By K Raveendran
The International Monetary Fund (IMF), which is in principle opposed to all forms of subsidies, has favoured a gradual increase in subsidies by India on the use of renewable energy, while collecting higher taxes on emissions.
IMF considers energy subsidies as wasteful expenditure and estimates that as much as 6.5 percent of global GDP is spent on this account, which according to the multilateral agency benefits the rich rather than poor and contributes to global warming. It estimates fossil fuel subsidies alone at 4 percent of global GDP. The fund argues that this money can be used to help raise long-term economic growth, which is a key ingredient to reduce the burden of high public debt. It can also spread economic benefits more widely within and across countries and help restore the public trust in institutions necessary for economic stability.
The Fund notes that India has made significant progress towards meeting its emissions reductions targets under the Paris Agreement, but with current policies total emissions would nonetheless increase by more than 40 percent by 2030. While a modest increase in short-term emissions may be necessary to meet poverty reduction and energy security goals, a more rapid scaling up of current policies could help lower emissions considerably over the medium-term and bring India closer to a path to net zero by 2070.
It is pointed out that achieving net zero will require adjustments to how people live, work, and get around—and some of these changes will be costly. But upfront action could lower the cost. First, India is expected to increase investments in coal-fired power plants, but by limiting these investments, substantial irreversible fixed costs could be saved. Second, early scaling up of renewable energy allows for a more gradual policy adjustment, which may be less politically costly, and for a more continual adoption of new technologies. Costs can also be amortized over longer periods.
It is in this context that the Fund is recommending an increase in the renewable energy subsidies. This, it is argued, would have the added benefit of early reduction in the reliance on imported fuels, helping to ensure universal access to energy, and of lessening the negative health effects from pollution. External climate financing and technology transfer would help mitigate costs and ensure sustainability.
In the IMF’s model, combining renewable subsidies and higher tariffs on coal, which is roughly equivalent to ramping up India’s existing excise duty on coal, would result in nearly one third lower emissions by 2030 compared to current policies. In this scenario, growing energy demand is met through a gradual increase of renewable energy and by allowing coal power to taper off, thus exceeding the goal of 50 percent non-fossil fuel electricity capacity. Under such a policy, not only would the share of renewables rise significantly but overall electricity supply would increase.
While this policy has clear environmental benefits, IMF estimates that the policy will result in a modest reduction in the level of real gross domestic product as firms and consumers pay higher taxes. However, enough fiscal revenues would be raised to compensate the poorest citizen to such an extent that the policy would be progressive overall. Additionally, the small cost of this policy is less distortionary than other options.
Lower emissions would have significant benefits. Increasing renewable energy usage and allowing coal to taper-off in this policy scenario would lead to a 2.5 percent reduction in pollution, saving lives and leading to fewer missed school and workdays. It would also decrease coal imports by 14 percent by 2030, thus increasing resilience to global changes in energy prices and improving energy security.
Global agencies are mighty impressed with India’s achievements on the green energy front. The International Energy Agency recently noted that India’s scale of transformation is indeed stunning. It noted the country’s economic growth has been among the highest in the world over the past two decades, lifting of millions of people out of poverty. Every year, India adds a city the size of London to its urban population, involving vast construction of new buildings, factories and transportation networks. Coal and oil have so far served as bedrocks of India’s industrial growth and modernisation, giving a rising number of Indian people access to modern energy services. This includes adding new electricity connections for 50 million citizens each year over the past decade.
The rapid growth in fossil energy consumption has also meant India’s annual emissions have risen to become the third highest in the world. However, India’s CO2 emissions per person put it near the bottom of the world’s emitters, and they are lower still if historical emissions per person are considered. The same is true of energy consumption: the average household in India consumes a tenth as much electricity as the average household in the United States. (IPA Service)