Fiscal Planners: The Class that Failed | Centre for Science and Environment

Fiscal Planners: The Class that Failed

Hit where it hurts most. Improving technology to cut emissions is expensive. So let it be. No need to take care of the extra cost -- even if it means compromising on clean air and public health. So obtuse and damaging! But so are our finance mandarins in the North block. They have culled all proposals for a fiscal strategy to meet tighter fuel and emissions standards. This dismissal of fiscal solution to technology transition blocks further negotiation to tighten the dismally weak technology roadmap of the Auto Fuel policy. As market loses out as a  possible agent of change, only the court’s whip prevails.

‘Ostrich syndrome’ indeed! The finance ministry still believes that the government can actually afford the enormous costs of environment bureaucracy and enforcement forever! It simply ignores fiscal measures that can be more cost-effective than command and control strategies to force change. Nor is the ministry shamed by the Supreme Court’s intervention in proposing a differential taxation policy to promote clean fuels.

The finance ministry has raised the bogey of revenue loss. They are too lazy to notice how other governments are using green taxes to speed up implementation of environmental policies. If designed intelligently, fiscal measures can broaden the revenue base and create alternative sources of revenue. Sway consumer choices towards cleaner technologies. Encourage refineries and industries to cut time and reduce the cost of technological improvements.

Amazing connivance this! First the ministry of petroleum and natural gas puts an unlikely cost tag of Rs 300,000 million to meet its weak roadmap on emissions standards, and then asks for tax cuts. The finance ministry without even considering reforms in the conservative fiscal systems rejects this as impossible. While both are content with their respective positions, the country loses all hope of hastening the roadmap.

Other governments crosscheck the cost claims of industry and refineries first -- but not our government. For instance, within the ambit of the European Auto Fuel programme, data on the costs involved in any abatement strategy, including new vehicle emissions standards and fuel quality specifications, is provided by the oil and automobile industries. But these cost claims are also independently evaluated. A similar assessment to meet Euro III and Euro IV standards in Europe found that industry’s cost claims for achieving a 30 ppm sulphur petrol were overestimated by 17 per cent, and for 50 ppm sulphur diesel by 55 per cent.

Finding fiscal measures is the next step. Fiscal planners should learn how countries in Europe and even in Asia have used differential pricing to get rid of leaded petrol, and phased in ultra low sulphur fuels, alternative fuels and cleaner technologies. Just not technology even mobility management in cities hinges on fiscal measures.

Total irrationality rules in India. Cleaner fuels and technologies are made to pay more than dirtier ones. In Delhi, for instance, 500 ppm sulphur diesel was priced higher than the 2500 ppm sulphur diesel during the phase-in. The 2002 budget lowered taxes on diesel but raised the tax burden on CNG. CNG prices in Delhi even exceeded diesel prices last year. The tax burden on electric vehicles is as high as 30 per cent of the final price. Higher duty increases the import cost of their components by nearly 60 per cent. The wisdom of taxing the products for the vice and not just for their values is completely lost.

The same finance ministry never feared revenue losses while giving sops to the automobile sector this year. They gave blanket excise concessions to the sector to improve sales. They never considered using such concessions to lever the auto sector towards making cleaner vehicles. Additional taxes -- not advalorem, but based on emission levels of the vehicles would have been most effective to push manufacturers to compete with each other to produce cleaner vehicles -- at no net loss to the government.

The finance bureaucracy squirms even at the whiff of change towards fiscal correction. Its own peer, the environment ministry, has commissioned a study on a possible tax regime to combat air pollution. The draft has proposed an emissions tax on diesel passenger cars, and a resource tax linked to fuel economy. The government of Karnataka has already slapped a green tax on old vehicles and the revenues generated are to be set aside to finance their LPG programme. A fiscal penalty imposed by the Supreme Court on diesel buses has mopped up Rs 260 million that is now available to the Delhi government for emissions reduction measures.

If the mantra is deregulation its blasphemous to even suggest fiscal support to force change -- especially in the refinery sector! But its alright if the country continues to make huge losses on account of their warped fuel pricing. Such myths -- tax diesel minimum ostensibly to help the agricultural poor and keep freight charges low or prevent adulteration of diesel with subsidised kerosene. But no one cares to evaluate the actual economic impact of raising the tax on city diesel and capacity to pay. Imagine, compared to other metros, diesel prices are cheapest in Delhi that also has the highest per capita income in the country. Additional revenue with minimum dislocation would surely help.

As cheaper diesel prices encourage dieselisation of transport and other sectors, refineries cut deeper to produce more poor quality diesel with no capacity to clean up the heavier streams. The ministry thinks there is still no need for demand management to break this vicious cycle either. The biggest benefactor of the subsidised kerosene and cheap diesel is the urban consumer today. Almost 90 per cent of subsidised kerosene does not even reach the targeted group. But as conservative official estimates show that the government loses a whopping Rs 100,000 million annually on account of fuel adulteration alone. Possibly, full recovery of losses due to fiscal distortion in the fuel market could fund phase-in of Euro IV fuels!

Greening of fiscal reform is possible only if we break the rigid mindset. Maybe this ministry should peruse new studies, such as the recent White House study conducted by the office of Management and Budget in the US, which found that the health and social benefits of enforcing tough clean-air regulations in the past decade were five to seven times greater in economic terms than the costs of complying with the rules.

As policy fails, the market remains inert. Fiscal correction and incentives could have helped to get a bolder roadmap. But our fiscal planners would bend only to protect profits but not our health. Nor would it let the market do the clean up job.

Anumita Roychowdhury



  • The Centre for Science and Environment (CSE) is organising a three-day orientation programme on Managing Urban Air Quality: Focus on Clean Vehicle Technology, Fuels and Mobility Management in New Delhi from August 6 - 8, 2014 for government officials from different cities of India. The objective of this forum is to promote good regulatory practices in air quality management, clean vehicle technology, fuels and management of in-use vehicle fleet and mobility management.

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