Will doubling India’s coal tax boost the clean energy sector?

COMMENT: The Modi government needs to explain where funds from the coal cess will go for it to have a transformative impact on clean energy

(Pic: Smeet Chowdhury/Flickr)

(Pic: Smeet Chowdhury/Flickr)

By Swati Agarwal

In the recently announced Union Budget speech, the Modi government doubled the carbon cess [tax] on coal, lignite and peat from US$ 2.96 to $5.94 per tonne.

This is the third time the cess is doubled since it was introduced.

A move that began as a minor redistribution policy of taxing production of coal/lignite/peat (both domestic and imported), initially at $0.74 per tonne in 2010, aimed at redistributing revenue to fund clean energy projects in India.

A pricing policy which started as a climate conscious effort by the government of India became one of its most significant climate policy initiatives, more so in light of India’s climate plan, known in UN jargon as an Intended Nationally Determined Contribution (INDC).

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India in its INDC, pledged to the UNFCCC to achieve 40% cumulative electric power installed capacity from non-fossil fuel based energy resources by 2030.

The cess on carbon will seek to meet this objective in two ways.

One, it will provide a clear and direct indication to the market of rising regulatory risks that hover over the fossil fuel industry in coming times, drawing investments away from it.

Two, it will build business confidence in the non-fossil fuel industry through gradual narrowing of price gap which will eventually help bring about price parity with the fossil fuel industry.

For instance, the increased cess on coal is expected to hike coal fired generation costs by 0.30 cents per unit in India and reduce the difference between cost of renewable power generation and thermal power generation further making the renewable energy sector competitive.

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Interestingly, the thinking of the government behind levying the carbon cess of this kind serves to meet many objectives besides the one listed above.

The revenue that is collected from the cess goes to the National Clean Environment Fund (NCEF), (erstwhile National Clean Energy Fund).

The fund was renamed in the same budgetary announcement in order to increase the scope of activities to be funded through NCEF.

Till the end of last year, NCEF held close to $2.53 billion of grant funds which was to be allocated initially in innovation and R&D in clean energy sector, and to be modified to include investments in clean energy.

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From this year onwards, the corpus in the fund is expected to substantially go up with the current hike in cess and the scope of NCEF has been broadened to cover other developmental activities that have a bearing on the environment.

Some of them include the Ganga Rejuvenation Plan, green infrastructure, project tiger and wildlife conservation, meeting India’s dual priorities of environmental conservation and development.

However on this, one may contest that while it is true of the carbon cess to have provided a strong pricing signal to the market to move away from the non-fossil fuel based growth in the country.

Widening the scope of NCEF towards other environmental projects may have dampened motivation among the clean energy protagonists to invest due to dilution of fund’s objectives.

To ensure the cess sends a strong signal to business, it will be necessary to set up a clear operationalization/disbursement policy of the NCEF.

Here we need to have target shares for funding for both the clean energy projects vis-à-vis other environmental projects clearly laid out.

This is imperative because in India, NCEF is indeed viewed as one of the most critical domestic climate finance tools to promote its clean energy sector, and now, of other environmental objectives as well.

Swati Agarwal is a climate change researcher at The Energy and Resource Institute (TERI), New Delhi. She works in the area of international and domestic climate policy and climate finance.

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