The tax that is levied on the carbon content of fuels is called Carbon Tax. So, in Carbon Tax, the burning of fossil fuels viz. coal, petroleum products such as gasoline and aviation fuel, and natural gas is taxed in proportion to their carbon content.
The result is an increase in the competitiveness of non-carbon technologies compared to the traditional burning of fossil fuels. It directly helps to protect the environment while raising revenues.
Carbon Tax in India
India does not have a de jure Carbon tax, there has been de facto carbon tax. There are several examples:
In 2010, the government had launched the National Clean Energy Fund (NCEF) whereby it imposed a clean energy cess on coal produced in India as well as imported coal @ Rs.50 per tonne. This is one example of de facto Carbon Tax. In the Union budget 2014-15, this cess was raised to Rs. 200 per tonne. In July 2015, this fund was worth Rs 17,000 crore.
The objective of such taxes is to limit the consumption of polluting fuels and promote use of clean energy. However, this fund is not doing what it was supposed to do i.e. finance the clean energy. Only levying a cess does not reduce pollution by itself. The government needed to use this fund to provide support to clean energy infrastructure in the country.
Currently the government sets aside Rs. 4 per litre of the petrol / diesel excise duty for a dedicated road cess. This is also one kind of Carbon Tax whereby tax on fossil fuel is to be used to develop infrastructure.