Use higher GST on coal to drive climate action
It is necessary to ensure that the higher tax rate on coal is used by both the Union and state governments to accelerate warming mitigation strategies
Successive Conference of the Parties (CoP) meetings have underscored the need to mobilise funds, particularly for developing countries. The funding requirement, to be contributed by developed nations, was set at $100 billion per year at the CoP15, held in Copenhagen in 2009. This funding was to begin in 2020 and end in 2025.
In the last concluded CoP held in Azerbaijan, this commitment was tripled, and is to be provided annually from 2035. That said, technical assessors have maintained that the amount agreed to is too little compared to what is needed for meaningful climate action. Indeed, India led a cohort of developing countries at the Bonn Climate Change Conference in June, which argued for re-negotiating the annual $300-billion target.
The question remains whether developing countries can ever rely on the developed world for their funding requirements. Or should they attempt to finance their needs domestically?
India’s transition from fossil fuel to cleaner energy sources could lead to a loss of revenue in the long run. That said, given the climate action imperative, revenue will have to be generated from taxes and imposts on fossil fuels to finance the transition in the short to medium run.
This is where the recent round of Goods and Services Tax (GST) reforms presents an opportunity. The GST Council increased the applicable tax rate on coal from 5% to 18%, while removing the only impost that came close to a carbon tax by the Union government — the clean environment cess, fixed at ₹400 per tonne of coal.
Against this backdrop, it is necessary to ensure that the higher tax rate on coal is used by both the Union and state governments to accelerate warming mitigation strategies.
An important aspect of the energy transition is the greening of hard-to-abate sectors, such as iron and steel, aluminium, cement, and fertilisers. All these sectors are included in the list on which the European Union’s Carbon Border Adjusted Mechanism (CBAM) — an implicit carbon tax that will erode these products export competitiveness — is applicable. The first three are relatively more polluting. Some studies have estimated the cost of technological requirements essential for greening these sectors. The total estimated cost of energy efficiency technologies in these sectors is close to ₹1.32 lakh crore. This can be met through the increased revenue collections from the higher GST rate on coal and a small proportion of the revenue (~8%) from the Special Additional Excise Duty (SAED) on oil and natural gas.
If this is done for five years, beginning next year, it can help meet the emissions reduction target. Furthermore, the revenue from these sources could also be used to scale up the grid with renewable technologies, which can help meet the target of producing 500 MW from renewable sources by 2030. The cost of transmission lines, as computed by the CEA, stands at ₹2.44 lakh crore, which can also be financed from these sources. Thus, the government can play a vital role in aiding industry to meet emissions-intensity targets.
This will not only make for meaningful climate action, but also will be a boost to the economy, given key polluting input cost overheads, such as coal for thermal electricity, will fall and offer a win-win-win solution for climate, economy, and industry.
Can the Finance Commission (FC) play a role in this? The answer is yes, it can — by recommending better utilisation of the higher coal GST rate to the government, given the fact that GST 2.0 will come into effect from September 22.
The primary role of the FC is to ensure that the revenues generated are shared between the Union and states by taking into consideration various parameters, including population, area, demographic performance, income, etc. The FC now must look into the sources and sharing of funds for energy transition, given climate crisis impact can also be mapped to these parameters.
The revamping of the GST rates gives the government an opportunity to deliberate on the better utilisation of revenue from the higher rate on coal and the taxes on petroleum (energy transition is not the responsibility of the Union alone, but also of the states).
Rajat Verma is Associate Fellow, CSEP Research Foundation. The views expressed are personal
