India may see revenue gap of USD 178 billion by 2050 as world moves to cleaner energy

India could see a revenue gap of USD 178 billion by 2050 due to high reliance on revenues from fossil fuels, as the world transitions from fossil fuel-based energy systems to cleaner energies to limit global warming to 1.5 degree C under the 2015 Paris Agreement goal.

A new report by International Institute for Sustainable Development (IISD) titled "Boom and Bust: The Fiscal Implications of Fossil Fuel Phase-Out in Six Large Emerging Economies" estimates that six emerging economies— Brazil, China, India, Indonesia, Russia and South Africa (BRIICS) need to start changing their fiscal policies to account for declining fossil fuel use—or risk a USD 278 billion gap in revenues by 2030, equivalent to the combined total government revenues of Indonesia and South Africa in 2019.

India's present revenues from fossil fuels is 92.9 billion USD which is 18% of government's revenue and 3.4% of gross domestic product (GDP) according to the report. The report examines the possible fiscal consequences of phasing out fossil fuels in six emerging economies and suggests strategies for managing the transition. BRIICS nations represent 45% of both the world's population and its carbon dioxide (CO2) emissions, 25% of global GDP. The report argues that economic reliance on fossil fuels puts BRIICS countries at risk of experiencing a substantial revenue gap over the next few decades, as the world transitions from fossil fuel-based energy systems to cleaner energies to limit global warming to 1.5 degree C.

The study finds that by 2050, overall fossil fuel revenues in BRIICS countries could be as much as USD 570 billion lower than a business-as-usual scenario. The widest gaps are expected to occur in India (USD 178 billion), China (USD 140 billion), and Russia (USD 134 billion). The report also finds that public revenues from fossil fuel production and consumption currently account for a staggering 34% of general government revenue in Russia, 18% in India, and 16% in Indonesia. The share stands at 8% in Brazil, 6% in South Africa, and 5% in China. This includes only direct, first-order, government financial revenues—fossil fuel dependence would be much larger if considering private incomes and flow-on effects in these economies. But these revenues are not only unreliable and erratic—according to the authors, they are also undermined by the negative economic impacts of fossil fuel use, such as health costs due to air pollution and damage from climate change.

"To prevent devastating climate change, the world has to phase out the production and consumption of fossil fuels, which will inevitably erode related revenues. 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," said Tara Laan, Senior Associate at IISD and lead author of the report in a statement.

"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. 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," Laan added.

The report recommends that the BRIICS governments should use fossil fuel public revenues strategically while they still can. Most BRIICS countries are likely to receive a short-lived "boom" in fossil fuel public revenues based on current policy settings, which can be augmented by removing subsidies and increasing taxes on fossil fuels. The funds can be used to support social welfare, clean energy, and just transitions, authors recommended adding that these governments also need to prepare for the inevitable "bust" in fossil fuel revenues through economic and fiscal diversification. Reforms can be done in a way that accelerates the energy transition and reduces poverty and inequality.