Arun Jaitley’s shades-of-green budget

All said, a fog currently surrounds finance minister Arun Jaitley’s tax play on carbon credits


Finance minister Arun Jaitley. Photo: PTI
Finance minister Arun Jaitley. Photo: PTI

The West’s climate-change politics vilifies India for its pointed refusal to abandon coal as an energy source. This criticism continues unabated despite praise from multiple quarters for India’s Intended Nationally Determined Contributions (INDCs), submitted before the Paris climate summit in 2015. The INDCs commit to reduce the emissions intensity of India’s gross domestic product (GDP) by 33-35% from 2005 levels by 2030. Interestingly, the INDCs are voluntary, unlike past top-down climate governance mechanisms, such as the Kyoto Protocol.

India’s INDC moves are coming to life in myriad forms. Union finance minister Arun Jaitley has used the 2017-18 annual budget to incorporate some basic elements of a “Green Budget” as well as initiate India’s economic response to the West’s climate change politics. These policy initiatives include lighting up 7,000 railway stations across the country with solar power and halving basic customs duty (BCD) on liquefied natural gas—a relatively cleaner fuel compared to coal or oil—from 5% to 2.5%.

Green budgets deploy fiscal carrots and sticks to influence economic behaviour and improve the environment. Jaitley made a tentative start with his 2016-17 budget but without taking any of the long strides necessary to strengthen India’s commitment to sustainable development or place India firmly on the path to lower emissions. The measures in this year’s budget perhaps quicken the pace, but two decisions stand out for their curious configuration.

The first is a direct tax measure: a new section (115BBG) in the Income Tax Act makes income from the transfer of carbon credits taxable at a concessional 10% rate (plus applicable surcharge and cess). This income was earlier taxed at the normal rate. The directive would have been welcome had the timing not been mystifying. Critics have called the decision a delayed reaction, especially because carbon-credit markets are all but dead. The European Union’s emissions trading system (ETS) shut its doors in 2012; in addition, carbon credit prices have plummeted sharply, rendering the whole process of creation of carbon credits and subsequent trade unviable. But such criticism could also be hasty.

India is trying to create two domestic trading initiatives: Perform Achieve and Trade (or PAT) under the Bureau of Energy Efficiency and a Renewable Energy Certificate (REC) trading system. A third initiative has been launched in three states—Maharashtra, Tamil Nadu and Gujarat—for developing a pilot ETS programme to reduce particulate matter (such as sulphur dioxide) emissions. Only the PAT design, currently in pilot phase, comes anywhere close to an ETS.

The PAT mechanism has identified 11 industrial sectors accounting for 25% of GDP and 40% of India’s energy consumption: thermal power plants, cement, chlor-alkali, pulp and paper, petroleum refinery, power discoms, fertilizers, iron and steel, textile, aluminium and railways. PAT seeks to lower energy intensity in each of these industries through trade in energy savings certificates on designated power exchanges.

In the first phase, 478 companies from eight sectors were included in the programme and achieved an energy savings of 8.67 million tonnes of emissions (mtoe) against a target of 6.886 mtoe. In the second phase, 621 companies from all 11 sectors are being included in the scheme. Is Jaitley’s tax measure designed to provide greater acceptance of, or impart greater depth to, PAT? Did he use the term “carbon credit” interchangeably? This is a distinct possibility: Over the past few years, the number of ETS programmes has been rising across the world, trebling from 5 in 2012 to 17 now.

Throw into this mix China’s planned ETS going live in 2017—slated to become the world’s largest, and bound to change the nature of the game. China, South Korea and Japan are already exploring regional cooperation in carbon markets. Interestingly, India and China signed a bilateral agreement on climate change (goo.gl/BF3hke) in 2015. Both developments point to the possibility of enhanced regional cooperation, especially on a larger, plurilateral platform. But China needs to iron out some wrinkles: harmonizing cross-border compliance and enforcement regimes, improving liquidity, expanding the number of eligible sectors, fungible trading units, among others.

All said, a fog currently surrounds Jaitley’s tax play on carbon credits.

The second curious decision is ending the 5% BCD on the import of solar-tempered glass for the manufacture of solar cells/panels/modules. Simultaneously, and inexplicably, a 6% excise duty has been introduced, where none existed earlier, on domestic production of the same product, solar-tempered glass; it’s like expressing a preference for imports over domestic manufacture and thumbing one’s nose at the Make In India campaign. What adds to the mystery is that 5% BCD was imposed only last year, and in just one year the ministry has decided to backtrack.

There are only two plausible explanations. One, a domestic manufacturer favoured by the current political dispensation probably needs to import for a local photovoltaic fab facility, having already tied up with large importers. Alternatively, two-three large global tempered glass manufacturers have been able to impress upon the government the need to keep imports cheaper than domestic products.

Whatever the reasons, Jaitley needs to provide more clarity on these measures and what they intend to achieve.

Rajrishi Singhal is a consultant and former editor of a leading business newspaper. His Twitter handle is @rajrishisinghal.

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