Time To Relook At India’s Erstwhile Coal Cess

A labourer searches for usable coal at a cinder dump site on the outskirts of Changzhi

In the nondescript landscape of Tetariakhar coal mines in Basiya village, India the localvillagers bear the brunt of development, for ‘others’ far away. At the fringes, the Dalitfamilies are coerced to move out due to expansion of mines. 1 The miners have tocontend with air filled with coal dust that exacerbate health issues like asthma andother respiratory problems. The carbon boon for the country had turned out as banefor countless such villages in the coal belt of India. It bears grave social andenvironmental cost on them.Adding to this is the skewed version of domestic carbon tax that reinforces their misery. Unknown to them, but silentlylayeringa burden on their shoulders.

As Indian government tries to steer away from ‘carbon-intensive’ pathway for development to realise it’s bold commitments in Paris Agreement, it is clear that the huge coal reserves will have to be ‘stranded’ and remain buried forever. The energy mix will have to eventually phase-out fossil fuels to reach conditions for a low carbon economy.In-line with this strategy, India experimented with coal cess back in 2010-11 introducing it in the Union Budget. A coal cess is a carbon tax, which is a tax levied on the carbon content of the fuel. Unlike many other countries that levied tax on other fossil fuels like petroleum, natural gas, India applied specifically on coal and its variants- lignite and peat. [1] Both on domestic production and import. Hence, India started off with a coal cess which evolved in its intentions and applications over the years.

The Tax Paradox!

Most economists agree that a carbon tax is the most cost-effective means for regulating emissions.[2]Technically, Carbon tax tend to expose the actual cost of fossil fuel by factoring in the social cost of carbon (SCC) also. As one understands, the actual cost of fossil fuel not only comprises the cost of production, but also the cost on health and environmental damage.  It is simple and straight forward.But there is a discernible contradiction in theory and the contextual executionwhich tends to get obscured in the broader discourse.It is seen that the higher income groups have higher energy consumption, yet do not have to suffer consequences from damages caused by their consumption or production of energy. Whereas the lower income groups who are at the fringes tend to bear higher cost of environment and health. Carbon tax tries to rebalance this market distortion by internalizing the “polluter pays” principle – a universal principle used in international treaties which puts responsibility on the polluter to pay for the pollution damages. However, administering a carbon tax becomes tricky, especially in a developing or lesser developed country. This is because in these countries, low-income families already spend a substantial share of their income on energy intensive goods. Adding a blanket tax component will hit the lowest income group, the hardest. Thus, making the taxes disproportionately regressive and widening the economic gap. This is in contradiction with the “polluter pays” principle that tries to bring fairness and economic parity to lower income groups. So, is the carbon tax in bad taste for common Indian population?

It depends on how carbon tax is crafted. More importantly, it depends on how revenues from the tax is recycled or redistributed. 

In an event sponsored by Resources for the future, Dr.Roberton Williams, Sol Price Fellow at the Urban-Brookings Tax Policy Center at the Urban Institute said “The carbon tax by itself is regressive, but what you do with revenue is much more important. So, we can easily take a regressive policy and turn it progressive by how we use the revenue.”This highlights the fact how much ever we calibrate the tax rate, in the end, the way revenue is used makes a difference.Research[3] shows that direct transfers to high percentage of low-income households will make the carbon taxation even out this disparity. It is to be noted that there cannot be a perfectly fair and effective carbon policy. This is especially true in the Indian context where other social elements also factor in.

In the Indian scenario, the carbon tax or cess has been doubling periodically which augured well for clean energy initiatives in the country. From Rs 50 on every tonne of coal sold in 2010, the cess is currently at Rs 400 per tonne[4].In the last six years, government of India has collected around Rs. 54,000 crores by levying a cess on every tonne of coal mined or imported.[5]Hence, without doubt, there has been healthy net inflows into the account over the years with increasing production of coal. The accruals from the cess are routed to National Clean Energy Fund (NCEF). NCEF has dual function of constraining coal production and inducing shift towards cleaner technology and at the same time, garner funds to promote clean environment initiatives, funding research in clean environment or other such related purposes.Over the years,NCEF has developed its own sets of problem.

Where Lies the Priority?

The funding mechanism for NCEF has been mainly channelized towards environmental and energy initiatives that do not help in lowering the regressiveness of carbon tax. Although it is imperative that greener initiatives should be promoted, the adverse tax incidence on lower income group should not be overlooked. Moreover, the NCEF fund programmes are majorly for large scale projects like solar parks, river water rejuvenation projects that do not benefit the real intended beneficiaries directly. A village led off-grid renewable projects is the last point on the list.

There are concerns over the scope and functioning of NCEF itself. The data shows that not more than 40% of total revenue proceeds are transferred to NCEF. Moreover, the utilization rate has been dismal with utilization beingas low as 16% in some years[6]. Over the year’s there has been dilution in action and allocation beyond its mandate. The funds have been diverted to multiple ministries to compensate budgetary shortages.  Lately, the clean energy cess has become feeder for GST compensatory fund which is totally absurd.

In view of challenging road to low-carbon economy and transition strategy to cleaner energy, the government cannot afford to send mixed signals while posing a bold stance of a proactive renewable leader to the world community. For this, the proceeds from NCEF should be put to effect themandated intention of accelerating the transition to cleaner and sustainable energy. Also,Indian carbon tax or clean energy cess should not be a naïve western implant, but rather need to be adequately retooled to accommodate the deep-seated socio-economic realities. Thus, it is imperative that policy design of both the sourcing mechanism as well as theexpenditure channels of carbon tax needs to have a hard look.


Deepak John is a Senior Research Associate at Institute for Sustainable Development and Governance, India. His research area focuses on interlinkages in climate change, environment and alternative energy in the context of sustainable development. Email: [email protected]









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