India’s energy subsidies favour fossil fuels over renewables

Although subsidies to renewables have risen substantially, central government handouts to coal mining and coal-fired electricity continue to be high, which contradicts India’s stated aims on reducing carbon emissions

An inventory of energy subsidies provided by the central government in India shows that the total value of such incentives has declined substantially to INR 1.3 trillion (USD 20.4 billion) in the financial year April 2015-March 2016 from INR 2.2 trillion (USD 35.8 billion) two year earlier, primarily due to the drop in global oil prices and reforms to curb wasteful consumption in oil and gas subsidies.

The good news is tempered by the fact that federal subsidies to coal mining and coal-fired electricity generation have remained more or less the same at INR 150 billion (USD 2.3 billion) in 2016, according to a new report, titled India’s Energy Transition: Mapping subsidies to fossil fuels and clean energy in India, which was prepared by the Global Subsidies Initiative of the International Institute of Sustainable Development (IISD) in collaboration with the UK’s Overseas Development Institute (ODI) and consultancy firm ICF.

Although subsidies for renewables have risen significantly in India, coal subsidies have remained stagnant, despite increased social costs to India’s gross domestic product driven by air pollution and health care expenses, the report said.

Government subsidies, in the form of tax breaks and business incentives, typically drive the trend of energy consumption in any country. This is famously illustrated by the example of Energiewende, the transition by Germany to a low carbon, environmentally sound, reliable and affordable energy supply. Energiewende has been the European country’s primary tool to cut down emissions of greenhouse gases that cause global warming.

Tax subsidies

The IISD report says changes in tax subsidies due to the introduction of the recently introduced Goods and Service Tax (GST) make it difficult to ascertain if coal subsidies will go up or down in 2017. GST, which came into effect on July 1, is aimed at subsuming all local and national levies into a single payment, unifying India’s 29 states and 1.3 billion people into a common market for the first time.

India has been steadily increasing central government subsidies on electricity transmission and distribution (T&D), while reducing subsidies on oil and gas over the past three financial years, the report said. Subsidies for T&D increased from INR 403 billion in 2014 to INR 649 billion in 2016, becoming the main recipient of energy subsidies.

Although T&D subsidies are neutral to the energy source, they benefit mostly coal because of its dominance in India’s electricity generation at around 66%. In addition, these sums do not include the even larger volume of state government subsidies that have been provided through the government’s UDAY programme to bail out state-owned power utilities, which were provided an additional INR 1.7 trillion over 2016 and 2017.

Renewable subsidies

Subsidies to renewables have also significantly increased from INR 26 billion in 2014 to INR 93 billion in 2016, the report said. “The government is gradually transitioning its support to favour renewables, but more could be done,” said Vibhuti Garg, Associate, IISD, who led the preparation of the report. “While the decline is significant, subsidies still favour fossil fuels much more than renewables. This is not well aligned with several government objectives—reducing harmful air pollution and tackling climate change through its Nationally Determined Contribution (NDC), both of which require less fossil fuel use, particularly coal, and more renewables.”

As a member of the G20 group of nations, India committed in 2009 to phase out inefficient fossil fuel subsidies that encourage wasteful consumption while providing targeted support for the poorest. Overall, the scale of support to fossil fuels — coal, oil and gas — has remained more significant than subsidies to renewables through the entire reviewed period, the IISD report revealed.

“Though there have been significant positive changes in terms of a decline in India’s subsidies to oil and gas consumption, there is still very limited transparency in terms of subsidies provided to the energy sector,” said co-author Shelagh Whitley, Head of Programme of Climate and Energy Programme at ODI. “Reallocating the balance of government support to sustainable energy, or other priorities like health and education, may be better able to serve people’s interests.”

The report also critiqued India’s utilisation of the Clean Environment Cess, a tax on coal whose revenues are allocated to a clean energy fund. In 2016, INR 285 billion was collected through the levy but only INR 93 billion was utilised for clean energy development. In the same year, the country incurred an expenditure of INR 150 billion in coal subsidies, it pointed out.

Such subsidies have ramifications for the markets, society and the environment, IISD said. According to a recent report in the Lancet medical journal, outdoor air pollution caused more than a million premature deaths in India in 2016.