From Carbon Subsidy to Carbon Tax: India’s Green Actions

Economic Survey 2014-15 acknowledges the green actions taken by India, including imposing significantly higher taxation of petroleum products and thereby reenergizing the renewable energy sector. India shifted from a carbon subsidization regime to one of significant carbon taxation regime, from a negative price to an implicit positive price on carbon emissions. India has cut subsidies and increased taxes on fossil fuels (petrol and diesel) turning a carbon subsidy regime into one of carbon taxation, by putting an effective price on emissions. This has significantly increased petrol and diesel price while serving as price signal to reduce fuel burnt and hence CO2 emissions. Calculating CO2 emission reductions from measures taken for petrol and diesel suggests that there will be a net reduction of 11 million tons of CO2 emissions in less than a year compared to the baseline or 0.6 percent India’s annual emissions. In addition, India has increased the coal cess from Rs. 50 per ton to Rs. 100 per ton, which is equivalent to a carbon tax of about US$ 1 per ton. A higher tax on coal offsets the domestic externalities including health cost of coal for power generation. The Economic Survey points out that any rationalization of coal pricing must take account of the implications for power prices and hence access to energy for the poorest in India which is and must remain a fundamental objective of policy. The Economic Survey observes that there is still a long way to go with potential large gains still to be reaped from reform of coal pricing and further reform of petroleum pricing policies. Broadly, the move to substantial carbon taxation combined with India’s ambitious solar power program suggests that India can make substantial contributions to the forthcoming Paris negotiations on climate change.