Fuel prices have hit record highs affecting household budgets, causing Parliamentary walkouts and even protests. It’s good policy though.
In India, taxes on Petrol amount to 58% of the Retail Price. Not only is this a great source of revenue for the government, but also acts as a lever to reduce living costs. The spike in fuel prices due to the Russia-Ukraine Crisis and rising domestic retail inflation might trigger any government into cutting this tax to help the common man, but in recent months, India has seen record high fuel prices sparking protests without any tax cut. Opposition attacks against these “astronomical” prices include allegations that the government is, “drunk in their arrogance of power,” while taxi drivers demand an increase in their fares to account for their shrinking margins.
But is a high tax on fuel nothing more than a Carbon Tax? If there is anything that the progressively bleak IPCC Reports released this year have told us, it is that we need to initiate deep decarbonisation methods fast. By retaining the high rate of tax on fuel in spite of rising costs, isn’t the Government effectively taking a political hit to push people to economise on their use of fossil fuels?
So aren’t the high fuel prices a good thing?
In a 2016 report titled “Effective Carbon Rates: Pricing CO2 Through Taxes and Emissions Trading Systems,” the OECD said that the principle appeal of using prices to induce carbon abatement is that it encourages emission reductions where they are cheapest. Both in the sense of using the cheapest available options today and steering innovation and investment towards lower carbon technologies. Yet, most governments have long been hesitant to openly impose a “Carbon Tax” for fear of losing their political mileage. In fact, India was heavily criticised for refusing to commit to a “phase-out” of Coal-based energy by 2050 at COP26 leading to the perception that we are not serious about taking firm policy measures to tackle the Climate Crisis.
However, the present government’s firm position in maintaining the high rate of tax on fuel in spite of the knock-on political and economic effects shows that India is indeed using pricing mechanisms to cut emissions and finance its energy transition. India’s Transportation Sector contributes to 10% of its Carbon Emissions, but also contributes to roughly 6.4% of its GDP, and provides direct employment to over 22 million people. The Automotive industry (including component manufacturing) is expected to reach Rs.16.16–18.18 trillion (US$ 251.4–282.8 billion) by 2026, making it the third largest passenger market. However, this sector also needs to transition to electric vehicles, leaving the government in a tight spot on the policy front —
How can India cut carbon emissions, air pollution and traffic, protect jobs in transportation, maintain price controls on imported luxury vehicles and boost domestic manufacturing in fossil-fuel based cars, while also encouraging the transition to EV’s?
Simple! Pass on the cost of these carbon emissions to the consumer by allowing fuel to become more expensive.
Due to the above mentioned considerations, particularly the strong manufacturing sector, India has been unable to impose a robust policy mechanism to control vehicular emissions. In fact, Indians travelling to Singapore often react with shock and awe to the Certificate of Entitlement (CoE) system needed to purchase a Car. This system was introduced in 1990 to reduce the number of cars on the road by making potential car owners go through a tender process for the purchase of a CoE prior to making them eligible to buy a vehicle. Such a policy enabled Singapore to impose a premium on the purchase of cars, as well as to control the number of new vehicles thereby curbing air pollution and traffic woes. Singapore also has a duty of 79 cents a litre for premium grades (98-octane and above) petrol, and 66 cents a litre for intermediate grades (92-octane and 95-octane) and in 2017 introduced a cap on the total number of cars. Without officially classifying it as such, Singapore effectively has a robust carbon tax system on vehicular emissions.
India has previously shied away from taking measures that would restrict the number of vehicles on the road. For us, the four-wheeler symbolises stability, independence, comfort and forms the ultimate status symbol. For the government to impose a high tax on this, our most beloved wedding present would be unthinkable, climate be damned.
In leaving the tax on fuel unchanged in spite of high prices and consequential political risk, the Government has taken a brave position with a potentiallly positive impact on the planet.
