeds were credited to the National Clean Energy Fund, later the National Clean Energy and Environment Fund, to support clean-energy and environment projects. A candidate who knew the rate ladder could have recognised the ₹ 100 figure as the 2014-15 rate; but the question does not turn on the rate at all, only on what kind of instrument a per-tonne levy on a fossil fuel is.

Why the others are wrong

(b)carbon subsidy — A subsidy and a cess move the price in opposite directions. A subsidy is a payment out of the exchequer that lowers what the user pays and therefore encourages the activity; a cess is a payment into the exchequer that raises the user's cost and therefore discourages it. Nothing about a levy of ₹ 100 a tonne on coal transfers money to a coal producer or a coal user. The phrase 'carbon subsidy' does have a real referent in the literature — it is used for the underpricing of fossil fuels, whether by direct budgetary support or by leaving the external damage untaxed — but a coal cess is the very instrument by which such a subsidy is reduced, not an instance of one.
(c)carbon incentive for technology — An incentive works by rewarding the behaviour you want; a tax works by charging for the behaviour you do not. Accelerated depreciation for wind turbines, viability gap funding for solar parks, generation-based incentives and capital grants for research are carbon incentives for technology, and they operate at the other end of the pipe from a cess. It is true that the proceeds of this cess were earmarked for the National Clean Energy Fund and used for clean-technology projects — so the money did end up supporting technology — but the stem asks what the cess on coal is, and what it is, is a levy. Where the revenue afterwards goes is a question about earmarking, not about the nature of the instrument.
(d)carbon incentive for selling carbon permit — This describes a quantity instrument rather than a price instrument, and the two are the standard alternatives in environmental economics. Under a permit or cap-and-trade scheme, the regulator fixes the total quantity of emissions, issues permits adding up to that cap, and lets a market discover the price; a firm that abates cheaply sells its surplus permits and earns the incentive this option names. Under a tax, the government fixes the price and the market decides the quantity. A coal cess is unmistakably the second: no permit is issued, nothing is created that can be sold, and no cap is set. India's tradable-certificate schemes of the period dealt in energy attributes — renewable energy certificates, and the energy saving certificates of the Perform, Achieve and Trade scheme — and were separate from this levy.

Concept

Carbon pricing comes in two families. A price instrument — a carbon tax, or a specific levy on a fossil fuel that stands in for one — fixes the cost per unit of carbon and lets emitters decide how much to abate; the quantity of emissions is then whatever the market delivers. A quantity instrument — cap-and-trade, emissions trading, tradable permits — fixes the total quantity of emissions and lets the market discover the price of a permit. Both make the polluter face a cost that the unpriced atmosphere would otherwise absorb, and both are ways of internalising the negative externality that Pigou described. India's principal instrument of the period was the Clean Energy Cess on coal, lignite and peat, introduced by the Finance Act, 2010 with effect from 1 July 2010 at ₹ 50 per tonne, raised to ₹ 100 per tonne in the 2014-15 Budget, to ₹ 200 per tonne from 1 March 2015 and to ₹ 400 per tonne in the 2016-17 Budget, at which point it was renamed the Clean Environment Cess. Receipts were credited to the National Clean Energy Fund, and later the National Clean Energy and Environment Fund, which financed clean-energy research and projects. The cess was abolished by the Taxation Laws (Amendment) Act, 2017 when the Goods and Services Tax began on 1 July 2017, and a GST Compensation Cess on coal at the same rate of ₹ 400 per tonne took its place — with the difference that the proceeds now went to compensating States for GST revenue loss rather than to clean energy.

EPFO likes an item where a candidate who knows only the scheme's name will still miss the point. The stem does not use the words 'Clean Energy Cess' at all; it describes the instrument — a cess, on coal, at so much a tonne — and asks what category it belongs to. That is a question about how instruments work, and it is answered by asking two things: does this levy raise or lower the cost of the carbon-intensive activity, and does it fix a price or fix a quantity. A levy that raises the cost and fixes a price is a carbon tax, whatever it is called on the statute book. The same two questions dispose of all three distractors.

Key facts

The Clean Energy Cess was introduced by the Finance Act, 2010 on coal, lignite and peat produced in or imported into India, with effect from 1 July 2010, at ₹ 50 per tonne.
It was raised to ₹ 100 per tonne in the 2014-15 Budget — the rate this question quotes.
It was doubled to ₹ 200 per tonne with effect from 1 March 2015, and to ₹ 400 per tonne in the 2016-17 Budget.
The Finance Act, 2016 renamed it the Clean Environment Cess.
Proceeds were credited to the National Clean Energy Fund, later the National Clean Energy and Environment Fund.
The Economic Survey converts the specific coal cess into an equivalent carbon tax rate using coal's carbon emission factor and net calorific value — which is why it is described as an implicit carbon tax.
A carbon tax is a price instrument: government sets the price of carbon and the market determines the quantity of emissions.
Cap-and-trade is a quantity instrument: government sets the quantity of emissions and the market determines the permit price.
The cess was abolished by the Taxation Laws (Amendment) Act, 2017 on the arrival of GST from 1 July 2017; a GST Compensation Cess on coal at ₹ 400 per tonne replaced it.

Two families of carbon pricing, and which one a per-tonne cess belongs to

(a) A price instrument — the carbon tax→Government fixes the cost per unit of carbon and lets emitters decide how much to abate; the quantity of emissions is then whatever the market delivers. A cess of so many rupees a tonne of coal is unmistakably this.

Why a levy on coal counts as one→The base only has to be proportional to emissions, not measured at a chimney. Coal has a broadly fixed carbon content per tonne, so a specific duty per tonne converts, through the fuel's carbon emission factor and net calorific value, into a rate per tonne of carbon dioxide. It is called implicit because it is written on tonnes of coal.

(d) A quantity instrument — permits→Under cap-and-trade the regulator fixes the total quantity of emissions, issues permits adding up to that cap, and lets a market discover the price, so a firm that abates cheaply sells its surplus. Here no permit is issued, nothing is created that can be sold, and no cap is set.

(b) A subsidy moves the price the other way→A subsidy is a payment out of the exchequer that lowers what the user pays and encourages the activity; a cess is a payment into it that raises the user's cost and discourages it. A coal cess is the very instrument by which fossil-fuel underpricing is reduced, not an instance of it.

(c) An incentive rewards; a tax charges→Accelerated depreciation for wind turbines, viability gap funding for solar parks, generation-based incentives and capital grants for research are carbon incentives for technology. The proceeds of this cess did go to the National Clean Energy Fund — but where revenue goes afterwards is a question about earmarking, not about the nature of the instrument.

The rate ladder, which dates the item→₹ 50 per tonne from 1 July 2010 under the Finance Act, 2010; ₹ 100 in the 2014-15 Budget, the figure this stem quotes; ₹ 200 from 1 March 2015; ₹ 400 in the 2016-17 Budget, when the Finance Act, 2016 renamed it the Clean Environment Cess. It was abolished when GST began on 1 July 2017.

Study next

Cess versus surcharge versus tax — how each is levied, and why cess proceeds are earmarked while surcharge proceeds are notNational Clean Energy and Environment Fund — its receipts, the projects it financed and the criticism that its corpus went unspentCarbon markets: cap-and-trade design, permit allocation by grandfathering or auction, and the Indian Carbon MarketIndia's climate commitments — the Paris Agreement, the Nationally Determined Contributions and the emissions-intensity targetPrice versus quantity instruments under uncertainty, and why the choice between them is not neutral

Common traps

Looking for the words 'carbon tax' in the levy's official name; the Indian instrument is called a cess and is still a carbon tax in substance.
Confusing where the revenue is spent with what kind of instrument raised it — earmarking the proceeds for clean technology does not turn a levy into an incentive.
Mistaking a tax for a permit scheme; if nothing is issued that can be sold, it is not a trading instrument.
Assuming a cess must be a small or temporary levy; this one quadrupled inside six years.
Quoting the ₹ 400 rate for a question dated before the 2016-17 Budget, or the ₹ 100 rate for one dated after it.

Environmental fiscal instruments appear in EPFO papers either as a classification item like this one, or as a current-affairs item on the rate, the fund or the renaming. The reliable preparation is to hold three things about any levy: what its base is, what its rate ladder has been, and where its proceeds go. That trio answers the classification question and the current-affairs question at the same time.

Related PYQs

EPFO_EOAO_2017_Q42Open & attempt →

Social cost is higher than economic cost because

(a) society is bigger than economy
(b) society includes polity, while economy does not include it
(c) cost borne by bystanders is positive
(d) society includes both consumers and producers

Answer(c) cost borne by bystanders is positive

The theory this levy applies, asked one question earlier — social cost exceeds economic cost when a third party bears part of the burden, and a tax is how that burden is put back on the producer.

EPFO_EOAO_2023_Q117

With reference to the three types of carbon emissions from companies, consider the following pairs : Emission Example 1. Scope 1 emissions : Emissions as a result of employee commuting, business travel and waste produced 2. Scope 2 emissions : Emissions as a result of purchase of electricity, steam, heating and cooling for own use 3. Scope 3 emissions : Emissions from fuels consumed by company vehicles, owned and leased Which of the above pairs is/are correctly matched ?

(a) 1 and 2
(b) 2 only
(c) 1 and 3
(d) 3 only

Answer(b) 2 only

The measurement side of the same subject on a later EO/AO paper: how a company's carbon emissions are sorted into Scope 1, Scope 2 and Scope 3.

Practice

practice — not a real PYQ
Which one of the following statements about a carbon tax and a cap-and-trade scheme is correct?
- (a)A carbon tax fixes the quantity of emissions and lets the market discover the price
- (b)A carbon tax fixes the price of carbon and lets the market determine the quantity of emissions
- (c)Both instruments fix the price and the quantity of emissions simultaneously
- (d)Neither instrument makes the emitter bear any part of the external cost
Answer(b) A carbon tax fixes the price of carbon and lets the market determine the quantity of emissions
practice — not a real PYQ
The proceeds of the Clean Energy Cess levied on coal were credited to
- (a)the Consolidated Fund of India, without earmarking
- (b)the National Clean Energy Fund
- (c)the National Investment Fund
- (d)the Contingency Fund of India
Answer(b) the National Clean Energy Fund

Why