A big obstacle in India’s energy transition -

A big obstacle in India’s energy transition


  • Covid-19 has revealed how much India depends on revenue generated from fossil fuel to control its fiscal position. It is estimated that around 25 percent of the central government’s revenue comes from taxing fossil fuels while the states get around 13 percent of their tax revenues from the same.
  • Though the Indian government has imposed high taxes on fossil fuels targeting a reduction in consumption the demand has only increased in absence of alternatives.
  • Experts emphasise that with the present tax structure, where fossil fuels are disproportionately taxed, an energy transition that is ‘just’ remains a distant dream. They advocate for reforms in the tax structure and reducing the dependence on fossil fuels.

The Covid-19 pandemic has laid bare the Indian government’s dependence on fossil fuels for revenue generation and this could impact the country’s plans for large-scale adoption of clean energy at a time when a ‘just’ energy-transition is crucial to address climate change.

For the most part of 2020, when the economy was in the doldrums, the rise in prices of petrol and diesel were often among the most discussed issues. The petrol prices crossed Rs. 100 per litre in several areas of the country and the issue has received significant attention in the ongoing assembly elections across five states and union territories as well.

But no amount of criticism has been able to impact the central government which has continuously defended high tax, around 60 percent, petroleum products statin that it is stating that it is necessary to improve the fiscal position of the country. Anurag Singh Thakur, who is the minister of state for Finance on March 15, said, “The excise duty rates have been calibrated to generate resources for infrastructure and other developmental items of expenditure keeping in view the present fiscal position.”

But this practice is not new and certainly not due to the Covid-19 pandemic alone. In fact, the present government has earned significant revenues from increasing taxes on fossil fuels since it came to power in 2014.

In 2013-14, the government of India (GoI) earned Rs. 12.35 trillion (Rs. 12,35,870 crores) from the central excise duty on petrol, diesel and natural gas. It was about 4.3 percent of the budget estimate of Gross Total Revenue (GTR) of the particular year. In comparison to this, the Indian government received Rs. 24.23 trillion (Rs. 24,23,020 crores) from the central excise duty in just 10 months (April 2020 – January 2021) which is 12.2 percent of the budget estimate of the GTR.

A working paper ‘Energy: Taxes and Transition in India’ published by a Pune-based non-profit working in the energy sector, Prayas, highlights the Centre and states’ dependency on fossil fuel for their revenue generation. It notes that “the energy sector contributed about 18 percent to the tax revenue of the Centre and states in 2018-19, with the Centre’s dependence being greater (25 percent). At an aggregate level, states depend on the energy sector for 13 percent of their tax revenues.”

In comparison to this, a country in the European Union earns only about 4.7 percent of total tax revenue from energy tax, the paper by Prayas claimed.

Vehicles burning diesel as fuel generate black carbon. Photo by S. Gopikrishna Warrier/Mongabay.
Vehicles burning diesel as fuel generate black carbon. Photo by S. Gopikrishna Warrier/Mongabay.

The government earns revenue from the energy sector in many ways including the Goods and Services Tax (GST), the GST compensation cess, custom duty, excise duty, National Calamity Contingent Duty (NCCD) and sales tax/value-added tax (VAT) etc. All these duties and taxes fall under the tax revenue. While under non-tax revenue, the government gets revenue through a royalty on coal, crude oil and natural gas and also contribute to the District Mineral Foundation (DMF) funds.

Prayas’s paper claims that the revenue estimates from the energy sector – 25 percent for the Centre and 13 percent for the states – are conservative since it has considered only the primary revenue sources.

Ashok Sreenivas, a senior fellow at Prayas and one of the authors of the paper, said that the energy transition is going to take at least 10-20 years and for this, taxation is crucial. Whenever energy transition is discussed, issues related to technology and its impact on people or society gets significant attention. Like, how renewable integration as part of the energy transition will happen, how people employed in the coal sector will be affected, but what rarely is discussed is the economics of fossil fuel and its impact.

“If we keep the tax regime as it is, it is not going to work. The government is too dependent on fossil fuel. Point is that the tax regime has to be changed. How and what are the questions that need to be debated,” Sreenivas told Mongabay-India.


Read more: [Commentary] India’s transition to green energy is an opportunity to get it right


Earnings from fossil fuels go into the black hole of fiscal deficit

When the present government came into power in 2014, it introduced a paradigm shift in energy taxation with a claim that high taxation of petroleum products acts as an implicit carbon tax. In the national economic survey 2014-15, a whole chapter ‘From Carbon Subsidy to Carbon Tax: India’s Green Actions’ was dedicated to explaining the rationale behind putting more taxes on petroleum products with huge claims.

One of the claims was that the increased petrol and diesel price will serve as a price signal to reduce fuel burnt and carbon dioxide (CO2) emissions. However, the impact of the increase in price was not seen in terms of reduction in fuel burnt. In 2015-16, India burnt 184.6 million metric tonnes of petroleum products which increased to 214.1 million metric tonne in 2019-20.

It should be noted that despite heavy taxes, demand for energy has not gone down, noted R. Kavitha Rao, an economist associated with the National Institute of Public Finance and Policy (NIPFP). She was talking in reference with increase in fuel price in pandemic and its consumption.

When asked about the increased fuel prices not leading to reduced consumption, Chandra Bhushan, president and CEO of iForest, a think-tank working on environment and sustainability said this is a “nonsensical equation.”

“Increasing prices of essentials will not lead to less consumption. People don’t have other alternatives so they will cut their expenditure on other things but will continue to spend on fuel,” Bhushan told Mongabay-India.

In the same chapter of the 2014-15 national economic survey, the central government explained the rationale behind the increased coal cess from Rs. 50 per tonne to Rs. 100 per tonne with the claim to make it equivalent to a carbon tax of about one U.S. dollar per tonne. The coal cess was later increased to Rs. 400 per tonne.

But the twist in the tale is that the whole revenue collected as a ‘carbon tax’ under the name of clean energy cess was diverted to fill the revenue deficit of states under the GST instead of being used for clean energy projects. A report claimed that about $12 billion (Rs. 872 billion) were collected in the form of the clean energy cess on coal production between 2010-11 to 2017-18.

Trucks carrying fuel on Srinagar-Leh highway. It is estimated that around 25 percent of the central government’s revenue comes from taxing fossil fuels while the states get around 13 percent of their tax revenues from the same. Photo by Rajesh/Flicker
Trucks carrying fuel on Srinagar-Leh highway. It is estimated that around 25 percent of the central government’s revenue comes from taxing fossil fuels while the states get around 13 percent of their tax revenues from the same. Photo by Rajesh/Flicker

In another instance, the cess collected on the crude oil in the last decade was not even transferred to the purpose it was collected for. In its audit report in September 2020, the Comptroller and Auditor General (CAG) of India said that Rs. 1.24 trillion (Rs. 1,24,399 crore) representing the cess on crude oil collected in the last decade had not been transferred to the designated Reserve Fund (Oil Industry Development Board) and was retained in Consolidated Fund of India (CFI). This fund was to be used for taking up measures conducive for the development of the oil industry, as per the report.

Karthik Ganesan, a fellow at Council on Energy, Environment and Water (CEEW), said that for much of the last decade, lower oil prices have only translated to higher duties and cesses and revenues for the government.

Ganesan, who leads the research on the power sector at the CEEW, said the central government use this fill the revenue deficit and “effectively with this milking system in place, one cannot hope for an (energy) transition any time soon. It is only burdening the pockets of the poor.”

“You need to think about how to invest these revenues appropriately. The biofuel blending programme did not take off and neither has India invested in significant R&D and domestic capacity for other emerging technologies such as energy storage or hydrogen” Ganesan told Mongabay-India.


Read more: East and west: The parallel worlds of India’s coal and renewable sectors


Pandemic further risks the energy transition

Though there is a demand for green recovery from the Covid-19 induced slowdown in the economic activities, it seems this still has not become a priority for the government.

The NIPFP’s R. Kavitha Rao noted, “Central government like other governments across the globe saw shut down on economic activities because of the Covid-19 pandemic. Despite heavy taxes on fossil fuel and a substantial amount of revenue through this, the Indian government has managed just 82 percent of what it is budgeted for.”

“In case of slow recovery, the government will be relying on the same to meet its basic responsibility of paying salaries and other expenditures. Weighing between green recoveries and meeting the basic responsibility, it is not tough to imagine what the government will go for. Meanwhile, the finance commission has also asked for an increasing tax-to-GDP (Gross Domestic Product) ratio. So, it doesn’t seem to be in anyone’s mind to reduce tax on fossil fuels, she added. Tax-to-GDP ratio reflects the size of a country’s tax collection relative to its GDP.

iForest’s Chandra Bhushan noted that that the energy sector in India is taxed disproportionately. and said: “Energy transition has to happen. To get this transition done, the government will have to redistribute taxes and also it does not need to completely rely on fossil fuel, which it is doing right now.”

He called for large-scale reforms in the electricity sector. “If you want to get rid of coal, oil and gas, the main source of energy is going to be hydrogen, electricity, biofuels including biomass, biogas etc. So, the reform in the electricity sector becomes a very critical element. It should be underlined that the energy sector is heavily subsidised and is in a net loss. So the sectoral reform becomes important,” Bhushan explained.

He emphasised that isolated sector-wise policies are not going to work. “The energy sector is a complex world and the answer will also require understanding the complexity. But, the sectoral policies dominate India’s policymaking at present,” he noted.

 

Banner image: Manali Refinery belonging to Chennai Petroleum Corporation Limited. It produces petroleum products including LPG, motor spirit, superior kerosene, aviation turbine fuel, and high-speed diesel. In 2015-16, India burnt 184.6 million metric tonnes of petroleum products which increased to 214.1 million metric tonne in 2019-20.  Photo by Amirtharaj Stephen/PEP Collective.



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