Prime Minister’s Office Proposes Waiving Carbon Tax on Coal

This move is likely to make coal power prices more competitive with solar and wind energy


According to a communique reviewed by Mercom, the Indian Prime Minister Narendra Modi’s office has proposed waiving the Goods and Services Tax (GST) Compensation Cess, (earlier called the Clean Energy Cess which was India’s version of carbon tax) on coal to reduce the financial strain on distribution companies, besides helping the thermal power projects install flue gas desulphurization to curb pollution.

This proposal comes in light of the mandate to implement flue gas desulphurization (FGD) at thermal power projects in the country. The resulting investment in the FGD process is expected to result in increased power prices for customers.

FGD is the process of removing sulfur dioxide from exhaust flue gases of fossil-fuel power plants, and sulfur oxide emissions from processes like the incineration of waste material.

Earlier this year, the Ministry of Power (MoP) proposed a ₹835 billion ($11.70 billion) plan to meet the cost of development of Flue Gas Desulfurization to improve air quality and to conform to new norms notified by the Ministry of Environment Forest and Climate Change (MoEF & CC) for power plants.

Projects which have the FGD facility at their sites would have to sell power at a higher cost after factoring in implementation costs. The communique stated that even with financing, the power tariff would increase by ₹0.30 – 0.35 (~$0.004 – 0.005)/kWh and would further burden DISCOMs that already owe power developers over ₹844 billion (~$11.83 billion) in outstanding dues.

The National Clean Energy Fund (NCEF) was created in 2010 to fund the cost of research and innovative projects using clean energy technologies by public and private sector entities. The fund has evolved under the NDA administration and was rebranded as the Clean Environment Cess, from the earlier Clean Energy Cess, to include river cleaning and other projects. The Cess, which was ₹50 (~$0.74)/ton when it was introduced in 2010, was raised to ₹100 (~$1.5)/ton in 2014 and to ₹200 (~$3)/ton in the 2015-2016 budget. It was again doubled from ₹200 (~$3)/ton to ₹400 (~$6)/ton in the 2016-17 budget.

From 2010 to 2017, about ₹864 billion (~$13.3 billion) has been collected through the Clean Environment Cess, out of which only ₹296 billion (~$4.6 billion) was transferred to NCEF. Ministry of New and Renewable Energy (MNRE) had only received about ₹171 million (~$2.6 million) to that point.

The Government of India then enacted a bill to utilize the Clean Environment Cess (India’s version of carbon tax) collected on coal, to finance the Goods and Services Tax (GST) Compensation Fund, a non-lapsable fund that will form part of the public account of India.

The Goods and Services Tax (Compensation to States) Act, 2017 which came into force in April 2017, states that coal cess, along with other cess on pan masala, tobacco, aerated water etc., would constitute GST Compensation Fund and would be utilized to fund the States for five years to compensate them for potential losses on account of GST implementation. After five years, any amount left was to be shared on a 50 percent basis between the Center and States.

The PMO explained that by waiving the ₹400 (~$5.61)/ton cess, the increase in tariff would not be transferred to customers. Consequently, the requirement of subsidies from the government would also not increase, and this would make up for losses to the GST compensation cess.

This move, while positive for the Indian coal industry would, however, would make coal power slightly more competitive with solar and wind energy.

The total power capacity installed in India stood at 366 GW at the end of September 2019, with coal accounting for 53.8% and renewable energy capacity (including large hydro), making up 35.7% of the total installed power capacity in the country.

“The amount of clean energy cess fund going towards renewable energy and MNRE was only about 20% in 2017. The funds were already being diverted to river cleaning, water and sanitation, and other areas. The impact of this proposal on renewable energy development is likely to be minimal,” said Raj Prabhu, CEO of Mercom Capital Group.

Image credit: Shivang Dubey [CC BY-SA 4.0]