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Oil prices have declined sharply these past eight months. The benchmark Brent crude was at $115 a barrel in June 2014. Now it is at slightly below $50 a barrel. For oil-importing countries such as India, this has come as a huge relief. Macroeconomic indicators have improved markedly and consumers are paying lower prices for diesel and petrol at least. Of course, for populous oil-exporting countries desperately in need of revenues like Iran and Russia, this fall has become somewhat of a nightmare. If the downward slide of oil prices was a little unexpected, the behaviour of Opec (Organization of the Petroleum Exporting Countries), especially Saudi Arabia, has been even more pleasantly baffling.

Saudi Arabia has traditionally been the “swing producer", cutting production when prices fall. But this time around, it has studiously avoided doing so. There are various theories for this behaviour—that Saudi Arabia wants to inflict economic pain on its arch-rival Iran; that, with the connivance of the US, Saudi Arabia wants to inflict pain on Russia; that Saudi Arabia lost market share last time it cut production and could not regain it subsequently and therefore once bitten, twice shy; that Saudi Arabia wants to keep prices low so as to discourage exploration, development and extraction activities in the US itself, which is on its way to becoming the world’s largest hydrocarbon producer in a few years from now. Whatever be its reasoning, the fact is that for the present Saudi Arabia has resisted pressures from other Opec members like Venezuela and Iran to cut its supplies. The next Opec meeting will be some time in May 2015 when another review will take place and only then will the world know whether Saudi Arabia has won the second round, too.

To be sure, oil prices have fallen steeply in the past as well only to recover and move up once again. This is certainly not the first time the decline is happening. But what seems to mark the current trend out is its backdrop. China’s economic growth has slackened by at least 1.5 percentage points and the projections are that gross domestic product (GDP) growth will settle at around 7-7.25% for some time. The 28-member European Union is facing growth stagnation, with its strongest economy Germany posting a GDP growth of just around 1.5% in 2014. The US economy has, no doubt, rebounded impressively, but at the same time, oil and gas supplies within the US have expanded significantly and the US is now the world’s largest producer of crude oil along with liquids separated from natural gas. New sources of non-Opec supply like the oil sand of Alberta in Canada have come on stream. Iraq’s production has increased. Libyan supplies have also resumed, albeit erratically. Economies everywhere but especially those of the large oil-consuming nations have become more energy-efficient, particularly in industry and transport. All in all, it does appear that structural factors have been behind the 60% fall in oil prices since June 2014 and these factors are here to stay for some time to come.

Clearly, a window of opportunity has been created by the current round of oil price declines. Previous opportunities have been squandered mostly, but this time around there is the over-riding imperative of climate change. Now is the time for taking bold steps that will send powerful signals of decisive action in the run-up to the United Nations Conference on Climate Change to be held in Paris in December. The best way of raising the current low level of ambition being exhibited by major emitter countries particularly the big three comprising China, the US and India is to put into effect a carbon tax on all fossil fuels in proportion to the emissions of carbon dioxide.

The carbon tax is simple, transparent, easy to administer and will also raise revenues. It is certainly a far better option than the complex cap-and-trade mechanisms that have been adopted in Europe and that are being planned on a national scale in both the US and China. Even India will soon be fully operationalizing its version of a cap-and trade, namely the perform, achieve and trade (PAT) system, for enforcing energy efficiency norms on 478 energy-intensive companies. It is true that a cap-and-trade system can regulate a predetermined level of emissions clearly better than a carbon tax can do. But the design of such a system is technically very challenging and becomes more contentious, whereas the carbon tax is straightforward and completely predictable. Even enthusiasts of the cap-and-trade approach while acknowledging it is more market-friendly accept that the carbon tax is a superior idea. Contrary to popular belief particularly in the US, the impact of such a tax on consumers will not be burdensome. For example, a carbon tax of $25 a tonne of carbon will increase petrol prices by just around 25 US cents a gallon and this too at a time when petrol prices are falling anyway.

India should be taking the lead in the international community on the carbon tax issue since it has already taken the first steps when a cess of 50 a tonne was imposed on locally produced and imported coal by then finance minister Pranab Mukherjee in his 2010-11 budget to finance a National Clean Energy Fund. Last year’s budget hiked the cess to 100 a tonne. From a carbon point of view, however, this is still way too low, far below what the world’s preeminent environmental economist William Nordhaus has been suggesting (around $25 a tonne of carbon). And to be truly meaningful, a carbon tax should also be imposed on petroleum fuels as well since their use in the form of petrol and diesel also leads to global warming. Even so, India should claim the leadership space. Dealing with climate change challenge involves much more than merely announcing ambitious targets for solar and wind energy, important as they surely are.

The author is a former Union minister and Rajya Sabha MP.

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