Carbon Tax Waiver may put Renewables Growth in India at Risk: Fitch

Fitch Solutions believes that the centre’s proposed carbon tax waiver on coal may pose substantial downside risks to India’s renewable sector growth.

Fitch Solutions has said that it believes that the centre’s proposed carbon tax waiver on coal may pose substantial downside risks to India’s renewable sector growth. In a bid to alleviate significant debt levels in the power industry, India has proposed to waive carbon taxes on coal (Rs 400 rupees/tonne), it said.

This comes at a time where aggressive bidding and rapid fall in tariff prices in the country’s renewable power auctions have squeezed profit margins for project developers and threatened the economic feasibility of the project pipeline in the renewables sector.

The proposed carbon tax waiver on coal will “weigh on renewables growth,” Fitch Solutions said, adding that the carbon tax waiver was likely to make coal-fired power cheaper, increasing the use of coal.

It expects coal to continue dominating India’s power sector, making up a share of slightly under 70 percent of the total power generation mix by 2029, with non-hydro renewables at 15.6 percent.

“We stress that the continued push for lower tariffs in the tender process have already resulted in the under subscription and cancellation of a few auctions across FY’18 and FY’19,” it said.

Most notably, Tamil Nadu, one of India’s largest renewable energy states, has decided to cease wind and solar auctions for the time being due to under subscription in the previous two.

Coal-powered projects had faced some headwinds in recent years, noted by multiple project cancellations and stiff competition from non-hydro renewable sources, as the cost of renewables in India has fallen below that of coal and gas.

In May 2019, An IMF Executive Board review of the fiscal policies for Paris climate strategies and discussed a paper providing country-level guidance on the role, and design of, fiscal policies for implementing climate mitigation strategies that countries have submitted for the 2015 Paris Agreement and for addressing vulnerabilities in disaster-prone countries.

On the mitigation side, the paper presents a spreadsheet tool for judging the likely impact on emissions, fiscal revenues, local air pollution mortality, and economic welfare impacts of a range of instruments including comprehensive carbon taxes, emissions trading systems, taxes on individual fuels, and incentives for energy efficiency. The paper discusses the cases for voluntary carbon price floor arrangements at the regional level, or among large-emitting countries, to reinforce domestic initiatives and help address concerns about competitiveness without resorting to trade penalties on other countries. It revealed that at USD 70 per ton of carbon dioxide, a carbon tax would be the most efficient means of cutting greenhouse gas emissions.