India moves to end diesel subsidies, increase natural gas prices

21 October 2014

The Indian government announced this past weekend that it would be allowing diesel prices to be determined by market forces, in a significant shift in policy aimed at spurring energy-related investment and reducing the fiscal burden of subsidising the industry.

“Henceforth, like petrol, the price of diesel will be linked to the market,” said Indian Finance Minister Arun Jaitley, who announced the move. “Whatever the cost involved, that is what the consumer will have to pay.”

With the global price of oil having tumbled in recent months, supporters of the move have said that it will help save money for the government while actually leading to a lower price in oil for consumers.

Furthermore, they say, it could serve to prop up domestic industry, which has struggled in the wake of the fall in global oil prices. India currently imports approximately 80 percent of its oil, and relies on diesel for nearly half of its fuel needs. 

Along with de-regulating diesel and ending the associated subsidies, the administration of Prime Minister Narendra Modi – who has been in office less than six months – has also decided to raise the price of natural gas from US$4.2 per million metric British thermal units to US$5.61, with the change expected to take effect at the beginning of November.

The latter move, analysts say, could lead to additional domestic exploration for gas resources. However, it is smaller than the previously proposed US$8 rate proposed by Modi’s predecessor.

Both decisions come in the wake of Modi’s Bharatiya Janata Party (BJP) winning two large industrial states in regional elections, and suggest that larger economic reforms – as had been expected when the Indian premier took office – could be forthcoming.

Renewables

Energy has long been a point of concern for India, with over 300 million consumers lacking access to power. Along with the above-stated policy changes, increasing the share of renewables in India’s energy mix has been one of the top stated priorities of the new Modi government.

The Indian premier made headlines in May, shortly before taking office, when he pledged that his government would develop the country’s solar sector enough within the next five years in order to ensure every household can run at least one light bulb from the energy source. (See BioRes, 22 May 2014)

“Our commitment to the people of India is that we should rapidly expand this [energy] sector, reach out to every home, and make sure we can do a diesel-generator free India in our five years,” Indian energy minister Piyush Goyal told The Guardian newspaper earlier this month.

Goyal has said that India aims to be a “renewables superpower,” with a potential amount of US$100 billion to invest in renewables over the next five years.

A recent report commissioned by the international New Climate Economy project looks at the financial impact of a global low carbon transition. It suggest that while gas could be a useful “bridge fuel” for some regions over the next 15 years, governments should be careful to limit their ownership in this energy source after 2030, in order to limit the loss of asset value.

Coal power, international shift?

Despite efforts to move away from relying on coal, including raising coal taxes and pushing for closing older, inefficient coal plants, Indian government officials have not ruled out increasing the use of coal for meeting the country’s energy needs.

Coal has the highest carbon content of all fossil fuels. A report released by UN climate scientists last April found that the proliferation of coal use in the global energy mix in the first decade of this century was a key factor behind greenhouse gas emissions growth. The report called for a beefing up of renewables worldwide in order to limit damaging economic and social consequences of climate change. (See BioRes, 14 April 2014)

Coal, Goyal explained to The Guardian, will be easier to fund than renewables, noting that India will likely have “to balance our developmental goals and our environmental goals.” The fact that India is a major emitter, he said, should be qualified with the fact that the Asian country has a large population, and – unlike major developed economies – has not been a large emitter historically.

Indian energy policy is likely to be watched closely in the coming months, given both the domestic and international policy implications. Countries are currently aiming to negotiate a binding global climate deal under the auspices of the UN Framework Convention on Climate Change (UNFCCC) that would take effect from the end of this decade.

The role played by major developing economies – who are exempt from binding emissions cuts under the current climate regime – will play has been particularly in focus.

Such a deal, officials hope, would be ready for the December 2015 UNFCCC Conference of the Parties, to be held in Paris. Preparatory talks are currently underway this week in Bonn, Germany, with the goal of laying the groundwork for this year’s Conference of the Parties in the Peruvian capital of Lima in December. 

While the Indian premier did not attend a closely watched high-level summit convened by the UN Secretary General in September, Modi met with US President Barack Obama shortly after, where the two countries agreed to cooperate closely on climate change including in the realm of advancing clean energy.

The US and India represent the world’s second and third largest emitters of greenhouse gas emissions and their stance will significantly colour the tone of the UN climate talks, experts have said.

ICTSD reporting; “‘Build bridges for Lima climate talks’,” THE GUARDIAN, 20 October 2014; “India Frees Diesel Prices from Government Control,” THE WALL STREET JOURNAL, 20 October 2014; “India ends diesel controls, raises gas prices,” REUTERS, 18 October 2014; “Modi to axe India’s diesel subsidies,” FINANCIAL TIMES, 19 October 2014; “India will be renewables superpower, says energy minister,” THE GUARDIAN, 1 October 2014. 

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