The benefits and challenges of transitioning away from oil for India

This is an opinion piece published in the Business Line in India on Dec 5

In case this LINK is behind a paywall, here is the full text

Updated - Dec. 06, 2023 at 10:01 AM.

Electric transportation, despite its high upfront cost, tax revenues foregone and jobs lost, seems to be the best option. The issue here is to make policy to meet multiple goals

DEEPAK RAJAGOPAL

There appears to be a consensus in India that it should undertake serious efforts to address climate change without compromising its economic future. Although transportation currently accounts for only about 10% of India’s energy-related carbon emissions and despite the fact that it is currently cheaper to reduce greenhouse gas (for simplicity, carbon) emissions from electricity generation, there are strong reasons to already begin a transition to low-carbon transportation future that will eventually lead to a net-zero carbon transportation. 

Firstly, emissions from transportation can be mitigated in several ways such as slowing growth in private vehicles especially cars, increasing public-transit ridership, raising fuel economy of vehicles, and growing the share of rail freight. While each of these is worth pursuing, to achieve serious reductions in carbon in the longer run a transition away from oil is inevitable. Reducing oil consumption will also help improve energy imports and could help improve balance of trade and energy security depending on what and how much of it needs to be imported and from which countries.

Secondly, as challenging as it is to transition away from coal, moving away from oil-based transportation is far more challenging. For one, while there are multiple clean alternatives to coal including solar, wind, nuclear, hydro, and geothermal, there exist few alternatives that are obviously low-carbon and require little transformation of the infrastructure. Moreover, whereas electricity is a commodity that people don’t relate to personally and psychologically so long as the power flows when they need it, transportation and vehicles have a personal connection that cannot simply be reduced to cost per kilometer unlike a cost per unit of electricity. Lastly, government revenues from petroleum use are 8-fold and 13-fold greater than that from coal and electricity respectively.

Biofuels are one potential low-carbon alternative that can largely use the existing infrastructure. However, their water footprint is an order of magnitude or two greater than for oil, they require farm chemicals that pollute soil and water, and their tail-pipe emissions do little to reduce urban air pollution. Another alternative is Hydrogen which today is made from natural gas and is more carbon intensive as transportation fuel. Hydrogen made by splitting water using solar and wind energy is prohibitively costly. But even if its cost can be brought down in future, it will require tremendous amounts of potable-quality water. This leaves battery electric vehicles (BEV) as the only alternative to oil today with no tail-pipe emissions, low water footprint, already cleaner than petrol/diesel and will get greener as electricity gets greener. But BEVs are not without their own challenges such as higher upfront cost, lack of charging infrastructure, time for refueling, need for scarce critical minerals not available domestically, high end technology for making battery cells which needs to be imported, and high cost of recycling batteries. 

There are also macro-economic challenges of moving away from oil. An obvious one is the burden of subsidies on public finances. The FAME II 2019 scheme for BEVs had an outlay of Rs 10,000 crore  over 5 years but this amounts to only 0.04% of India’s annual budget of Rs 45 Lakh crores for 2023-24.  It has been reported that FAME III might have an outlay of Rs 40,000 to 50,000 crores.  The National Green Hydrogen mission announced in 2023 has twice the total outlay of FAME II across 7 years or 0.06% of current annual budget. These seem small but so is the total number of vehicles these subsidies can support.  FAME II aims to help adoption of a mere 5500 electric buses (<1% of India’s bus fleet) and 55000 cars (1% of annual sales of cars and commercial vehicles). 

Then there are implicit subsidies which are foregone revenues from the GST rebate on EVs (5% versus 28% for petrol/diesel cars) and lost excise and VAT on petrol and diesel which account for about 50 % of their retail price.  Currently oil products generate 90% of excise and central excise accounts for 12% of all central taxes (including state share) while VAT is major source of revenue for states. In a peer-reviewed paper published in the journal Energy Policy earlier this year titled “Implications of the energy transition for government revenues, energy imports and employment: The case of electric vehicles in India”,  I estimate that on a per vehicle basis, each petrol or diesel vehicle generates more than six-fold greater taxes for the central and state governments combined over its life relative to a BEV today. In fact, GST and fuel excise and VAT over the life of car amount to as much as the upfront cost of a mid-size car. What this paper also shows is that despite their upfront cost, BEVs can have a lower total cost of ownership even in the absence of any subsidies, and they help reduce total imports and carbon emissions. Finally, BEVs generate less total employment across their life as they require fewer components to be manufactured, assembled, maintained, and replaced. 

This is not to suggest that India should temper its ambitions for transitioning away from oil. Instead, it reveals the need for a more sustainable and well thought out long-term strategy that does not rely solely on subsidies, which already are substantial. Simply reducing the GST rebate runs the risk of making BEVs even costlier which will slow adoption. Implementing a carbon tax on fuels can help but this will also decline if the intended effect of reducing fossil fuel consumption comes to pass. Policymakers also need to plan for additional job creation to compensate for low labor intensity of an electrified transport sector.