Budget 2022: A Fiscal Roadmap To Low Carbon Economy

Prime Minister Narendra Modi has committed India to a lower carbon economy by 2030 and the first and firmest steps towards delivering that need to come from Finance Minister Nirmala Sitharaman.

"We are locked into a high carbon economy, through our fiscal structure, through our expenditure systems," said Navroz Dubash, professor at Centre for Policy Research, in a discussion on BloombergQuint.

We need a fiscal system that recognises the only social 'bads' are not things like cigarette smoking or alcohol addiction but also air pollution, water pollution, groundwater depletion...and taxes those 'bads' because regulatory apparatus will always be inadequate in a country this big with a dominance of small scale or informal businesses, E Somanathan, economics professor at the Indian Statistical Institute, said in agreement.

Whether it's taxing the 'bads' or incentivising the 'goods' or subsidising local governments, both pointed out that India's fiscal system will have to make big changes to mitigate climate change and provide for those worst impacted by it.

Need A New Framework

From ambitious renewable energy production targets to the LED bulb campaign to incentive schemes for e-vehicles, India has made several moves towards a greener economy.

But, the Prime Minister's commitments at COP26 require a different approach. India must move from "episodic, opportunistic, short term immediate actions, to a more systematic, long term action framework", Dubash said.

The budget can help kickstart that with stock taking.

For instance, a detailed assessment of the impact of centrally sponsored schemes on climate change, both mitigation and adaptation. Do the various budgetary outlays make India more resilient or less resilient?

Or, the impact of meeting 50% of India's energy needs via renewable energy by 2030. How will this impact budgetary dependence on fuel tax, at the centre and state level?

According to Dubash, the Union Budget is a good place to do that assessment, and then start providing short term budgetary support for strategic new initiatives such as the hydrogen economy, more investment in solar power, the transition to gas, etc.

Somanathan emphasised the need to disincentivise climate negatives i.e. tax the 'bads', as he put it. For instance, raising taxes on coal and fossil fuels in a gradual, predictable way over several years so that the industry can make appropriate investments and transitions.

Or taxing plastic.

"Plastic is a good that causes a lot of pollution, and we need to tax that good at the source, which is when it comes out of the refineries; that is the sort of strategic perspective that we need. Of course, those taxes can be refunded if it's shown that plastic has been recovered and recycled. But that's the kind of strategic perspective that we need, and we need to do that across the board so that our economy just becomes less wasteful and more efficient, and greener, cleaner and healthier."

The revenue from these taxes can be used to incentivise green initiatives or support those most affected by the transition.

While the budget can be a starting point for this transition, it needs a 10-year framework that applies across the economy and is implemented across national, state and local governments.

Beyond The Budget

We need a big transition over a short time, Dubash underscored. We need local governments to lead this as well, Somanathan added.

Here are some of the key steps they listed:

A legal framework

India needs a new law according to Dubash, not to regulate carbon as we are still a developing economy, but to "inject the consideration of carbon, as well as consideration of vulnerability and the impacts of global warming...through line ministries to industry, to resident welfare associations, to universities..."

An institutional structure that links science to policy

When states are thinking about how to make themselves more resilient, they don't have ready and easy access to what the best science is or the impact. A low-carbon development commission could help ascertaining pathways to and impact of long-term transitions like the renewable energy transition or what happens to coal communities in Chhattisgarh, Jharkhand and Bihar, Dubash said.

Support and empower states

States have different circumstances and capacities to fight the climate change battle. They will need central support to undertake transitions and mitigate local impact, according to Dubash.

"What exactly are the structures to allocate money to coal-dependent states? What are the structures that will enable them to think about industries that can support the populations with jobs? South Africa, for example, has started a Just Transition Commission, which looks at this question, bringing in coal mining workers, the power industry, users, money from the World Bank, and structuring a process over several months to think about what the long term looks like for these regions. I think we need to learn from some of these experiences and do something analogous in India."

Incentivise local governments

India's transition will not be successful in any part without the active participation and leadership of local governments, Somanathan said.

"The localities are really weak. This is why so many problems arise. Why do we have poor garbage collection, why do we have poor waste disposal, why do we hardly have any public transport, why do we have congestion? You know, all these problems are local governance problems. So, we really need to realise that both from the perspective of improving our environment, of making a low carbon transition, and most importantly, for economic development, we need our localities to work and right now they don't."

Watch the full discussion with Navroz Dubash and E Somanathan here.