A CSEP study suggests redirecting India's fossil fuel tax revenues to fund clean energy and industrial efficiency.
This could potentially boost GDP, reduce emissions and improve household incomes.
The study models three scenarios, with renewable energy investments showing the highest economic gains and emissions reductions.
Redirecting a portion of India’s fossil fuel tax revenues toward clean energy and industrial efficiency could simultaneously boost economic growth, cut emissions intensity and improve household incomes, according to a new working paper by the Centre for Social and Economic Progress (CSEP).
The analysis comes at a time when India faces the dual challenge of sustaining economic growth while meeting its updated Nationally Determined Contributions (NDC) and 2070 Net Zero commitment.
Fossil fuel taxes contribute around a third of India’s indirect tax revenues, according to Fossil Taxes Funding India’s Decarbonisation: An Impact Analysis. With climate finance needs rising and international commitments from developed countries falling short, including the unmet $100 billion annual pledge under COP15 and the revised $300 billion commitment at COP29, domestic resource mobilisation has become critical.
The study explores what would happen if a portion of fossil fuel taxes, including GST on coal and excise duties on oil and natural gas, were redirected toward:
Energy efficiency technologies in iron and steel, aluminium and cement sectors; and
Renewable energy transmission systems required to meet India’s target of 500 GW of non-fossil fuel-based capacity by 2030.
To finance both energy-efficiency upgrades in hard-to-abate (HTA) sectors and the renewable transmission system, the study estimates an annual requirement of Rs 75,166 crore.
Following GST 2.0 reforms in September 2025, which discontinued the GST Compensation Cess and increased GST on coal from 5 per cent to 18 per cent, excess revenue from coal GST is estimated at Rs 16,949 crore (based on FY24 figures).
In addition, Rs 58,217 crore (equivalent to 8.7 per cent of oil and gas tax collections) could be mobilised from existing levies such as Special Additional Excise Duty (SAED) and Road and Infrastructure Cess.
The authors of the study noted that no new taxes would be required; instead, a small portion of existing fossil-related revenues could be earmarked for climate finance.
The capital expenditure required for energy-efficiency technologies in HTA sectors is estimated at Rs 1,32,000 crore cumulatively:
Iron and steel: Rs 76,479 crore
Aluminium: Rs 32,499 crore
Cement: Rs 22,650 crore
Separately, the Central Electricity Authority estimated that Rs 2,44,000 crore will be required by 2030 to build the transmission system needed to integrate renewable capacity.
While redirected fossil tax revenues would not fully meet total investment needs, they could finance a substantial portion of efficiency upgrades or accelerate grid expansion.
Using an Environmentally-extended Social Accounting Matrix for 2019-2020, covering 45 economic sectors and 318 labour categories, the study modelled three scenarios:
Scenario 1: All funds invested in energy-efficiency technologies in HTA sectors.
Scenario 2: All funds invested in renewable energy transmission systems.
Scenario 3: Funds split between efficiency and renewable transmission.
The model evaluated impacts on gross domestic product (GDP), Gross Value Added (GVA), output, emissions intensity and household income distribution.
All three scenarios showed increases in GDP, GVA and output.
Scenario 2 produced the highest GDP gains, followed by scenario 3 and scenario 1. The stronger impact in Scenario 2 is attributed to spillover effects across construction, machinery, agriculture, food and beverages, and services sectors, which together account for roughly 60 per cent of production activity.
Because the investments rely on existing tax revenues rather than new levies or borrowing, the study characterises the approach as fiscally neutral.
Electricity generation accounts for nearly 40 per cent of India’s greenhouse gas emissions, while HTA sectors together account for about 12 per cent. In 2020, electricity and HTA sectors combined accounted for more than half of national emissions.
Scenario 2 yields the largest reduction in emissions intensity by lowering the grid’s emissions factor through higher renewable integration.
Scenario 1 reduces emissions within HTA sectors by lowering energy consumption but produces narrower system-wide benefits. Scenario 3 delivers a balanced outcome, with emissions intensity reductions greater than Scenario 1 but lower than Scenario 2.
Household incomes rise in all scenarios due to increased production and factor demand.
Scenario 2 shows the most progressive distributional impact:
Rural lower-income households gain relatively more.
Urban households see progressive gains only under Scenario 2, while Scenario 1 and Scenario 3 show mildly regressive patterns.
The study described Scenario 2 as delivering a “triple dividend”, economic growth, emissions reduction and social equity.
Coal India Limited (CIL) and subsidiaries paid Rs 61,014.2 crore in taxes and duties in 2024-2025. Under GST 2.0, estimated collections would be Rs 42,441.3 crore, with GST’s share rising from 8 per cent to 39 per cent of total tax revenues.
On oil and gas, central excise duty components in 2023-2024 included:
Basic excise duty: Rs 33,786.9 crore
Special additional excise duty: Rs 1,46,619.6 crore
Agriculture infrastructure and development cess: Rs 53,778.1 crore
Road and infrastructure cess: Rs 44,549.5 crore
The study noted that SAED and CRIF allocations are not fully earmarked for energy transition and could potentially support renewable investments.
The authors recommended allocating additional GST collected from coal toward decarbonisation efforts, earmarking part of SAED along with road and infrastructure cess for climate finance, prioritising investments in renewable energy transmission due to their superior economic, environmental and equity outcomes, and establishing or reviving a dedicated Clean Energy Fund equipped with strict reporting and transparency mechanisms to prevent underutilisation — as seen with the earlier Clean Environment Cess, where over 60 per cent of collections remained unused.