India will have to bear a steep fall in revenues from fossil fuels in its efforts to limit global warming to 1.5 degrees Celsius, but advance planning can avoid shortfalls in total revenues, according to a new report by the International Institute for Sustainable Development (IISD).
India earned a revenue of USD 92.9 billion from fossil fuel production and consumption in 2019 which accounted for 18 per cent of its total government revenue.
It could fall to around 65 per cent of 2019 levels by 2050 on an energy pathway consistent with limiting global warming to 1.5 degrees Celsius, the independent think tank said. In the 2015 Paris Agreement, countries agreed to hold the increase in the global average temperature to well below 2 degrees Celsius and to pursue efforts to limit the temperature increase to 1.5 degree Celsius".
To comply with the Paris Agreement, the world will have to phase down fossil fuels, which will erode related revenues. Titled "Boom and Bust: The Fiscal Implications of Fossil Fuel Phase-Out in Six Large Emerging Economies", the report examines the possible fiscal consequences of phasing out fossil fuels in six emerging economies and suggests strategies for managing the transition.
The countries -- Brazil, Russia, India, Indonesia, China, and South Africa -- represent 45 per cent of both the world's population and its carbon dioxide (CO2) emissions, 25 per cent of global GDP, and a significant share of the world's poor. These countries are particularly vulnerable to the fiscal impacts of the energy transition because of their high reliance on fossil fuel revenues.
The study found that by 2050, overall fossil fuel revenues in these countries could be as much as USD 570 billion lower than a business-as-usual scenario where governments fail to phase down fossil fuels enough to avoid the worst climate impacts. The widest gaps are expected to occur in India (USD 178 billion), China (USD 140 billion), and Russia (USD 134 billion).
To prevent devastating climate change, the world has to phase out the production and consumption of fossil fuels, which will inevitably erode related revenues," said Tara Laan, Senior Associate at IISD and lead author of the report. "Emerging economies have an enormous opportunity to build more resilient and economically sustainable energy systems as they decarbonize but they must plan ahead to avoid shortfalls in public revenues that could reverse progress on poverty eradication and economic development, Laan said.
This economic planning can be done in climate-positive and socially progressive ways, such as by removing subsidies from and increasing taxes on fossil fuels in ways that don't hurt the poor like export duties and windfall profits taxes, as imposed by India last week. The eventual fall in global energy prices will be an opportune time to impose carbon pricing, IISD experts said.
Diversifying income streams such as new targeted taxes in the energy and transport sectors will also ensure that addiction to fossil fuel revenues does not become a barrier to reform. "Surging energy prices and demand are generating huge revenues from fossil fuel production and consumption. These temporary, short-term windfall profits should be taxed to fund the energy transition, which, in turn, will boost energy supplies, create green jobs, contribute to economic growth, and ultimately, increase government revenues," Laan said."At the same time, governments must protect vulnerable consumers from high prices and support fossil fuel-dependent workers and communities in ways that don't hinder the transition to cleaner energy," she said.