This is a follow-up post to the “The Case For A Carbon Tax”. There were some very valid points raised in the comments which I will try to address here. The concerns have essentially been clubbed into two points.
Should the carbon tax pinch?
Lets start with the power plants. Lanco recently won the Sasan Ultra Mega Power Project deal where they offered to sell power to the SEB at just Rs 1.19 per unit. This is coal-based power – located at pit-head it involves some of the worst form of environmental pollution (CO2 and fly ash among others), besides some rather inhumane working conditions for very poor manual laborers, besides exposing them to huge risks to limb and life.
Dabhol on the other hand has a deal with the Maharashtra Govt to sell power at Rs 3.3 per unit and at current gas prices they just cannot do that. Lets assume that a more reasonable price would be Rs 3.55. Now, Dabhol is practically the anti-thesis of a coal-based plant. Much less CO2 pollution (since it runs on natural gas), no fly-ash and relatively good working conditions. At the other end of the spectrum Madhya Pradesh pays Rs 3.97 per unit (the highest in India) for wind-power, which is even cleaner than natural gas.
So if we set the price of gas-based power as the bench-mark, then consumers must pay around 3.55 for their power (ignoring the SEB’s margins for now). The difference between the cost of production at coal-based plants and the selling price would be collected by the Govt as Carbon Tax. In the case of the Lanco power for instance, the Govt would collect 3.55 – 1.19 = Rs 2.36 per unit as tax. Similarly if the benchmark is the MP rate for wind power (Rs 3.97), that tax will go up to Rs 2.78 per unit, while Dabhol would pay a tax of Rs 0.42 per unit.
Thus taking gas-based power as the benchmark would mean we should price power at above Rs 4.00 per unit (after the SEB’s charges), which is still lower than what industrial consumers pay, but much more than residential consumers do.
Automotive fuel on the other hand is already severely taxed in India. It is my firm belief that this tax should be phased out. Sources of energy should not be seen merely as wealth, but as the means to create more wealth. At the same time, removing tax on petrol/diesel should not bring the prices down, as consumption will shoot up, further discouraging energy efficiency. This is where the carbon tax should come in. Essentially what I am suggesting is that the carbon tax should replace all other forms of tax on automobile fuel (except a few targeted ones like the education and highway fund taxes). The difference is that the carbon tax will get used exclusively to get rid of our carbon addiction.
So the only group that would have to take a hit would be the residential electricity consumers. But they too will benefit enormously in the longer run, as we shall see below.
The argument for per-capita emission limits
This argument is seriously flawed. Air pollution works broadly at two levels: the local level and the global level. At the global level air pollution might cause drastic climate changes resulting in droughts, floods, hurricanes and all sorts of resultant human disasters. Even if the rich nations stop polluting today, the environment is still in a mess. And if the developing nations don’t stop, the environment is doomed anyway. Arguing that the rich nations should themselves stop polluting first, and then pay the poor nations to stop too, is fine. Only the practicality is zero.
However, while thinking global we have the option of acting local. And acting local on this issue makes tremendous economic and environmental sense. For instance the air in Delhi became much more pleasant once natural gas became the rule for public transport vehicles. Plus since natural gas costs less, the transport operators also make more money. Electricity will reduce the cost of operation even more, and pollute even less (even if the electricity comes from coal).
Talking of electricity, a fully depreciated wind power plant can produce electricity for as little as Rs 0.50 per unit, which is cheaper than the cheapest coal power. In time solar power will get there too. Better still, eventually we will all be able to afford our own solar panels which will pay back their cost in less than 5 years, and then we will not have to pay for electricity at all. And if we are already driving electric vehicles we wont have to pay for fuel either. In addition to all that we could also have a strong economy built on hi-tech industries and a strong entrepreneurial culture.
We can either opt to spend (a relatively little) more money today to get to the free energy utopia outlined above, or we can all go down in a blaze of fossil-fuel fires.