Fiscal Instruments for Climate Friendly Industrial Development in Tamil Nadu
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MSE Monographs * Monograph 14/2011 MONOGRAPH 28/2014 Impact of Fiscal Instruments in Environmental Management through a Simulation Model: Case Study of India D.K. Srivastava and K.S. Kavi Kumar, with inputs from Subham Kailthya and Ishwarya Balasubramaniam * Monograph 15/2012 Environmental Subsidies in India: Role and Reforms D.K. Srivastava, Rita Pandey and C. Bhujanga Rao, with inputs from Bodhisattva Sengupta * Monograph 16/2012 Integrating Eco-Taxes in the Goods and Services Tax Regime in India FISCAL INSTRUMENTS FOR CLIMATE FRIENDLY D.K. Srivastava and K.S.Kavi Kumar INDUSTRIAL DEVELOPMENT IN TAMIL NADU * Monograph 17/2012 Monitorable Indicators and Performance: Tamil Nadu K. R. Shanmugam * Monograph 18/2012 Performance of Flagship Programmes in Tamil Nadu K. R. Shanmugam, Swarna S Vepa and Savita Bhat * Monograph 19/2012 D.K. Srivastava State Finances of Tamil Nadu: Review and Projections K.R. Shanmugam A Study for the Fourth State Finance Commission of Tamil Nadu D.K. Srivastava and K. R. Shanmugam K.S. Kavi Kumar * Monograph 20/2012 Madhuri Saripalle Globalization and India's Fiscal Federalism: Finance Commission's Adaptation To New Challenges Baldev Raj Nayar * Monograph 21/2012 On the Relevance of the Wholesale Price Index as a Measure of Inflation in India D.K.Srivastava and K.R.Shanmugam * Monograph 22/2012 A Macro-Fiscal Modeling Framework for Forecasting and Policy Simulations D.K.Srivastava, K.R.Shanmugam and C. Bhujanga Rao * Monograph 23/2012 Green Economy – Indian Perspective K.S. Kavikumar, Ramprasad Sengupta, Maria Saleth, K.R.Ashok and R.Balasubramanian * Monograph 24/2013 Estimation and Forecast of Wood Demand and Supply in Tamilandu K.S. Kavi Kumar, Brinda Viswanathan and Zareena Begum I * Monograph 25/2013 Enumeration of Crafts Persons in India Brinda Viswanathan * Monograph 26/2013 Medical Tourism in India: Progress, Opportunities and Challenges K.R. Shanmugam * Monograph 27/2014 Appraisal of Priority Sector Lending by Commercial Banks in India MADRAS SCHOOL OF ECONOMICS C. Bhujanga Rao Gandhi Mandapam Road Chennai 600 025 India March 2014 Fiscal Instruments for Climate Friendly Industrial Development in Tamil Nadu D.K. Srivastava Chief Policy Advisor, Ernst & Young [email protected] K.R. Shanmugam Director, Madras school of Economics [email protected] K.S. Kavi Kumar Professor, Madras School of Economics [email protected] Madhuri Saripalle Assistant Professor, Madras School of Economics [email protected] Report Submitted to Confederation of Indian Industry MADRAS SCHOOL OF ECONOMICS Gandhi Mandapam Road Chennai 600 025 India March 2014 i MONOGRAPH 28/2014 MADRAS SCHOOL OF ECONOMICS Gandhi Mandapam Road Chennai 600 025 India March 2014 Phone: 2230 0304/ 2230 0307/2235 2157 Fax : 2235 4847 /2235 2155 Rs.200/- Email : [email protected] Website: www.mse.ac.in ii Preface This study was carried out by Madras School of Economics as part of a project, ‗Development of Fiscal Instruments for Climate Friendly Industrial Development in the State of Tamil Nadu‘ undertaken by Confederation of Indian Industry with funding from the British High Commission under the Prosperity Fund. The study was initiated by the then Director of MSE, Dr. D.K. Srivastava with support from Dr. K.S. Kavi Kumar and Dr. Madhuri Saripalle. The study coordination was taken over subsequently by the current Director of MSE, Dr. K.R. Shanmugam. The study benefited from active support provided by Mr. K.S. Ventakagiri, Ms. Gargi Mitra, Ms. Nisha Jayaram and Mr. S. Karthikeyan of Confederation of Indian Industry. The study team would like to thank all of them. The study team would also like to acknowledge the support provided by the project consortium including Jadavapur University and Eunomia Research & Consulting. The MSE team also gratefully acknowledges the support received from a number of officials from the Government of Tamil Nadu during the course of this study. The authors would like to place on record the help extended by Dr. C.Rangarajan, Chairman, Madras School of Economics in facilitating successful completion of the project. The authors would also to like to acknowledge able secretarial assistance provided by Ms. Sudha, Ms. Jyothi and Ms. Geetha in preparing this report. Finally the authors would like to acknowledge the research assistance provided by Ms. Vandana. MSE Study Team iii Fiscal Instruments for Climate Friendly Industrial Development in Tamil Nadu Abstract There is increasing scientific consensus linking greenhouse gas (GHG) emissions from developmental activities to global climate change. In response to this, many Governments globally have started looking towards various actions to reduce GHG emissions. India too has pledged its support to contribute to climate change mitigation, with a voluntary commitment by the Prime Minister of India at the World Stage to reduce the country‘s carbon intensity by 20-25 percent of 2005 levels by 2020. In view of this, it has become imperative for all the states to individually chalk out their action plan to achieve the set target within their boundaries so as to facilitate the nation to achieve the target. Being one of the industrialized states in the country, Tamil Nadu has a significant carbon footprint already and is reported to have emitted 111.86 million tons of carbon dioxide (CO2) during 2009-10 at 1.59 tons of CO2 per person. Government of Tamil Nadu in its ―VISION 2023: Strategic Plan for Infrastructure Development in Tamil Nadu‖ proposed 12.3 percent industrial growth in Tamil Nadu and 13.8 percent growth for manufacturing. Such aggressive growth strategies could aggravate the climate change issues unless appropriate policy interventions are made. Against this background, this study examines the scope of using fiscal instruments for climate friendly industrial development in Tamil Nadu. Specifically the study attempts to design fiscal instruments at the state level that encourage a switch from higher carbon intensity activities (and fuels) to low carbon intensity ones. To maximize impact all instruments suggested in this study are designed as two part instruments. The first part is a tax and the second part is a subsidy. This strategy addresses several aspects of the design simultaneously. The salient features of the iv suggested instruments include: maximizing environmental impact; financing subsidy; endogenizing administrative costs; and minimizing revenue risks. The instruments selected in consultation with different stakeholders including the policy makers and industry representatives cover four broad sectors: energy, transport, cement and construction. A summary of suggested fiscal instruments aimed at interventions meant for the Tamil Nadu economy along with their basic features is given below: a. Energy sector related instruments 1. Coal cess or limiting input tax rebate of statevat to finance a green fund used to subside use of cleaner substitutes for energy production 2. Green cess to finance the green fund b. Transport sector related instruments 3. Green motor vehicle tax to subsidise use of less polluting vehicles 4. Congestion tax to finance a city road maintenance fund to reduce use of diesel and petrol per km of use by vehicles c. Construction sector related instruments 5. Reducing VAT on energy saving materials accompanied by higher state VAT on high energy using materials used in construction 6. Reducing property tax on green buildings accompanied by higher rate on high energy consuming properties (like malls, etc.) 7. Cess on solid waste accompanied by subsidy for burning waste in cement producing firms. From a longer term perspective there is a now a move to subsume a number of central and state taxes on goods and services in a comprehensive Goods and Services Tax (GST). The GST may involve constitutional changes affecting the powers and flexibility of the states in using the tax instrument for environmental purposes. It is important for the states to have autonomy in levying cesses and surcharges or differentially higher rates for identified polluting goods and services. In a GST framework, since the idea is to tax all goods and services in a rate structure that has either just a single rate or few rates, there must be scope at state-level for rate differentiation for environmental purposes. Keywords: Climate change, Fiscal Instruments; Carbon Emissions JEL Code: H23; Q38; Q53 v CONTENTS Preface iii Abstract iv List of Tables viii List of Charts Tables ix List of Annexure Tables ix Chapter 1 Introduction 1 2 Tamil Nadu Economy: An Overview 5 3 Environmental Profile of Tamil Nadu 27 4 Climate Friendly Industrial Policies in Tamil Nadu 39 5 Selection Of Industry Specific Instruments For Climate Friendly 65 Development in Tamil Nadu 6 Fiscal Instruments For Selected Industries: National and 81 International Experiences 7 Design and Effectiveness of Fiscal Instruments 95 8 Fiscal Intervention For Climate Friendly Industrial Development Of 115 Tamil Nadu – Prospects References 127 Annexure I 129 Annexure II 143 vi LIST OF TABLES 2.1 Share of GSDP (GDP) in Tamil Nadu (India) at 2004-05 Prices 2.2 Composition and Growth of Sectoral Employment 2.3 Annual Growth Rates: GSDP and GDPfc at 2004-05 Prices 2.4 Changing Structure of GSDP in Tamil Nadu: Future Outlook 2.5 Projected Values of GSDP till 2021-22 2.6 Tamil Nadu‘s Share of GDP (at 2004-05 prices) 2.7 Growth of Per Capita Income (in 2004-05 Prices) 2.8 7 Year Average Annual Growth of GSDP and Sectors of Major States (2005-06 to 2011-12) in 2004-05 prices 2.9 State Wise Selective Indicators of Development