Home >Politics >Policy >Who pays the most for emissions from fuel use in India?
India has already made substantial progress in embracing renewable energy to reduce emissions. Photo: Reuters
India has already made substantial progress in embracing renewable energy to reduce emissions. Photo: Reuters

Who pays the most for emissions from fuel use in India?

An OECD study shows that agriculture has the highest share of fuel emissions taxed in India

In October, India ratified the Paris Agreement, thus binding itself to its commitment to reduce the emissions intensity of GDP by 2030 to around one-third of its 2005 levels. While shifting to renewables would play an important role in this endeavour, taxing fossil fuels is also an important constituent of this strategy. Taxing dirty fuel usage serves as an effective carbon tax, rendering polluting fuels unattractive to users, and encouraging users to opt for cleaner options such as renewable energy. As is to be expected, fossil fuels are used in many production activities, apart from powering vehicles. However, incidence of taxes can be quite different due to the nature of consumption.

A recently released OECD report on environmental taxes in India has data on the burden of such taxes on different sectors. The report shows that it is agriculture which has the highest share of fuel emissions taxed, even ahead of road transport.

Since India does not have an emissions trading system, the OECD report took into account taxes on energy usage. An emission trading system works on the cap and trade principle: countries, or companies, are restricted to a fixed amount of greenhouse gas emissions. An entity that stays within its emissions limit can trade its unused allowance with another country that may have exceeded its allotted quota of emissions. The OECD’s calculation included taxes on fossil fuels, such as CENVAT, extra duty of Rs2 per litre for petrol and diesel, an additional special excise duty for petrol (Rs7 per litre) and diesel (Re1 per litre), the clean energy cess on coal (Rs50 per tonne of coal as on 2012; it was later increased), the education cess applied to CENVAT and the clean energy cess, among others, as well as taxes on electricity use based on information for some states (Gujarat and Tamil Nadu). All these tax rates are for the year 2012.

Though agriculture and fishing accounted for only 1% of emissions from fuel consumption, 99% of fuel emissions from this sector were taxed. In contrast, the industry accounted for 31% of fuel emissions, but 55% of industrial emissions were taxed. After agriculture, the sector that pays the highest share of taxes on fuel emissions is road transport at 97%. At almost €20 per tonne of carbon dioxide emitted, the agriculture and fisheries sector also pays a far higher tax rate than the industry’s €2.28 per tonne of carbon dioxide emitted.

What accounts for the differences between sectors? The answer lies in the nature of fuel used. Farmers and fishermen primarily use diesel which they buy at market rates. In contrast, industries use a wider range of fuel and refining intermediates which they purchase directly from refineries or buy in bulk at a discounted rate. However, it is important to note that this analysis does not take into account other factors that subsidise farmers. For example, in many states, farmers are provided electricity for running irrigation pump sets at heavily subsidized rates.

The report also shows that India is ranked fourth from last among 34 OECD countries and five partner economies in environment-related tax revenues as a percentage of the GDP. Taxes on energy constitute half of total environmentally related tax revenue in India, compared to 70% on average among the 39 countries. Kurt Van Dander, the author of the OECD report on India and head of the tax and environment unit of OECD’s Centre for Tax Policy and Administration, pointed out that the revenue from increasing taxes on energy use would allow either increased government spending or a cut in other taxes more detrimental to the economy’s capacity to growth. For example, taxes on wages or on corporate income.

However, India has always argued that since developed countries created wealth through the use of polluting fuels, it is unfair to expect a developing country to fully shoulder the burden of cutting emissions by foregoing the use of cheap fossil fuels.

So does this mean that there is no room to increase fuel taxes in India? Not necessarily. Vivek Adhia, head of business engagement at the World Resources Institute, India, said that there are studies by the World Bank and others which show that even if the coal cess goes up from the current level of Rs400 per tonne to Rs1,600-1,800 per tonne, power plants would still be able to break-even or remain viable.

It also needs to be kept in mind that just raising carbon taxes does not guarantee environmentally sustainable practices. As a previous Plainfacts column had shown, most of the current revenue from environmental taxes in India is either lying unutilized or has been directed towards heads other than its originally intended purpose. Moreover, the design of such taxes is equally important so as to not distort the market.

India has already made substantial progress in embracing renewable energy to reduce emissions. At the recently concluded COP22 meet, India showed commendable leadership by enrolling new members into the International Solar Alliance, the brainchild of Prime Minister Narendra Modi. It is time now for the government to show similar innovation in the matter of carbon taxes and work on all possible fronts to take India on the path of low carbon growth.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.

My Reads Redeem a Gift Card Logout