Who pays the most for emissions from fuel use in India?

India ratified the Paris Agreement, thus binding itself to its commitment to reduce the emissions intensity of GDP by 2030 to around one-third of its 2005 levels. While shifting to renewables would play an important role in this endeavour, taxing fossil fuels is also an important constituent of this strategy. Taxing dirty fuel usage serves as an effective carbon tax, rendering polluting fuels unattractive to users, and encouraging users to opt for cleaner options such as renewable energy. As is to be expected, fossil fuels are used in many production activities, apart from powering vehicles. However, incidence of taxes can be quite different due to the nature of consumption.

A recently released OECD report on environmental taxes in India has data on the burden of such taxes on different sectors. The report shows that it is agriculture which has the highest share of fuel emissions taxed, even ahead of road transport.

Since India does not have an emissions trading system, the OECD report took into account taxes on energy usage. An emission trading system works on the cap and trade principle: countries, or companies, are restricted to a fixed amount of greenhouse gas emissions. An entity that stays within its emissions limit can trade its unused allowance with another country that may have exceeded its allotted quota of emissions. The OECD’s calculation included taxes on fossil fuels, such as CENVAT, extra duty of Rs2 per litre for petrol and diesel, an additional special excise duty for petrol (Rs7 per litre) and diesel (Re1 per litre), the clean energy cess on coal (Rs50 per tonne of coal as on 2012; it was later increased), the education cess applied to CENVAT and the clean energy cess, among others, as well as taxes on electricity use based on information for some states (Gujarat and Tamil Nadu). All these tax rates are for the year 2012. Read more…