1] Revisit the idea of ‘aging out’ India’s coal plants (GS 3 Infrastructure)
Context –
- The Finance Minister, Nirmala Sitharaman, said in her Union Budget address for 2020-21 that shutting down old coal power plants, which are major contributors to emissions, will help India meet its Nationally Determined Contributions, an idea that has been endorsed by the Power Minister, R.K. Singh.
Case studies –
- It is argued that because newer (and presumably more efficient) coal-based capacity is underutilised, shutting down older inefficient plants would result in improved efficiencies, reduced coal usage, and cost savings.
- Furthermore, it is argued that retrofitting old plants with pollution control equipment to meet the Environment Ministry’s emission standards would be uneconomical, and that it would be better to retire them.
- Because plants older than 25 years account for roughly 20% of the country’s total installed thermal capacity and play a significant role in the country’s power supply, decisions about their retirement should be scrutinised more closely to see if the claimed benefits are actually realised.
Complexity of the issue –
- There are also a few older plants that produce at a lower cost. Plants like Rihand, Singrauli, and Vidhyanchal in Madhya Pradesh, for example, are all over 30 years old and have extremely low generation costs of around 1.7/kWh, which is significantly lower than the national average.
- This could be due to locational advantage rather than efficiency, as older plants are likely to be closer to the coal source, lowering coal transportation costs.
- However, this only adds to the problem’s complexity, as efficiency does not always imply cost savings.
Savings analysis –
- Indeed, the total cost savings from shutting down plants older than 25 years would be less than 5,000 crore per year, or less than 2% of total power generation costs.
- The argument that installing pollution control equipment to meet environmental standards is uneconomical for older plants is a stronger one, as all coal plants should reduce emissions.
- Even here, however, the debate is not black-and-white. Some older plants may be economically viable even if pollution control equipment is installed because their current fixed costs (which would rise with pollution control equipment installation) are low.
- Indeed, approximately half of the coal capacity older than 25 years has already issued tenders for the installation of pollution control equipment.
Risks involved –
- There is a growing demand for capacity that can provide flexibility, balancing, and ancillary services to support the sector’s growing intermittent renewable generation.
- Thermal capacity from the past, which has lower fixed costs, is a prime candidate to fill this role until other technologies (such as storage) can replace it at scale.
- Furthermore, the old capacity’s capacity value is critical for meeting instantaneous peak load and load when renewable energy is unavailable.
- There’s also a political economy risk, as aggressive early retirement of coal-based capacity without thorough analysis could result in real or perceived electricity shortages in some states, prompting calls for State-owned entities to invest in coal-based base-load capacity.
- A total of 65 gigawatts (GW) of thermal capacity is already planned, with about 35 GW in various stages of development.
Conclusion –
- Using age as the sole criterion for making these decisions is a blunt instrument that can backfire.
- To make retirement-related decisions, a more disaggregated and nuanced analysis, taking into account the various technical, economic, and operating characteristics of individual plants and units, as well as factors like renewable energy intermittency, growing demand, and the need to meet emission standards, would be appropriate.
- To achieve long-term economic and environmental benefits, it may be prudent to let old capacity fade away over time while focusing on such detailed analysis and weeding out unnecessary capacity in the pipeline.
2] The sovereign right to tax is not absolute (GS 3 Economy)
Context –
- Last week, a significant bill was introduced in Parliament with the goal of repealing the regressive 2012 amendment to the Income Tax Act.
- The 2012 amendment overturned the Supreme Court’s decision in Vodafone International Holdings v. Union of India, allowing the income tax law to be applied retroactively to indirect transfers of Indian assets.
- As a result of the retroactive amendment, Vodafone and Cairn Energy have filed lawsuits against India in the Investor-State Dispute Settlement (ISDS) tribunals of the bilateral investment treaties between India and the Netherlands and India and the United Kingdom (BITs).
- Both tribunals found that India’s retroactive tax law changes violated the two BITs’ fair and equitable treatment provisions.
The amendment –
- The proposed amendment is a welcome development that has been long overdue. It is, however, presented as a domestic legal reform that corrects a past error.
- This amendment does not appear to be proposed in order to comply with the two adverse ISDS decisions against India, nor with India’s international law obligations contained in BITs.
- This is because there is an incorrect belief in bureaucratic and political circles that taxation matters are not subject to ISDS tribunals because they are part of sovereign measures.
Sovereign right to tax –
- Several ISDS tribunals have recognised the fundamental principle that taxation is an integral part of the sovereign power of the state.
- “The State has a sovereign right to enact the tax measures it deems appropriate at any particular time,” the ISDS tribunal ruled.
- Not only that, but the ISDS tribunals have ruled that when a foreign investor challenges a state’s taxation measures, the taxation measures are presumed to be valid and legal.
Limits on the Right –
- Despite the state’s sovereign right to levy taxes and the presumption that taxation measures are legal, the exercise of this public power is subject to certain constraints.
- Expropriation and the fair and equitable treatment provision are the two most commonly used BIT provisions to challenge a state’s taxation measures.
- The tribunal determined that the state’s right to tax is subject to two limitations under customary international law.
- The tax should not be discriminatory in the first place, and it should not be confiscatory in the second.
- Foreign investors have frequently challenged taxation measures in the context of the fair and equitable treatment provision, claiming that they violate legal certainty, which is a requirement of the fair and equitable treatment provision.
- Although legal certainty does not imply immutability of the legal framework, states are required to make reasonable and proportionate legal changes, such as amending their tax laws.
- In Cairn Energy v. India, the tribunal stated that taxing indirect transfers is a sovereign power exercised by India, and that the tribunal would not comment on it. There are limits to “absolute, unquestioning deference” in such situations.
- As a result, India’s right to tax in the public interest must be weighed against the investor’s desire for legal certainty.
- When it comes to amending tax laws retroactively, such a move should be justified by a specific goal that cannot be achieved by applying taxes prospectively.
- The tribunal determined that the public purpose that justifies applying the law prospectively is usually insufficient to justify applying the law retroactively.
Carving out taxation measures –
- In its Model BIT of 2016, India completely excluded taxation measures from the scope of the investment treaty. However, excluding taxation measures from the BIT’s scope does not mean that states are free to do whatever they want.
- States that act in bad faith toward foreign investors, abuse their right to tax, or adopt mala fide taxation measures will not be able to benefit from the carve-out provision, as held in Yukos Universal v. Russia.
Conclusion –
- The most important lesson to be learned from this nine-year saga of retrospective taxation is that India should exercise its right to regulate while keeping in mind its international law obligations, acting in good faith, and in a proportionate manner.
- ISDS tribunals have no jurisdiction over such regulatory measures.
- To summarise, the debate was never about whether India has a sovereign right to tax, but rather about whether this sovereign right is limited.
- The answer is a resounding yes, because the sovereign right to tax is not absolute under international law.
