changeadminTaxes play a crucial role in addressing climate change by providing financial incentives, penalties and taxes that shape behaviour around greenhouse gas emissions, resource consumption, and investment in cleaner technologies.
On one hand, increasing taxation drives producers and consumers to reduce fossil-fuel consumption; on the other hand, through a reduction in taxes, the government can encourage a shift towards renewable energy and investments in low-carbon technologies.
Economic studies consistently show that such approaches are not only effective in emissions reduction but also cost-efficient compared to alternative policies.
On 3rd September 2025, the Indian government introduced reforms to the existing Goods and Services Tax (GST) structure, which would bring significant relief to the common man and also materialise some of India’s climate goals.
To the uninitiated, GST is a comprehensive indirect tax levied on the supply of goods and services across India, replacing previous indirect taxes such as excise duty and service tax. It was implemented in the country on July 1, 2017, with tax rates ranging from 0% to 28%, depending on the category.
Now, eight years later, the government has introduced significant tax reductions across various goods and services, which can help drive the rapid expansion of the economy, boost domestic supply chains, and encourage new investment initiatives.
Apart from a considerable tax reduction on consumer goods, healthcare, hotels and other sectors, GST rationalisation has also ensured that things promoting green energy are made more affordable.
In a social media post, India’s Minister for Environment, Forest and Climate Change, Mr Bhupender Yadav, termed the reforms as “GST Reforms for a Green India”, as they would help in advancing clean and green power adoption, improving waste management, lowering emissions, and protecting ecosystems, while maintaining fiscal balance.
A look at some of the climate-friendly measures of India’s GST reforms that support sustainability and emissions reduction.
Solar and Wind Devices
In one of the major climate-friendly moves, India’s GST reforms have lowered the taxes on renewable energy equipment such as solar cookers, biogas plants, solar water systems, and windmills from 12% to 5%.
A reduction in taxes will directly lower the capital costs of solar panels, PV cells, wind turbines, and related devices. It will make solar and wind projects more viable and accessible to households, utilities, and industries.
In India, where agriculture plays a significant role in driving its economy, cheaper solar pumps will reduce irrigation costs, support farmers in adopting environmentally friendly irrigation methods, and improve energy access in rural agricultural areas.
Additionally, reform will boost domestic manufacturing of renewables. It will support India’s solar cell and module manufacturing ecosystem under PLI schemes, making domestic products competitive against imports.
Boosting Effluent Treatment
Not just on goods, climate-friendly measures of India’s GST reforms also include services, as treatment of effluents by a Common Effluent Treatment Plant (CETP) would be reduced from 12% to 5%.
Tax reduction on CETPs would encourage industries to adopt centralised waste treatment solutions, leading to a pollution-free environment and promoting sustainable development across industrial regions.
It will help municipal corporations adopt clean energy solutions for waste management. The rate cuts will stimulate green jobs in waste segregation, plant operations and maintenance.
Containing Plastic Pollution
GST on biodegradable bags is lowered from 18% to 5%, making biodegradable bags more affordable and encouraging consumers and retailers to shift away from single-use plastics.
Faster adoption of biodegradable bags would reduce plastic leakage into rivers, soil and marine ecosystems. It would help reduce plastic pollution and strengthen India’s compliance with the plastic waste management rules and the ban on single-use plastics.
The step would encourage investment in R&D and scale-up of bio-polymers, starch-based and compostable materials. Many biodegradable bag makers are small and medium enterprises or startups, and lower GST would ease their market entry and expand demand.
Cycling made affordable
The GST rate has been reduced to 5% on bicycles and their parts from 12%.
The revised rates make cycling affordable and beneficial for the environment because it produces zero emissions, reduces air and noise pollution, and conserves green spaces.
Boost to Affordable Transport
India’s GST reforms have also introduced rate cuts for the automobile sector across different categories, including passenger cars, bikes (up to 350 cc), tyres, batteries, and components.
These rate cuts are expected to encourage consumers to replace old vehicles with new, fuel-efficient models, thereby supporting cleaner mobility.
While electric vehicles retain the 5% rate, taxes on passenger buses (seating capacity of 10+ persons) and commercial goods vehicles (trucks, delivery vans, etc.) are reduced from 28% to 18%.
The lower tax rate will reduce the upfront cost of passenger buses and minibuses (10+ seater), will spur demand from fleet operators, corporates, schools, tour operators, and state transport undertakings. The step would in turn encourage a shift from private vehicles to shared/public transport, reducing congestion and pollution, while encouraging fleet expansion and modernisation, and reducing the usage of old buses.
Additionally, trucks are the backbone of India’s supply chain (carrying 65%-70% of goods traffic). The reduction of taxes on trucks would encourage fleet expansion and modernisation, while reducing the usage of old vehicles, thus reducing pollution and emissions.
Not all is hunky dory – GST rationalisation on Coal can fuel emissions
Despite considerable progress made on renewables, coal-based power generation still accounts for nearly 70% of total generation at an all-India level.
The positive news was that the tax on coal and lignite was increased from 5% to 18%, making fossil fuels look less attractive by raising costs and reinforcing the polluter-pays principle.
However, the additional compensation cess levied at 40% removal is bad news for the climate, as it is projected to lower thermal power generation costs and is expected to benefit coal-based power production.
Wrapping Up
The specific tax reform on coal can be seen negatively in the context of climate change, which aims to reduce fossil fuel use. However, overall, climate-friendly measures of India’s GST reforms do present a significant shift towards supporting climate action by making clean energy and sustainable products more affordable.
Reduced project costs for renewables will encourage consumption, attract private investment and boost domestic manufacturing of green technologies.
Lower rates for climate-friendly goods encourage wider adoption by consumers, giving a vital boost to schemes like PM Surya Ghar Muft Bijli Yojana (rooftop solar installation) and PM-KUSUM (solar-powered irrigation systems).
A steady adoption of solar, wind, and waste-to-energy projects is critical for meeting India’s net-zero by 2070 ambitions and scaling up clean energy targets (500 GW by 2030). Furthermore, this reform positions India to meet its Paris Agreement commitments.
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