Decoding the Budget's 'carbon tax'

In Budget 2015, the finance minister has opted to take the slow road and has doubled the cess on coal to “balance the need to tax pollution and the price of power” in his words, says Sunita Narain.

Finance Minister Arun Jaitley in Budget 2015 delivered a first.

India has accepted that it has a de facto carbon tax — on petroleum products and on dirty coal.

In fact, arguably the only big green initiative of this Budget is the increase of the cess on coal — from Rs 100 a tonne to Rs 200 a tonne. Budget 2015: Complete Coverage

The question to ask is if this carbon tax – imposed on the carbon content of fuel – is doing what it should. Is it reducing the greenhouse gas emissions that are responsible for climate change?

In other words, is there a design behind the carbon tax to ensure that we move beyond polluting fossil fuels?

The Budget takes its lesson from the Economic Survey, which states that high prices of diesel and petrol are important price signals to limit consumption and, hence, carbon dioxide (CO2) emissions and other externalities like congestion costs and air pollution.

In 2014, taking advantage of the global fall in fuel prices, subsidy or under-recovery has gone and government has increased excise duty on both petrol and diesel.

So even though fuel is cheaper, the tax component is higher. The Economic Survey estimates that based on emission factors currently, India imposes an implicit carbon tax of $140 a tonne of CO2 on petrol and $64 on diesel.

The Economic Survey also estimates that the cess on coal of Rs 100 a tonne of coal is equivalent to a carbon tax of $1 a tonne of CO2.

It argues that this cess should be increased, so that it can lead to CO2 reduction and also better reflect the health cost of emissions from coal-fired power plants.

It calculates that a threefold increase from the current cess would lead to an annual CO2 emission reduction of 129 million tonnes — this is equal to seven per cent of India’s current emissions.

A fivefold increase in the cess would equalise the domestic coal price with the international price, and would contribute to annual CO2 emission reduction of 214 million tonnes, which is 11 per cent of India’s annual emissions.

In Budget 2015, the finance minister has opted to take the slow road and has doubled the cess on coal to “balance the need to tax pollution and the price of power” in his words.

He also mentions that India’s de facto carbon tax on most petroleum products compares with international norms. But is this tax an adequate signal to bring about change? Let’s take petrol and diesel.

The fact is that the government has increased tax on fuel because it is convenient and opportune.

It will be important to maintain this “carbon tax” even when prices of petrol and diesel increase in the international market.

But that said, it is also a fact that the prices of these fuels are lower today and, so as far as the consumer is concerned, the signal to change consumption is weak and inadequate.

Therefore, not only does the government need to tax this polluting fuel, it also needs to use the funds and much more to provide infrastructure to wean us away from driving cars or using roads to transport goods. But Budget 2015 is doing the reverse.

It says that it will set aside Rs 4 a litre of the excise duty on petrol and diesel for a dedicated road cess.

This tunnel vision, viewing infrastructure for transport only as “roads” – in cities and on highways – is regressive.

Instead, what is needed is to reinvent mobility so that it moves goods and people, and not vehicles.

This would require massive investment in augmenting public transport in cities; building infrastructure for walking, cycle, bus and metro, and not for cars.

The fact is that Budget 2015 has recognised that this excise duty is a carbon tax, which is putting a price on each tonne of CO2 emitted.

This tax must be used to help shift to less carbon-intensive ways of production.

We also know that health costs of air pollution are deadly across the country.

Budget 2015 does little to address this concern. It does not say that the excise duty collected on dirty fuel will be used to upgrade refinery technology, so that we can get clean fuel and breathe easy.

It is also a fact that even though the government is no longer subsidising diesel, its price remains lower than petrol, mainly because of differential levels of taxation.

So even though there has been a decline in the number of diesel private cars being sold, it is not enough to make a dent in deadly pollution levels.

Therefore, what is needed is to tax diesel vehicles to equalise the price differential.

This is also the case with the coal cess.

The government now aims to use this cess to clean the Ganga or build toilets. All this is important, but takes away from the objective of moving us away from using polluting fuels or cleaning up emissions from thermal power plants to reduce health costs.

The coal cess has to be used to provide the biggest climate-change game changer for India — to provide affordable and clean power to the millions who even if connected to the grid do not have energy to light homes or cook food. What is needed is to walk the talk. Budget 2015: Complete coverage

Not just talk the talk.

Sunita Narain is at the Centre for Science and Environment