Cleaner Fuels in Asia: The Role of Pricing, Taxation and Incentives

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Cleaner Fuels in Asia The Role of Pricing,
Taxation and Incentives
Grant Boyle, UNU-IAS Cornie Huizenga, CAI,
Asia Better Air Quality December 6-8 2004 Agra,
India
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Role of Pricing, Taxation and Incentives
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Overview

• Market Conditions and Cleaner Fuels
• Market Instruments and Cleaner Fuels
• Recommendations for Use of Market Instruments in
  Asia

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Market Conditions and Cleaner Fuels
(DOE, EIA, 2004)
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Ownership Structure

• A free and competitive refining market is
  generally more amenable for generating capital
  for investments in cleaner fuels as well as
  allowing for imports of cleaner fuels.
• Example the inability of Indonesia to phase out
  leaded gasoline is party due to the absence of
  mechanisms for attracting private capital for
  upgrades and the presence of barriers to regional
  imports.

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Pricing Structure

• A free market pricing regime allows refiners to
  pass costs of higher quality fuels on to
  consumers and gives greater flexibility to
  refiners in meeting the costs of cleaner fuels.
• Example
• Singapore has mandated ULSD for 2005.
• Oil companies anticipate a 3-5 S. cent increase
  in price for ULSD.
• Costs to be passed onto the consumer in the form
  of higher prices.
• Similar approach taken in 1999 when 500ppm diesel
  was introduced.

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Pricing Structure

• A controlled pricing regime can have different
  implications for cleaner fuel markets.
• On the one hand, controlled prices with price
  caps for consumers in countries like Indonesia or
  Malaysia may inhibit investments, as refiners are
  not able to pass extra costs onto consumers.
• On the other hand, where price setting is
  accepted practice, governments posses the
  administrative levers to exert controls in favor
  of cleaner fuels. The deregulation of fuel prices
  in India, for example, may diminish the
  governments ability to keep CNG prices
  sufficiently low compared to diesel.

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Market Instruments and Cleaner Fuels

• Policy Rationale
• To accelerate and support introduction of cleaner
  fuels and vehicles in conjunction with
  regulations.
• Help to ensure efficient allocation of resources
  in meeting higher fuel standards in the region.
• Help implement Polluter Pays Principle (for
  pump price differentials).
• Types
• Differentiated tax on fuel products
• Direct subsides/incentives for refiners
• Taxes or incentives for higher quality vehicles

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Tax Differentials

• A fuel tax differential creates a cost advantage
  for a higher quality fuel end product through an
  increased tax on the un-improved fuel, a lower
  tax on the improved fuel or both.
• Environmental/health goals are rarely reflected
  in fuel taxation, but differentials have been
  successful in accelerating benefits in many
  countries UK, Sweden, Denmark, Germany, as well
  as in Asia.

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Tax and Pricing Differentials for ULG in Asia
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Example ULSD in Hong Kong

• 2002 Hong Kong passed regulation for ULSD
• In July 2000 tax differential of HK 0.86 for
  50ppm diesel relative to the conventional 500ppm.
  
• ULSD penetrated 100 of the market over the
  summer of 2000.
• During the summer, the pump prices of ULSD and
  regular diesel were equal.
• The government mandated higher vehicle standards-
  Euro 3, and undertook extensive diesel oxidation
  catalyst retrofit programme.
• Ongoing tax revenue loss.

Source Kong and Tsang, 2003
Tax differential lead to rapid market uptake
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Example Unleaded Gasoline in Thailand

• 1991 unleaded gasoline introduced and leaded
  banned in 1995.
• Costs to refiners estimated at B0.5/liter.
• Excise tax on unleaded set at B1 per liter less
  than leaded for both locally produced and
  imported fuel.
• Pump price set at B0.3 less for unleaded.
• Financed by Thai Oil Fund

Wangwongwatana, 2002
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Example Unleaded Gasoline in the Philippines

• 1999 unleaded gasoline received 1 peso less
  excise than leaded (5.35 pesos to 4.35)
• Approximately a 0.5 peso pump price advantage for
  unleaded.
• Demand for unleaded in the initial year of
  operation expanded its market share from 20 to
  34 in Metro Manila and 7 to 15 in the rest of
  the country.
• However, ULG was imported, rather than produced
  locally. A US170 million Policy Loan under the
  Metro Manila Air Quality Improvement Sector
  Development Program with co-financing from
  Japan, drove refinery investments subsequently.

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Direct Subsidies/ Incentives

• Producer subsidies/incentives can come in the
  form of a cash subsidy, usually allocated as a
  set amount or percentage of investment over a
  given time period or a targeted tax incentive on
  refinery investments.

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Example Lower Sulfur Diesel in Japan

• 1990-1992 "Tax Scheme for Promoting Investment in
  the Reform of the Energy Supply-Demand
  Structure", to lower sulfur content in diesel
  fuel below 2000ppm
• 7 deduction in corporate tax or
• 30 accelerated depreciation on the purchased
  equipment.
• The second stage of the 1993-1997 for 500ppm used
  the same structure as the first phase.
• 2004 Japan allocated a 5.2 billion yen cash
  subsidy for refiners to produce 10ppm sulfur
  diesel, which has been mandated for Jan 2007.
• The subsidy was allocated on a first come first
  serve basis for those companies that produce or
  import the fuel.
• The scheme was developed by the Ministry of
  Industry, the Ministry of Finance and the
  Ministry of Environment
• Funded from the "Oil and Energy Conservation Fund

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Vehicle Incentives

• Tax benefits and rebates for cleaner vehicles
  that require cleaner fuels (unleaded gasoline,
  lower sulfur fuels) can indirectly support the
  local market for cleaner fuels or niche markets
  for cleaner fuels.
• Example In 2004 the Singaporean government
  provided market incentives for cleaner vehicles
  that require ULSD (Euro 4) fuel.
• Taxis that move from Euro 2 to Euro 4 standards
  will gain a rebate of 100 of the basic price of
  the car.
• Euro 4 buses and commercial vehicles get an
  exemption of additional registration.
• Accordingly, oil companies in Singapore have
  geared up to provide Euro 4 diesel for direct
  supply to these particular market segments.

Cleaner vehicle incentives can indirectly support
market development for cleaner fuels.
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Factors Influencing Potential of Market
Instruments in Asia for Cleaner Fuels

• Market orientation
• Finance capacity
• Institutional capacity
• Political feasibility

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Recommendations

• Governments in the Asian region should develop
  clear plans for regulations as the primary means
  of improving fuel quality in the region.
• Governments in the Asian region should include
  health and environmental goals in fuel taxation
  policy in a consistent manner, along with
  economic, price stabilization and other concerns,
  particularly when the government is introducing
  higher quality fuels with public heath benefits
  and overall economic savings.
• Where the costs of domestic refinery upgrading to
  produce desired cleaner fuels are prohibitive or
  the investment environment is not attractive,
  governments should look toward regional imports
  over the short term to supply the cleaner fuel.

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Recommendations

• To accelerate or support the introduction of
  cleaner fuels in Asia, governments should
  investigate the feasibility of adjusting fuel
  taxes to create a price advantage to stimulate
  demand among motorists. This can rest on pricing
  regimes in both state-owned and market oriented
  refining sectors.
• To accelerate or support the introduction of
  cleaner fuels in Asia, governments should
  investigate the feasibility of adjusting fuel
  taxes to create a price advantage for the cleaner
  fuel to stimulate investments in local refining
  sectors or expand imports. Tax differentials on
  end prices in state-controlled sectors are not
  appropriate means of stimulating investments in
  local refinery upgrades but may help to stimulate
  imports.

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Recommendations

• To accelerate or support the introduction of
  cleaner fuels in Asia, governments with both
  state-owned and market oriented refining sectors
  should investigate the feasibility of employing
  direct subsidies and incentives to refiners.
• To accelerate or support the introduction of
  cleaner fuels in Asia, governments should
  investigate the feasibility of employing vehicle
  tax incentives to consumers to indirectly support
  the market for required cleaner fuels.