05 July 2010

How Might Indians React to a $30/tonne Carbon Tax?

The Indian government's decision to partially rescind subsidies for petroleum, diesel and kerosene, and the associated public reaction provides us with a natural policy experiment to see how the Indian public might respond to a high price on carbon (see the news report above for how that experiment turns out).

To understand this more precisely we need to convert the governments action on subsidies into an equivalent carbon price. Here is what the BBC reports on the impact of the partial removal of subsidies on fuel prices:
The fuel price rise followed the government's decision last month to scrap its subsidy of petrol prices in an effort to cut the budget deficit, which is forecast to hit 5.5% of GDP by 2010-11.
Allowing the price of petrol to be decided by the market has added about 3.5 rupees (£0.05; $0.08) to the price of a litre of petrol, a rise of 6.7%.
Diesel prices will be increased by 5% or 2 rupees a litre, although not immediately.
And kerosene, which is used for cooking by tens of millions of poor Indians, went up by 33% (3 rupees per litre) in the first such increase since 2002.
There are 0.002322 tonnes of carbon dioxide per liter of gasoline, kerosene or petroleum (there are small differences, but irrelevant for present purposes, sources: EIA, Galiana and Green, 2009).

From the BBC article we can calculate the prices of petrol, kerosene and diesel at 52, 9 and 40 rupees per liter respectively. The current rupee to dollar conversion is about 47 per dollar.

Thus, the carbon-dioxide-tax-equivalent of the India government's decision to partially remove fuel subsidies is abouyt $18 per tonne for diesel, $27 for kerosene and $32 for petroleum. (That is, a 3.5 rupee increase is equivalent to ~1,500 rupee per tonne carbon dioxide tax, or about $32).

Who thinks that a high price on carbon (such as above $20 per tonne) -- implemented via whatever mechanism -- is in the cards in India (or anywhere really)? Climate policy must begin by recognizing that a fundamental boundary condition of policy design is that energy prices cannot be made much higher. In fact, public support is far more likely with policies that reduce energy costs.

I am of course fully aware of and sympathetic to academic arguments about the importance of externalities, subsidies and incentives. I am also aware of political realities. When academic arguments confront political realities, guess what wins? If we are to accelerate decarbonization, then making clean energy cheaper has to be a top priority.

This of course is why India has quietly placed a carbon tax on coal. Yes, you read that right.
“This will give 25 billion rupees ($535 million) this year alone,” Environment Minister Jairam Ramesh said in Mumbai, calling it “a carbon tax that will be used for clean energy.”
Why aren't there protests in India about this carbon tax? Simple, the tax is 50 rupees (about $1) per tonne of coal, which is about equivalent to about a $0.35 per tonne carbon dioxide tax. Such a tax is not politically contentious, and that is of course the point. To sum up:
  • High carbon price = public protest and opposition
  • Low carbon price = money to invest in clean energy + public acceptance
There is a lesson here.