Home / Opinion / India’s de facto carbon tax is excessive

Julia Gillard, the first and only woman prime minister of Australia, introduced a carbon tax in July 2012, after getting it duly passed by the legislature. The tax was A$23 per tonne of carbon, which was fixed for an initial period of three years. Less than 12 months later she lost her job, and had to resign. Such was the intensity of the orchestrated backlash against this carbon tax. It was seen as an unnecessary burden on industry, increasing energy costs, hurting Australia’s competitiveness and leading to inflation. By July 2014, the Senate had repealed the Australian carbon tax. Remember, Australia is one of only two countries that back in 1997 did not ratify the historic Kyoto Protocol to curb global greenhouse gases. The other country was the US.

Twenty years after Kyoto, there is much greater awareness and support for measures to mitigate climate change. Who knows, if a similar tax were introduced in Australia today, it might actually pass and get popular support. Even China is proactively trying to bring an emission trading system that will put an implicit price on carbon. A total of 194 countries have enthusiastically signed the Paris Agreement, and have promised to aggressively cut greenhouse gas emissions in a time-bound manner. Presidents Barack Obama and Xi Jinping together signed up to the Paris deal, in a great symbolic ceremony last year. But currently under President Donald Trump there is apprehension that the US may back out of even the international Paris Agreement.

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So where does India stand on climate change? The National Action Plan on Climate Change was launched in 2008. It has eight vertical missions on water, energy efficiency, solar, sustainable habitat, agriculture, forestry, Himalayan ecology and strategic knowledge on climate change. India’s ambition for renewable energy production is well known. Under Prime Minister Narendra Modi, the timelines to achieve renewable capacity has been aggressively advanced, and the scale vastly enlarged. So India’s commitment for action on greening, to mitigate climate change and to act against global warming is not in doubt. Indeed by some reckoning, India’s initiatives and leadership for environmental activism dates back to the 1972 UN conference in Stockholm.

The question is: Is India overdoing its bit in greening its energy, especially considering its developmental needs? Granted, this question is like waving a red rag to the environmentalist bulls. It is already so “hotly" debated that the heat itself might worsen global warming. India is now, in the aggregate, not per capita terms, the third highest emitter of carbon dioxide. But consider these not-so-well- known developments. Firstly, the coal cess that was introduced a few years ago is now at Rs400 per tonne, almost one-fifth the cost of mining coal.

Think of this like a 20% carbon tax. India has the world’s third largest endowment of coal, which can help double our per capita electricity usage at a relatively low cost. But thanks to reckless bidding in auctions (post Supreme Court orders), and now the coal cess, India now might have become the most expensive place to produce coal-fired electricity. It is greatly hurting our competitiveness, and will directly undermine industry as it faces an onslaught of imports from China and other trade partners. Also, we already have a system of renewable purchase obligations (RPOs) on all electricity distribution companies and also captive producers. Never mind that there’s often not enough solar or wind energy available for purchase, within state boundaries. Across states, wheeling of solar is not yet possible and the RPOs burden goes up steadily every year. This increases the cost of energy.

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Further, there is the excise tax escalation on petrol and diesel. The Economic Survey reports that petrol excise has gone up by about 150% since July 2014, and diesel excise by an even higher percentage. India now has the highest taxes imposed on petroleum products. These are nothing but de facto carbon taxes. Indeed excise tax collection by the Central government went up by more than 40% in each of the last two fiscal years, mostly because of the silently creeping, and escalating tax on petrol and diesel. This was not done with any “climate change" enlightenment, but merely to fulfil fiscal needs and achieve a lower fiscal deficit. Whatever the intent, the outcome is that India has a de facto carbon tax of roughly $12 dollars per tonne. When Gillard resigned as PM, the prevailing price of carbon credits traded in Europe had dropped to less than a dollar. No wonder the Australians were up in arms against the carbon tax. Excise taxes are also regressive and hurt the poor more than the rich. Hence a carbon plus excise tax is a double whammy.

It is not as if India should stay away from global joint efforts at curbing greenhouse gases. Green energy, apart from mitigating climate change has great potential for job creation. India is uniquely blessed with sunshine almost all the time, and hence solar can contribute hugely to our energy needs. Electric vehicles are a nascent industry, which eventually can change the economics of oil and geopolitics. But it is not necessary for India, whose per capita consumption of electricity is barely half the world average, to embrace the highest rate of carbon taxes in the world. It is like being holier than the Popes of environmentalism. Success in mitigating climate change requires global and absolute cooperation. One of the reasons for its initial reluctance, was that Australia contributes less than 1.5% of greenhouse gases. In a similar vein, India needs to cautiously calibrate its “greening pace" and de facto carbon taxation.

Ajit Ranade is chief economist at Aditya Birla Group.

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