That India ought to reduce its emissions of greenhouse gases (GHG) (henceforth, carbon for simplicity) is indisputable and thankfully unlike in some wealthier and more culpable countries this is a much less contested fact in India. And even though transportation currently accounts for only about 10% of India’s carbon gas emissions, and notwithstanding the fact that it is more economical to focus first on reducing carbon emissions from power generation, there is a strong case to already begin charting an ambitious but carefully planned path to a truly low-carbon future for India’s transportation which will eventually lead to a net-zero carbon future.

Firstly, reducing emissions from transportation means reducing oil use of transportation which can be accomplished by slowing the rate of growth in dependence on private use vehicles, increasing public transit use, increasing the fuel economy of petrol and diesel vehicles, a shift to battery electric vehicles and hydrogen fuel cell vehicles, and increasing the share of electrified freight. But with its fast-growing middle and upper-middle class, and given their preferences for comfort and convenience, slowing the growth of private vehicles and increasing public transit use is going to be challenging notwithstanding the ongoing massive and necessary expansion of metro rail in many Indian cities. At the same time after more than century of innovation, progress in internal combustion engine technology is a region of diminishing returns. Such trends imply that a shift from oil-based transportation is inevitable if India is not simply slow the growth but reduce carbon emissions in absolute terms. Reducing oil consumption will also help improve energy imports and could helpimprove balance of trade and energy security depending on what and how much of it needs to be imported and from which countries.

The challenges

Secondly, as challenging as it is to reduce coal consumption for electric power generation, transitioning away from oil in the transportation sector will be far more for several reasons. For one, whereas there are multiple low-carbon alternatives to coal such as solar, wind, nuclear, hydro, geothermal and potentially even natural gas. Among these solar and wind have seen a rapid reduction in cost such that they are already cheaper during the day and on course to be cheaper all 24 hours of the day as battery costs continue to decline. If we are willing to pay a little more and take on little bit greater risk of accidents there is the immense under-exploited potential of nuclear power. In contrast, there exist few alternatives that are truly low-carbon and societally cheaper than oil for transportation today.

Biofuels can be low-carbon but their carbon footprint is variable (depends on how they are made) and they water footprint can be an order of magnitude or more higher compared to oil and they will cause greater pollution of soil and water pollution due to release of farm chemicals, and will not reduce let alone eliminate tail-pipe emissions. Hydrogen today is made from natural gas and hence more carbon intensive per kilometer travelled relative to petrol and diesel. Hydrogen made by splitting water using solar and wind energy sounds good on paper and viable on paper only for the next decade at least.

This leaves us the batterie electric vehicles (BEV) as perhaps the best alternative to oil today that completely eliminates tail-pipe emissions and helps improve urban air quality and is already cleaner than petrol and diesel based on current electricity mix even if only slightly so. But BEVs are not without their own challenges such as higher upfront cost, lack of charging infrastructure, time for refueling, need to scarce minerals not found in India, high end technology which needs to be imported and high cost of recycling batteries.

However, these benefits need to be weighed against the costs of transitioning away from oil and internal combustion engine vehicles. An obvious cost is the burden of subsidies on public finances. The FAME II scheme for BEVs adopted in 2019 had an outlay of Rs 10,000 crore2over 5 years which amounts to a mere 0.04% of India’s annual budget of Rs 45 Lakh crores for 2023-243. It has been reported that FAME III will have an outlay of Rs 40,000 to 50,000 crores.4 The National Green Hydrogen mission announced in 2023 which has twice the outlay of FAME II spread across 7 years or 0.06% of current annual budget. These might seem quite small but their success depends on whether these policies lead to BEVs and Hydrogen vehicles becoming commercially viable without subsidies.

The subsidies

But as important as these explicit subsidies there are other implicit subsidies which are the foregone revenues through rebate on GST on electric vehicles (which is 5% as opposed to 28% for petrol and diesel cars) and foregone excise tax and VAT on sale of petrol and diesel which account for about 50 % of their retail price.5 In fact today, central excise taxes account for around 12% of all taxes collected by central government (including the states’ share) and over 90% of this accrues from taxes on oil products.

Tax revenue angle

Value added taxes on oil products imposed by state government, which account for 15% of the retail price of petrol and diesel, are major source of revenue for states. According to a 2022 report by Prayas Energy Group government revenues from the petroleum sector are more than 8-fold greater than that from coal and more than 13-fold that from electricity. 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”,6 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.

This paper also shows that despite their upfront cost, BEVs can be cheaper on a lifecycle cost of ownership basis even in the absence of any subsidies and that they reduce total imports and carbon emissions. However, in addition to reducing government revenues they also entail fewer total jobs across the life of a vehicle (production, fueling, maintenance but end of life excluded as it was not modeled) as they require fewer components to be manufactured, assembled and maintained.

None of this his not suggest that governments go slow on the transition away from oil so as to avoid a hole in their budget but that we need to a more holistic plan that will make up for loss in excise taxes without necessitating additional distortions elsewhere in the economy.

Simply reducing the GST rebate runs the risk of making BEVs even costlier upfront and slowing the 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.

The writer is Associate Professor, Institute of Environment and Sustainability, UCLA