Title: Cleaner Fuels in Asia: The Role of Pricing, Taxation and Incentives
1Cleaner Fuels in Asia The Role of Pricing,
Taxation and Incentives
Grant Boyle UNU-IAS, Cornie Huizenga Herbert
Fabian CAI-Asia Secretariat 10th Annual Fuels
and Lubes Asia Conference, Shanghai, March 2-5,
2004
2Overview
- Vehicles Emissions, Health Impacts and Fuel
Quality Issues in Asia - Pricing, Taxation and Incentives for Cleaner Fuel
- European and Asian Experiences with Pricing,
Taxation and Incentives for Cleaner Fuel () - Future Directions for Pricing, Taxation and
Incentives for Cleaner Fuel in the Asian Region
The authors express their gratitude to the
International Fuel Quality Center (IFQC) for
making available information for this section of
the presentation
3Part 1 Vehicles Emissions, Health Impacts and
Fuel Quality Issues in Asia
4Vehicles are on the Rise in Asia
Source Swisscontact, 2000
Source ADB, 2003
5Health Impacts from Emissions
- 61 of the global estimate for premature deaths
due to ambient air pollution occur in Asia (WHO,
2002). - Chronic bronchitis cases (8,439) and excess
deaths associated with PM10 (1,915) costs US392M
in Metro Manila in 2001. (Source World Bank,
2002). - Chronic bronchitis cases (15,188) and premature
deaths (7,261) associated with PM10 costs US880M
in Shanghai in 2000. (Source Chen et al., 2002).
- Chronic bronchitis cases (1,092) and excess
deaths (4,550) associated with PM10 costs US424M
in Bangkok in 2000. (Source World Bank, 2002 ).
Source Swiss Contact, 2000
6Fuel quality is an important enabler to reduce
emissions from motor vehicles
- Cleaner fuels will result in lower emissions
(garbage in and garbage out) e.g. lead
sulfur in fuel and lead sulfur in emissions. - High sulfur fuel inhibits advanced vehicle
pollution control technologies e.g. Diesel
Particulate Filters Diesel Oxidation Catalysts. - Other factors, will also influence adoption of
emission control devices, such as fleet renewal
rate, fleet composition (number of motor cycles
and in-use vehicles)
Source Adapted from Blumberg,, Pera and Walsh,
2003
7After Removing Lead from Gasoline, Reducing
Sulfur in Diesel and Gasoline in Asia is the Next
Step
Diesel sulfur levels in Asia Current and Future
gt 500 ppm
51 500 ppm
lt 50 ppm
Source CAI-Asia Research, 2003
8Cleaner Air in Asia Will Require Stricter
Emission Standards for New Vehicles
For Light Duty Vehicles a Entire country b
Delhi and other cities Euro 2 introduced in
Mumbai, Kolkata and Chennai in 2001 Euro 2 in
Bangalore, Hyderabad, Khampur, Pune and Ahmedabad
in 2003, Euro 3 to be introduced in Delhi,
Mumbai, Kolkata, Chennai, Bangalore, Hyderabad
and Ahmedabad in 2005
Source CAI-Asia Research, 2003
C Beijing and Shanghai d Gasoline vehicles under
consideration e for gasoline vehicles f for
diesel vehicles
9Part 2 Pricing, Taxation and Incentives for
Cleaner Fuel
10Policy Instruments Related to Fuel Quality
Source Adapted From Button, Kenneth, 1993
11General Attributes of Tax Incentives
- Based on Polluter Pays Principle. Although
poorer quality fuels may be cheaper to produce,
extra costs in improving fuel are passed onto the
consumers of poorer fuels. - Tax revenue accruing to refiners needs to be
large enough to cover extra investments and net
increases in operating costs without increasing
price to consumer. - Tax revenue loss to the government can be
minimized eg. through a budget neutral
differential.
Source Adapted from International Fuel Quality
Canter, 2003
12 Tax Incentives Environmental Benefits
Changes
Improved
Improved
Reduced
Changes
Reduced
in fuel
Reduced
Tax
fuel qualities
in fuel
Reduced
Tax
fuel
environmental
environmental
consumption
emissions
differences
enter the
enter the
consumption
emissions
differences
costs
costs
patterns
market
market
patterns
Total
External
Total
External
Costs of
changes in
changes in
costs of
emissions
Emissions (health environment)
emissions
emissions
Source Little, Arthur 1998
13Market Conditions and Rationale for Tax
Differentials on Fuel
Market Conditions
Rationale for tax differentiation
Consumers
The majority of consumers do not switch to
cleaner grade if it carries a higher price
To eliminate the cost advantage of lower quality
fuel in consumer pricing
Without anticipated demand, the refining sector
does not invest in quality better than legal
requirements
Refiners
To catalyze refinery investments to produce fuel
To catalyze refinery
investments in order that the
fuels could be produced
To offset increased refinery costs associated
with improved fuel grades
Improved fuels cost more to produce
Source Adapted from Little, Arthur, 1998
14Fuel Tax and Environment
- Fuel tax has occasionally been used as an
instrument to reduce adverse environmental
impacts of fuel use. - Fuel tax is more frequently used for generating
general tax revenue and for road and transport
infrastructure finance. - Environmental policy objectives are typically low
on the list of priorities and fuel taxes are
seldom used to fund AQM.
15Part 3 European and Asian Experiences with
Pricing, Taxation and Incentives for Cleaner
Fuel
16Tax Incentives In Europe
0.3Ec/l 50ppm Petrol (2001)
5.7Ec/l 10ppm Diesel (2001)
3.9Ec/l
Diesel (2000)
4.5Ec/l 50ppm Petrol
(2000), Diesel (2001)
10ppm Petrol (2002)
10ppm Diesel Available
10ppm Diesel (2002)
(2000)
2.5Ec/l 50ppm Diesel (1993)
2.4 Ec/l
Diesel (1999)
.076Ec/l 50ppm Petrol (2000), Diesel (2001)
3.1Ec/l
50ppm Diesel (1993)
1.5EC/l 10ppm Petrol/Diesel (2003)
1.5Ec/l 50ppm Petrol/Diesel (2001)
50ppm Diesel Available (2000)
4 Ec/l
2 Ec/l
10ppm Petrol/Diesel incentive
Petrol/Diesel (2001)
Petrol/Diesel (2001)
(2004)
Source International Fuel Quality Center, 2003
17Case Sweden
Sweden introduced a tax differential for 10 and
50 ppm sulfur diesel
Taxation in 1990
Taxation in 1991
Taxation in 1992
148
148
119
127
131
ECU/
ECU/
107
ECU/
95
ECU/
m
3
ECU/
3
m
ECU/
m
3
m
3
m
3
3
ECU/m
m
3
MK1
MK2
MK3
MK1
MK3
MK2
Standard
diesel
diesel
diesel
diesel
diesel
diesel
diesel
MK1 diesel
MK1 diesel
Tax decreased by 20 ECU/ m3
Tax decreased by 12 ECU/ m3
MK 1 10 ppm
MK2 diesel
MK2 diesel
Tax decreased by 12 ECU/ m3
Tax increased by 4 ECU/m3
MK 2 50 ppm
Tax differential of
Tax differential of 24 ECU/m3
24 ECU/m
3
compared to MK1
compared to MK1
MK3 diesel
MK 3 350 ppm
MK3 diesel (standard diesel)
Tax differential of 53 ECU/m
Tax increased by 21 ECU/m3
compared to
MK1
Tax differential of 41 ECU/m3 compared to MK1
Source Little, Arthur 1998
18 Market-penetration for 10ppm diesel (MK1)
Source ECMT, 2001, in CAI-Asia -IFQC, 2003
19Case UK
- Starting in 1993, the UK introduced a general
fuel strategy which consisted of a fuel duty
escalator and several differentials to help
mitigate local air pollution and reduce
greenhouse gas emissions. - Department of Environment, Transport and the
Regions and HM Treasury introduced a preferential
tax rate for ULSD in 1997, followed by further
decreases in 1998 and 1999
20Impact
3 pence per liter
2 pence per liter
1 pence per liter
Source HM Customs and Excise,2000- in
Environment Canada, 2000
21Analysis
- Getting the price right was important- (3 pence
per liter). Only from 1999 onward, did all oil
companies in the UK supply ULSD. - In 1999 the tax differential resulted 400 million
pounds in missed tax revenue.
22Case Denmark
- Denmark had a history of tax differentials for
environmental purposes. - In 1999 a tax incentive for below 50ppm sulfur
was introduced. - Two Danish refiners and the Danish Technological
Institute assessed the size of the incentive
needed. - The Danish Environmental Protection Agency and
the Ministry of Taxation delivered the measure.
23Tax on 50ppm was reduced by 0.09 DKK/liter and
tax on 500ppm was increased by 0.09 DKK
Source Danish Environmental Protection Agency,
in Environment Canada, 2000
24 Impact 1999 2000 Levels of Particulates in
Copenhagen
Source Danish Environmental Protection Agency,
in Environment Canada, 2000
25Impact
- 100 market penetration over night.
Analysis
- Government commitment was first step.
- Proactive consultation with refiners and
technical experts improved the success of the
market penetration. Danish refiners met
regulations 6 years ahead of schedule. - Price to the final consumer remained the same.
The differential appeared as a reduced tax in the
refiners remittance to the government.
26Case Hong Kong
- Fuel incentive scheme for cleaner diesel (July
2000). - In 2002, ULSD was made mandatory to prevent
backsliding. - The ULSD enabled the introduction of stricter new
vehicle standards and the retrofit of existing
vehicles.
Source
27Case Thailand
- 1991 unleaded gasoline introduced.
- Tax set on unleaded at B1 per liter less than tax
for leaded for both locally produced and imported
fuel. - Catalytic converters mandated as well.
- 1995 ban announced in 1993.
Source Sayeg, 1998
28Unleaded Percentage of Premium Gasoline in
Thailand 1991-1995
Source Sayeg, 1998
29Case Japan
- METI will use a fiscal scheme to promote the
early introduction of 10ppm sulfur gasoline and
diesel before the mandated dates of 2008 and 2007
respectively. - Scheme will start 1 January 2005.
- Incentives are available on first come, first
served basis, meaning that only selected refiners
will be able to make use of the subsidy. - Initial amount made available 23.5 million per
month.
30- Also,
- There are systemic fuel taxes in Asia that need
to be considered. - Ex. Diesel Preference
- Generally, Asian countries have a tax
differential that favors diesel over gasoline.
31Eg. Lower Taxed Kerosene Encouraging Adulteration
32General Observations (1)
- Case studies show that economic instruments have
been successful in promoting the penetration of
cleaner fuels. However more examples are
available for Europe than for Asia. - Tax incentives were used to accelerate and expand
the introduction of improved quality fuels in the
presence of a command and control regime. - Refineries in general wait for the regulation to
come into effect unless there is a market
incentive to prompt early action.
33General Observations (2)
- Determining the price/tax differential is a
matter of ensuring that enough revenue is
generated to encourage refiners to invest earlier
than required by the regulation. This does not
mean that incentives necessarily need to cover
all additional costs of refiners. - Tax differentials can be budget neutral, but may
not always be. The UK and Denmark cases resulted
in lower revenues. - Administrative costs are low, as the fuel duty
can be collected at the refinery gate, (few tax
points). - In setting tax incentives for a particular fuel
it is important to consider the possible impacts
in terms of fuel consumption patterns.
34Part 4 Future Directions for Pricing, Taxation
and Incentives for Cleaner Fuel in the Asian
Region
35Potential Use of Market Instruments in Asian
countries will be determined by
- Willingness to use fuel taxation as an
environmental policy instrument competition for
scarce tax revenues. - The level of commitment towards AQM and
understanding within society and government of
the role fuel plays in air pollution. - The structure of the energy market and free
market orientation. - The capacity to manage tax incentive programs and
to monitor fuel quality. - The degree to which benefits from a harmonized
approach are maximized.
36Government Willingness Many Asian countries
reliance on fuel taxation for revenue is
relatively low (compared to e.g. Africa),
indicating treasuries may not be overly
protective of fuel taxation.
37Tax Margin Flexibility
IFQC-CAI Workshop Outputs, 2003
Source Bacon, Rober, 2001
- The higher the tax margins are, the more
flexibility the government has in using tax
differentials. - Generally industrialized countries have higher
tax margins. - Large variation in tax margins in Asian
countries.
38Strength of AQM movement and (technical)
understanding of the role fuel quality plays in
air pollution
- In Asia, there is a considerable variation among
strength of the AQM movements e.g. Thailand
(quite strong), Bangladesh and Pakistan
(relatively weak), and Philippines and China
(emerging). - Role of fuel in air quality is not (yet) well
understood by decision makers. - Knowledge base on relationship fuel- vehicles-air
quality is biased towards Europe/USA-Japan (new
advanced vehicles, limited or no attention for
in-use vehicles and motor cycles).
39Structure of Energy Markets
Markets with dominant public sectors may not be
as responsive to tax instruments
Source Adapted from ASEAN
40Price Fixing and Subsidies
Source APEC
Controlled markets undermine the effectiveness of
tax instruments to promote cleaner fuels.
41Fuel Quality Monitoring
- Limited number of Asian countries have
comprehensive fuel quality monitoring strategies
in place - Technical and institutional capacity for fuel
quality monitoring is relatively weak - Fuel quality monitoring is under funded
- Governance and IT infrastructure for self
monitoring by refiners is poorly developed
42Conclusions
- Pricing and tax instruments have a proven ability
to advance the introduction of cleaner fuels and
contribute to better air quality. - Although little information is available on
economic impact, it is believed that benefits far
outweigh the costs and as such they are
attractive to the Asian region. - In those cases where they have been used
successfully in Asia, there was political
commitment and a reasonable capacity to implement
and monitor the program. - Due to structure and composition of vehicle fleet
in Asia, emission benefits and air quality
impacts are expected to be lower. - Substantive work needs to be done before tax
incentives can be effectively implemented in most
countries in Asia. - Regional cooperation and harmonization will
improve the chances for successful widespread
adoption. Cooperation should extend to industry
and government.