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India Announces Coal Tax To Fund Renewable Energy Projects

In a landmark announcement the Indian Finance Minister, in his annual Budget speech, put forward the proposal of setting of National Clean Energy Fund which would be constituted through tax lieved on coal usage in the country. The quantum of tax would be INR 50 per ton of coal used, which would generate an annual revenue of around $600 million.

The announcement is extremely important and a major step in India’s endeavor to promote renewable energy infrastructure. India is heavily dependent on coal for power generation with 75% of the power generated coming from coal-fired power plants.

The National Clean Energy Fund would provide finance for the National Solar Mission through which India plans to install 20,000 MW of solar energy by 2022. If implemented the project would potentially make India the largest producer of solar energy worldwide. The finances for such an enormous project has aways been a major hurdle. Ever since its announcement the government has been looking at various options to finance the project.

While the government wanted the developed countries to share the burden of the estimated $100 billion required for the implementation of the project, through the proposed Climate Adaptation Fund – agreed upon in the Copenhagen Accord, some government officials pointed out that the country could finance the entire project on its own.

With no clarity on the Adaptation Fund and pressure on developing countries to contribute to the Adaptation Fund in order to help the poor countries gain easy and cheap access to renewable energy technologies, the government seems to have decided to go ahead and arrange at least part of the funding on its own.

In addition to the coal tax, the government also announced a number of financial incentives for the renewable energy sector.

Last year, the government also announced the National Mission on Energy Efficiency under which the most energy intensive industrial sectors would be required to energy efficiency certificates from the industries which have used less energy than the quota specified to them. A press release from the Prime Minister’s Office said,

(T)he “Perform, Achieve and Trade” (PAT) mechanism ….. would assign energy efficiency improvement targets to the country’s most energy-intensive industrial units, with the provision of allowing them to retain any energy-efficiency improvements in excess of their target in the form of Energy Savings Certificates, called ESCerts. Units will also be allowed to use purchased ESCerts to meet their targets.

The mission includes setting up of two funds, one to provide guarantees to banks providing loans to energy efficiency projectas and the other, to support investment in the manufacturing of energy-efficient products and provision of energy-efficiency services. The energy efficiency trading scheme would potentially generate transactions close to $15 billion by 2015.

The government was in the process of identifying 714 energy intensive industrial sectors which would be allotted maximum energy usage limits last year and the trading of the ESCerts could start from next month.

It is heartening to see the Indian government proactively initiating financing schemes to support its ambitious renewable energy projects. India’s energy demand, carbon emissions and per captia emissions output are going to increase rapidly with its rapid economic growth in the coming decades. Therefore, it is important that India lays a solid foundation for the timely implementation of such projects. And as far as the policy frameworks and financial support is concerned, India seems to be heading in the right direction.