The green cess needs a makeover

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The government has made climate commitments under the Paris Agreement, including reducing the emissions-to-GDP ratio (emissions intensity) by 45% by 2030 from 2005 levels.

The Clean Environment Cess (CEC) was a tax introduced in 2010 as a fiscal tool to reduce the use of coal and associated carbon emissions, and the revenue from which was earmarked to fund and promote clean environmental initiatives . It was levied on the total sales of all types of coal in India.

To manage the funds accumulated under the CEC, the National Clean Energy and Environment Fund (NCEEF) was established in 2010, and the funds were mortgaged for environmental purposes such as river rejuvenation, afforestation and the promotion of renewable energy production through research and development. .

Despite these intentions to levy the tax, its design and implementation have been inadequate. Our recent study at the Center for Social and Economic Advancement (CSEP) analyzes the issues surrounding the implementation of CEC and its usefulness in tackling rising pollution levels in India.

The quality factor

The results of this study show that, firstly, the design of the CEC, which levies the tax in proportion to the sole quantum of coal (at ₹400/tonne), without differentiating by its grade, does not encourage people to switch to better coal. quality with lower pollution levels.

Second, this tax was rolled into the Goods and Services Tax (GST) in 2017, and the revenue, which was originally intended for environmental conservation, was instead used to compensate states for their lost revenue. .

Instead of earmarking funds for clean energy and environmental initiatives, it is now up to states to determine where their revenue from the GST offset tax is spent. This calls for immediate consideration and also highlights the inefficiencies in government budget operations and the reduced attention given to promoting clean environment programs.

Third, the data on the use of revenues from this tax indicate that only 18% of the aggregate revenues collected between 2010-2011 and 2017-2018 were used for the intended purpose. This again highlights the government’s inefficiency in using the revenue from a tax for its own purposes.

Fourth, and significantly, the study finds that the government is unable to collect the revenue due to this tax. The gap between the prescribed rate and the actual collection rate has widened since 2013-2014 (see graph). While the rate of this tax was ₹200/ton and ₹400/ton in 2015-16 and 2016-17, the actual collection rate per ton of coal was only ₹144 and ₹324, as a result.

The discrepancy of ₹56 and ₹76 per ton of coal sold in India resulted in an estimated revenue loss of around ₹4,900 crore and ₹6,700 crore, respectively.

Finally, despite the doubling of the CEC rate from ₹200 to ₹400/ton in 2016-17, modeling experience showed that the effect on emission reduction was small. Emissions from the combustion of coal and petroleum products in various industries decreased by only 0.90% in total.

Moreover, the doubling of the tax had a marginal impact on GDP, with a reduction of 0.09%. The emissions intensity of the economy has thus been reduced by only 0.81%, compared to the effective tax of 20% imposed on the price of coal. This shows that the tax has not been very helpful in reducing emissions intensity in India relative to its high tax rate.

The path to follow

The government cannot rely on a fiscal tool such as the ill-conceived CEC. The government should introduce a progressive form of environmental tax levied on the value of output from sectors such as coal, electricity, fertilizers, iron and steel, non-ferrous base metals, paper products and textile industries. This would be the opposite of the CEC, which was levied on the sale of coal, and coal is not as polluting as these sectors.

In addition, it will help broaden the tax base. Various studies indicate that these industries are the most polluting, which not only release air pollution, but also have adverse effects on water pollution and land degradation. Thus, a tax on their productions, and not necessarily on their emissions (because such taxes are more difficult to monitor, calculate and collect), can help India provide industries with the appropriate incentive to shift from polluting forms of production to cleaner mechanisms.

Most importantly, the proceeds of these taxes must be used in an environmentally sensitive manner in keeping with the desired goals of promoting clean environmental projects and meeting the country’s climate change mitigation goals.

The author is Senior Manager – Communications, Center for Social and Economic Progress, New Delhi

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