Of late, India has been cutting subsidies while at the same time increasing taxes on fossil fuels so as to transform itself from a carbon subsidy regime to one of carbon taxation. On Saturday, the country moved forward to double the “clean energy cess” it levies on coal used in the country.
While presenting the general budget, the Finance Minister Mr. Arun Jaitley announced, “I propose to increase the Clean Energy Cess from ₹100($1.6) to ₹200($3.2) per metric tonne of coal, etc. to finance clean environment initiatives.”
Jaitley later clarified “With regard to coal, there’s a need to find a balance between taxing pollution and the price of power.”
“I intend to start on that journey too,” he added. If this sounds like deja vu, it should! Only last year, India had doubled the coal taxes from ₹50($0.8) to ₹100($1.6) per metric tonne of coal.
The increase in cess applicable to both coal mined in India as well as imported coal is expected to encourage investments to increase efficiencies of coal-based power plants and processes.
The revenues collected will feed ₹120 billion ($2 billion) annually into the “National Clean Energy Fund (NCEF),” which is to be used for renewable energy–based projects and initiatives. Over a period of about 5 years of its existence, NCEF has grown to about ₹400 billion ($6.7 billion).
On the matter of clean energy cess, the Economic Survey 2014–15 released by the Indian Ministry of Finance (MoF) notes that, “In light of the recent falling global coal prices and contribution of coal to both local and global pollution, there may be room for further rationalisation of coal pricing.”
Economic Survey is a flagship annual document of the MoF which reviews the developments in the Indian economy over the past one year. The two-volume report can be downloaded at this link.
It further suggests that in order to bring down carbon emissions drastically and to bring domestic prices on par with international prices, there should be about a 5-fold hike in coal cess to ₹498 ($8) per metric tonne of coal. Such a price reform could potentially lead to annual CO2 emissions reduction of 214 million tons (11% of India’s annual emissions). This would still keep most of the coal power plants profitable, given the current tariff structure.
In a hypothetical exercise, the survey notes that the maximum value to which the cess could possibly be increased to, so that coal-based power producers could still break even, is $15 per metric tonne of coal. However, in such a case, reduction in profits of power plants would lead to calls for adjusting power tariffs to a level which would be highly disruptive.
As per the Economic Survey, the average health cost of coal for power generation in India is estimated to be $27.26 per metric tonne of coal. This includes costs associated with premature cardiopulmonary deaths and illnesses from the chronic effects of long-term exposure and the acute effects of short-term exposure.
However, the survey cautions that higher taxes on coal to offset these costs would need to be balanced against their effect on power pricing, and hence access to energy for the 300 million households still without electricity. The currently announced cess is expected to increase electricity prices by up to 0.2 cent/kWh.
On a pragmatic note, the authors of the report underline the need to highly consider alternative paths to energy access including renewables. Evoking the backdrop of the recent US–China climate pact, the survey points out that this agreement is expected to provide a boost to the renewable energy sector globally.
The report points out that the Indian clean energy sector is likely to generate business opportunities to the order of $160 billion for the next five years. It says, “We have an opportunity to avoid excessive dependence on fossil fuel-based energy systems and carbon lock-ins that many industrialized countries face today.”
NCEF will help fund projects under the National Solar Mission, solar projects to come up in defence owned areas, subsidy for off-grid solar applications, and soft loans by IREDA to clean energy projects.
Others in line to get their share of the NCEF pie include the Green Energy Corridor project, pegged at ₹400 billion ($6.7 billion) and the soon to be launched National Wind Energy Mission, which is expected to cost another ₹180 crore ($3 billion).
Apart from financing projects directly, the fund is also to be used for providing hedging support to foreign loans. However, the government has been found wanting to actually put these reserves to use.
On the whole, the move to substantial carbon taxation combined with India’s solar power program would add weight to its seriousness towards the forthcoming Paris negotiations on climate change.