All tax on carbon is not a carbon tax

India’s de-facto carbon tax is not reducing the demand for fossil fuels or risk from climate impacts  

 
By Umang Jalan
Last Updated: Monday 14 March 2016

In the last few years, countries like India that import a majority of their oil, have made considerable gains in reducing their fiscal and trade deficits. In India, the low prices have afforded the government an opportunity to decrease subsidies and increase excise duties on major crude oil distillates i.e. diesel and petrol. These increases in excise duties have been classified by the government as a progressive carbon tax. The revenue from the increased excise duty was estimated at around Rs. 70, 000 crores (US$ 10 Billion) for FY2015-16 in last year’s budget. However, oil prices have since gone down further and various increases in excise duty have been announced, which will increase this revenue. It would be interesting to note whether this year’s budget has provisions for spending this revenue in a climate-aware manner.

According to the government, there is a de-facto “carbon tax” on petrol and diesel at US$ 140 (per tonne of CO2) and US$ 64 respectively. This is much higher than the internationally agreed price of carbon—US$ 25-35. The increase in excise duty however has not led to any measurable reduction in demand from FY2014-15 levels, as they have been coupled with a corresponding reduction in global oil prices—keeping the net price of petrol and diesel low. This begs the question—will such a tax survive an eventual increase in oil prices?

The revenue from the carbon tax has also not been spent in a climate-aware manner. For example, a portion of the excise duty has been allocated as road cess. This could perhaps be used to modify urban mobility in a more sustainable manner, by improving public transport. This is part of a larger pattern of government expenditure, that does not take into account the systemic changes that would be needed to move to a low-carbon, climate-resilient economy.

Tax on Carbon to Carbon Tax

According to the German Ministry for Economic Cooperation and Development, India has the 17th highest climate risk index in the world between 1994 and 2013. In recent times, there has been a significant increase in the frequency and intensity of climate-related events in India. Although all of these cannot be directly attributed to climate change, the trend of increasing climate impacts is something the government should take notice of and act upon. The following are a few ways in which government expenditure can be made climate-aware:

 

As mentioned above, investment in transport-related infrastructure can take into account its long-term health and demographic impacts. A focus of transport spending in road infrastructure although important should be complemented with expenditures on improving the quality and scale of the country’s urban public transport systems.

In light of the high climate risk reported in the above study and the recent increase in frequency and intensity of extreme weather events seen in India, expenditure on risk reduction activities like early warning systems should be increased. Such funding could be focused towards areas that are particularly prone to such events. Such expenditure would include more efficient use and dissemination of meteorological data through awareness initiatives and better communication infrastructure.

There can be changes to the trade policy to include favourable trade terms for low carbon goods and technologies. The methods and infrastructure available for evaluating goods and technologies that would be eligible for such terms could be established and streamlined. Perhaps, there could be better co-ordination between organisations like the Indian Patent Office (IPO), which also seeks to expedite patent queries for green technologies (as part of the new national Intellectual Property Rights policy) in identifying eligible technologies.

 

Similar expenditures have been listed in India’s recently submitted Intended Nationally Determined Contributions (INDC), which estimates that India will need US$ 206 billion (at FY2014-15 prices) between 2015 and 2030 for implementing adaptation actions in agriculture, forestry, fisheries infrastructure, water resources and ecosystems. Perhaps, India can use the “good fortune” of extended periods of low global oil prices to compensate for some of these expenses.

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