The Right to Energy & Carbon Tax: A Game Changer in India

How free electricity could fight climate change and inequality
This piece was originally submitted to Ideas for India (I4I), an economic and policy portal run by the India Program of the International Growth Centre (IGC).

Climate scientists have pressed the panic button. They warn that time is running out. A recent study published by the Proceedings of the National Academy of Sciences shows that without immediate action, the earth will permanently change into a `Hothouse Earth,’ beyond which efforts to reverse these developments will likely prove futile. Despite such dire predictions, both the global north and south, albeit to varying degrees and for different reasons, are behaving like ostriches. The North blames the South, saying that the sharp rise in carbon emissions today originates in the newly industrializing countries and they should cut down whereas the South says the North has done it in the past so it is their turn now. In this bogey tug of war, it’s the ordinary citizens, particularly the poor of the world, who are most heavily affected as a result of environment-induced dramatic changes in the livelihood and habitats of tropical regions.

This passing the buck is not going to help. Instead, there is a need for collective and coordinated global action which is obscured by narrowly defined ‘national’ interests. When it comes to mitigation, there’s absolutely no doubt the global North has to shoulder a higher burden of adjustment both because of their past and current contributions as well as greater access to funds. At the same time, it’s also true that the global South has to carry a share of the burden. After all, it’s the global South, because of its tropical location with already high temperatures as well high density of population, which will face the wrath of climate change at disproportionately higher levels. Our argument here is restricted only to how the global South needs to respond to this challenge with India as a case in point since India’s battle to tackle climate change could determine the world’s fate.

Greenhouse gas emissions, especially carbon, are at the heart of the problem of climate change. In 2014, India’s total carbon emissions were more than three times the levels in 1990 (see figure). This is so because of India’s heavy dependence on fossil fuels and a dramatically low level of energy efficiency.

While emissions have increased sharply, their distribution across income groups is extremely skewed. If one calculates the carbon footprint of households across income deciles (table 1), it shows that the footprint of the richest 10% (as per the National Sample Survey (NSS) data) is 7 times as high as that of the poorest! The Climate Injustice Quotient (CIQ) in this table measures the carbon footprint of a decile as a proportion of their share in the population and the extent of inequality in quite stark. This table also shows that the bottom 70% of the Indian population contributes less carbon than their share in the population.

Table 1: Inequality in Carbon Emissions

What this essentially means is that it’s the poor in India who contribute the least to the climate problem but might, paradoxically, face the maximum brunt of it! Any environmental policy, therefore, has to be one which, apart from addressing the root cause, squarely addresses this paradox. It is important for issues of justice as well as acceptance by the broader sections of the people.

The question is how?

Emissions can be curbed only if people are persuaded to move away from fossil fuels and adopt greener forms of energy and improve energy efficiency. But how do we achieve that? Tax carbon, period. If this revenue is used for a systematic overhaul of the energy mix in the economy, then carbon taxes address both the demand (increasing prices of carbon-intensive products) and the supply side of the emissions equation.

The problem, however, is that a carbon tax, much like any other indirect tax on a necessary good, puts a heavier burden on the poor than on the rich because the poor consume a higher share of the good in their income. Such a carbon tax, let alone addressing the issue of climate injustice, will perpetuate income inequality in return. Is there a way out?

In the North, a case has been made to distribute the carbon revenue equally among the citizens which will invert the regressive incidence of these taxes. Unlike the North, it has generally been found, especially in the context of developing countries, that cash transfers often may not have the redistributive impact that one would expect in theory, because of limited access to banking, lack of control of finances by women in households, lack of inflation indexation, etc.

Our policy proposal is that instead of cash, a part of the carbon revenue should be spent on a Right to Energy program. According to this program, all households will have access to free electricity and transport (the two most carbon-intensive consumption categories) up to a certain limit. Since the eighth decile onwards (table 1) of carbon footprints far surpass their share in the population, we take the median consumption of both these commodities of the seventh decile to set this limit. This is the justice component of our policy which is comparable to the climate injustice faced by these sections of the population. So, instead of a carbon dividend, all citizens of the country will have an entitlement to a dividend in the form of energy. As of 2016, around 20 percent of India’s population did not have access to electricity. In July 2012, India experienced a blackout affecting roughly 700 million people. Through this Right to Energy program, every household in India will have access to electricity, a feat that almost all the governments since independence have dreamt of but failed to deliver. The free entitlement of fuel and electricity for a household comes out to be 189 kWh per month based on our calculations from the NSS data. Anything above this limit will be charged in full to prevent abuse of this policy. Travel passes with pre-loaded balance amounts of Rs. 835 per person per month, which can be used on any mode of public transport, private and government alike, will be available for every citizen to use.

Table 2 shows how climate injustice (Table 1) is inverted through this policy. It’s not surprising that the carbon charge as a share of expenses declines as we move up the income ladder, i.e. the carbon tax is regressive. But the benefit of free electricity and transport (up to a certain limit) under this Right to Energy program more than compensates for the carbon charge levied on these households. And not surprisingly, the pyramid of injustice is inverted as can be seen from the fall in net benefits with rising income.

Table 2. Right to Energy: A Progressive Alternative

There are additional reasons why this program would likely be more successful than carbon dividends. One, it has the effect of enticing the poor to move away from traditional forms of energy consumption because the price of energy will be zero for them as compared to a positive shadow price, which they spend in terms of time used for collection of wood/cow dung cakes, etc. As opposed to this, a cash transfer in all likelihood will not have the same effect since these other forms of energy consumption would still be available to them free of cost. Two, availability of free energy (up to a limit) addresses the issue of stealing electricity for consumption since there will be no incentive left for those stealing.

The remaining part of the carbon revenue so generated can be used for a systemic overhaul of the energy mix, which addresses the problem of environmental degradation from the production side. The Indian economy’s level of energy efficiency needs to be raised through investment in clean renewables, including solar, wind, hydro, geothermal, and low-emissions bioenergy, and among fossil fuel energy sources, increasing the proportion of natural gas consumption relative to coal. Our estimates tell that this energy mix overhaul requires an additional 1.5% of GDP (over and above the current level of 0.6% being spent annually) annually over the next 2 decades. If done, it will bring the emissions down by half from currently projected levels. Moreover, since this expenditure is financed by the carbon tax revenue, it will be a revenue neutral policy with no implications for the fiscal deficit.

The level of carbon tax required for this policy to come into effect is Rs. 2,818 per metric ton of carbon dioxide. It will be levied upstream, i.e. at the ports, mine-heads, etc. While almost all the commodities’ prices will increase as a result, the highest rises will be in fuel and energy since the carbon content is highest in this category. To give an idea of the pinch that will be felt, consider that the average price of electricity will rise from its current value of Rs. 3.73 to Rs. 4.67 per kWh.

This policy not only curbs emissions but also provides more employment since the employment elasticity in greener forms of energy is higher than those in fossil fuel based energy. Higher prices of commodities according to their carbon content will induce households, including the rich, to look for substitutes in green energy. It’s difficult to put a figure on the health benefits such a policy will entail, but as a rough measure, a significant part of the more than 3 percent of India’s GDP currently spent on pollution-induced diseases will inevitably come down.

This proposal simultaneously addresses the issue of equity and climate change. As a result of this policy – taxing all while redistributing the revenue in kind to the poor – those who pollute more (elites) because of their lifestyle choices will indirectly be paying for the energy usage of those who pollute less. One could think of it as a Robin Hood tax!

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