Economic Approaches for Addressing Vehicular Pollution: Issues and Prospects for India

Spurred by economic growth and motorisation, vehicular emissions in most urban areas of India have become a serious environmental and health issue. The policy response to regulating vehicular emissions has been mainly through command and control (CAC) strategies. These are essentially a set of “dos” and “don’ts” that, inter alia, mandate tailpipe emission standards, fuel standards, and technology and fuel choices. There are a number of problems with the current regulatory regime that are discussed in the paper. Perhaps the most significant is the lack of cost-effectiveness. A policy is said to be cost-effective when it attains its (prespecified) objectives in the least costly manner. In this context, under the current CAC approach no attempts have been made to quantify the cost per ton of reducing common pollutants such as particulate matter. Another problem with the CAC regime is excessive reliance on technical “fixes” such as tailpipe emission standards and on mandating types of fuel to be used such as compressed natural gas (CNG) or ultra low sulfur diesel (ULSD). The paper argues that apart from failing the test of cost-effectiveness, these measures are flawed in principle: they focus only on emissions per kilometre and not on total emissions which also depend on the number of kilometres traveled and on the number of vehicles in use. The paper then reviews the increasing use worldwide of market-based instruments (MBIs) for addressing vehicular pollution. These include, inter alia , fuel and vehicle taxes, congestion pricing, parking fees and subsidies to mass transit. These instruments are described and their relevance and applicability to the Indian situation is analysed. The paper takes the view that though there exist institutional and other barriers to using MBIs in India, these problems are not insurmountable. It offers specific and concrete suggestions on how MBIs could play an important role in abating vehicular pollution in India. It also illustrates how economic approaches are superior in principle to regulatory (CAC) approaches. Finally, the paper focuses on the cost-effectiveness of both types of policy interventions (CAC and market-based) for addressing vehicular emissions. Given the lack of data for India, studies carried out in other developing country cities such as Mexico City are reviewed and their implications for India are highlighted. ECONOMIC APPROACHES FOR ADDRESSING VEHICULAR POLLUTION: ISSUES AND PROSPECTS FOR INDIA INTRODUCTION Spurred by economic growth and motorization, vehicular emissions in most urban areas of India have become a serious environmental and health issue (see for instance the paper by Chhabra and others in this volume). Between 1971 and 1997 the number of vehicles in India grew 20 times from about 1.9 million to 37.2 million (MoST 1999). Over the same period the number of vehicles per 1000 population increased from 3.4 to more than 40, that is, about 12 times. Further, the rate of increase in road capacity has lagged behind the per capita and total growth in the number of vehicles—the total length of Indian roads went up only threefold during this period--from 917,000 kms. in 1971 to about 3.3 million kms. in 1997)—resulting in greater congestion and pollution. The bulk of vehicular population is in urban areas, particularly in the metropolitan cities. The city of Delhi alone accounted for 3.2 million vehicles in 2001 and recorded annual vehicle growth rates of more than 10 percent per year over the last thirty years. Rapid motorization in Delhi and several other Indian cities has been an important factor in the growing congestion and pollution loads. The policy response to regulating vehicular emissions has been mainly through command and control (CAC) strategies. These are essentially a set of “dos” and “don’ts” that, inter alia , mandate tailpipe emission standards, fuel standards, and technology and fuel choices. This paper presents a critique of these strategies on the grounds that they do not focus on vehicle ownership and use and place excessive reliance on technical “fixes” to reduce emissions. Second, these measures are not based on considerations of cost-effectiveness. In this context, the paper argues that it may be useful to: (i) take a more holistic approach to addressing vehicular emissions and (ii) to consider an economic approach to abating vehicular emissions as an alternative to the current regulatory regime. The following section places the current regulatory regime in context by developing a taxonomy of policies to reduce pollution. It shows that command and control (CAC) policies are one of a set of policies to address vehicular pollution (or pollution in general) other options being the use of a variety of market-based instruments (MBIs). In the section after that we set out an analytical framework for examining vehicular pollution. Thus, emissions from vehicles are viewed as a product of: (i) emissions/liter fuel, (ii) fuel used/kilometer, and (iii) total kilometers driven. This framework enables us to classify the underlying determinants of vehicular emissions in terms of their effect on one (or more) of these three categories. While it is it is quite likely that curbing vehicular emissions will entail a combination of policies that affect all three elements, in practice (iii) has largely been ignored. This discussion is followed by a review of international experience with MBIs in addressing vehicular pollution. We see that while several countries use MBIs to control vehicular emissions, few of these instruments are of a textbook emission tax/tradable permit variety. Nevertheless, there are important implications of this for India that are highlighted in this section. We then critically review the regime for abating vehicular pollution in India with special reference to Delhi. In light of this, a potential economic instrument for the production of cleaner new vehicles is identified, namely, an environmental excise duty (EED). Finally, based on the experience of cities such as Mexico City, we consider the potential cost-effectiveness of various policy interventions as well as the health benefits of an improvement in air quality in Delhi. 1. Paper prepared for Workshop on Transportation, Land Use, and the Environment, at Central Institute for Road Transport (CIRT), Pune, India, December 3-4, 2001. POLICIES FOR POLLUTION ABATEMENT—AN OVERVIEW There exist alternative approaches for abatement of pollution including that from vehicles (Table 1). In India, however, (as in several other countries), the policy response to regulating pollution in general and vehicular emissions in particular, has been through command and control (CAC) strategies. These measures are essentially a set of “dos” and “don’ts” that, inter alia , mandate tailpipe emission standards, fuel standards, and technology and fuel choices. Without going into the compulsions for adopting a CAC approach, there are a number of problems with the current regulatory regime from an economic point of view that are highlighted in this paper. An alternate paradigm for pollution abatement is to use economic instruments (EIs) or marketbased instruments (MBIs). These instruments use the market and price mechanism to encourage firms or households to adopt environmentally friendly practices. They comprise a wide range of instruments from traditional ones such as pollution taxes and tradable permits to input taxes, product charges and differential tax rates. The common element among all MBIs is that they work through the market and alter the behavior of economic agents (such as firms and households) by changing the nature of incentives/disincentives these agents face. Economists have advocated the use of MBIs to address environmental problems for over three decades. This advocacy is primarily on grounds of efficiency. In other words, MBIs are a more costeffective means of achieving a given environmental quality than alternative approaches such as direct regulation of polluters. Intuitively, MBIs result in lower total pollution abatement costs (as compared to CAC) because they allow a shift in abatement from high cost to low cost abaters. By contrast, CAC measures apply uniformly to all polluters such that the same environmental quality has to be achieved by polluters irrespective of their abatement cost structures. There is another aspect to the cost-efficiency of MBIs over CAC measures. Unlike some CAC measures, MBIs do not dictate how pollution is to be controlled and are not biased towards end-of-pipe treatment like (mandatory) catalytic converters in automobiles. Thus, under MBIs economic entities such as vehicle owners have an incentive to choose among alternative methods for pollution abatement on the basis of least-cost. In trying to achieve the cheapest means of pollution abatement, firms also have an incentive to innovate and develop new control technology and expertise in the long run. Thus, R&D is encouraged for better abatement technology. On the other hand, under an uniform emission standard (CAC) there is no incentive to abate beyond the required level. Furthermore, mandatory environmental standards are generally based on the best available technology (BAT) for pollution abatement at the time of legislation. Therefore, with improvement in technological knowledge over time the norms become outdated. 2. A number of terms have been used to describe MBIs which is sometimes confusing. Some of these are "economic incentives", "economic instruments", "economic approaches", "market-oriented approaches", "market-based incentives", "incentive mechanisms", and "incentive-based mechanisms". In this paper we treat them as equivalent. 3. According to economists a policy is efficient if it achieves its objective at least-cost compared to alternative policies. 4. It is only since the 1990s, however, that MBIs have been endorsed both by the international community and by the Indian government. See for instance, Principle 16 of the Rio Declaration on Environment and Development, Chapter 8 of Agenda 21, and the Policy Statement for Abatement of Pollution by the Government of India, 1992. As stated earlier, MBIs comprise one of several sets of policy instruments available for pollution abatement. Table 1 provides a taxonomy of various instruments and places MBIs in the context of other policies. Also, as stated earlier, in India so far there has been an overwhelming reliance on command and control (CAC) measures listed in the second row of the table, followed by direct government expenditures on pollution abatement (such as the Ganga Action Plan). One can further differentiate between direct and indirect policy instruments. In the case of MBIs, for example, direct instruments such as emission charges induce generators of pollution to internalize the external costs of pollution by charging for the use of environmental resources, e.g., air and water. Indirect MBIs on the other hand, increase (decrease) the prices of outputs and inputs that are complementary (substitutes) to the polluting activity. For example, a tax on petrol (or a subsidy to mass transit) is an indirect MBI to address vehicular air pollution. On the lines of the preceding table we now focus explicitly on emissions from motor vehicles (i.e., vehicular pollution) and highlight alternative approaches based on MBIs and CAC regulations (Table 2). Further, under each approach we distinguish between direct and indirect policy instruments. In the table, vehicular pollution is also differentiated by its sources, namely, vehicles, fuel quality, and traffic congestion. Specific examples of MBIs that have actually been applied are described in Table 3. Before doing that, however, we develop an analytical framework for examining vehicular pollution in the following section. VEHICULAR POLLUTION: AN ANALYTICAL FRAMEWORK Vehicular emissions can be decomposed in a number of ways. For example, emissions over a given period (say, daily or annual) may be viewed as the product of: (i) emissions per unit of fuel; (ii) fuel consumed per vehicle kilometer, and (iii) total vehicle kilometer traveled (VKT). The latter (VKT) in turn can be viewed as a product of the number of vehicles times the number of kilometer each vehicle travels per day or annually. Conversely, (i) and (ii) may be viewed as a composite variable, namely, emissions per vehicle kilometer, whereas (iii) may be viewed as the product of the number of vehicles (V) and the kilometer each vehicle travels (KT) over the reference period. The main reason for disaggregating emissions is that it facilitates analysis of policy instruments by identifying the underlying components and the actual point of impact of different measures for emission abatement. It also makes transparent the interlinkages and feedback mechanisms among these measures. As an illustration, in North America fuel consumed per vehicle kilometer (due to bigger cars) and VKT are high by world standards, but emissions per unit of fuel are quite low. The reverse is true in developing country cities such as Delhi. 5 Orders by the judiciary on environmental matters (of the kind that have been recently witnessed in India) would also come under the CAC approach (more so since they are typically orders to the executive branch to require that certain actions be undertaken). For instance, in May 1999 the Supreme Court required that all new vehicles sold in Delhi meet more stringent (Euro II) emission norms. 6. From this example it will be clear that the effectiveness of indirect instruments crucially depends on the strength of the linkage between the transactions (to which the MBI is applied) and the pollution that the policy seeks to control. 7. In a similar decomposition Levinson and Shetty (1992) replace (ii) and (iii) by units of fuel per passenger kilometer and passenger kilometers traveled, respectively. It is applied by Pargal and Heil (2000) as discussed below. 8. These are also referred to as emission factors. Following Pargal and Heil (2000), Figure 1 illustrates the major determinants of emissions from passenger vehicles. The figure is a modification of the decomposition above in that (ii) now refers specifically to units of fuel per passenger kilometer and (iii) refers to passenger kilometers traveled (PKT). The same framework can be modified to include freight transport as well. Each element is influenced by a set of factors (shown by arrows), some of which are linked to one another (as indicated by dotted lines). The advantage of this framework is in the clear separation of the determinants of vehicular emissions. For example, we see that reducing emissions per unit of fuel by 50 percent, ceteris paribus, would halve total emissions, as would curbing PKT by the same proportion. In both cases, behavioral modification could reduce emissions, for instance by choosing cleaner fuel (and/or vehicles with smaller/fuel efficient engines) or by carpooling. In practice, it is quite likely that curbing vehicular emissions will entail a combination of policies that affect all three elements. Figure 2 also from Pargal and Heil (op. cit.) rearranges the three components of vehicular emissions and their determinants and adds a list of policies that may help address them. It is evident that while policies such as emission taxes and permits target total emissions directly in theory, in practice there are few policies that actually do so. Most policies target one or more of the three elements such as emission/fuel standards or incentives/disincentives to change behavior. The high dependence of motor vehicle emissions on behavioral factors implies that it is difficult to predict the magnitude of abatement induced by different policies. Policy combinations and complementarities complicate matters further as discussed below. Still, behavioral modifications are crucial for reductions in automobile emissions. For example, while stringent emission standards have significantly reduced emissions per unit of fuel in the United States, aggregate emissions in some US cities have started rising again (Shalizi and Carbajo 1994). This is because of the unregulated component, namely, PKT. In fact, new cars in the US may emit 95 percent less CO, HC, and NOx than did uncontrolled cars in the 1960s (Harrington and Krupnick 1997) . Thus, abatement opportunities through technological improvement have been nearly exhausted. At the same time, however, travel demand management has received little attention. In fact, emission abatement through reducing PKT would be more cost-effective (Eskeland and Devarajan 1996). From Figure 2 we also note that the divisions between the three components of emissions overlap. Some determinants such as age of vehicle affect more than one component, and appear more than once, as do corresponding policies. These overlaps reflect the crosscutting nature of vehicle emissions and the difficulties in designing policies to reduce them. In particular, there exist complementarities across 9. In the US, the approach towards vehicular pollution combines control of emissions at the point of manufacture with those from in-use vehicles. A certification and enforcement program is used to administer new car emission standards--prototypes of car models are subjected to stringent tests and only those models with a certificate of conformity can be sold. The associated enforcement program consists of assembly line testing, recall, anti-tampering procedures and warranty provisions to ensure that manufacturers meet the emission standards. Standards on fuel content and alternative fuels and vehicles have also been passed. For in-use vehicles the main emission control strategy is a regular inspection and maintenance program. The US approach for new car emission standards has been adopted by Austria, Sweden, Switzerland, Norway and Finland, and later by the European Community as well. For a critique of the US approach see Harrington et al. (1998). various policy levers--policies to reduce traffic congestion, for instance, increase average speed and thus reduce emissions . These complementarities, however, at times could work in opposite directions. For instance, improving fuel efficiency may lower emissions but also increases PKT (due to reduced cost of travel). This in turn increases emissions and the two effects may, ceteris paribus, balance out on the whole. A similar point is made with respect fuel taxes which contrary to popular belief, may not lower emissions for two reasons (Sevigny 1998). First, in the long-run fuel taxes encourage the purchase of fuel-efficient cars--lower operating costs of the new vehicle could increase PKT/VKT. Also, as Sevigny points out, "While a gasoline tax encourages the purchase of fuel efficient cars, the correlation between emissions per mile and miles per gallon (MPG) is weak." (op. cit., p. 12 emphasis added) The reason is that fuel efficiency depends in part on vehicle weight, engine size and performance, vehicle aerodynamics and gearing. These features generally do not affect emissions, which depend on the completeness of the fuel burn and the presence or absence of emissions control systems such as a catalytic converter. Similarly, the success of a policy may result in perverse incentives. For example, paving dirt roads to reduce particulate matter (PM) from re-suspension could increase demand for travel. Likewise, reducing traffic congestion tends to attract more drivers since private travel becomes easier/cheaper. In the case of Delhi, building more bridges and/or widening existing ones across the river Yamuna eventually increased the population locating on the other side with a concomitant increase in the volume of traffic and no reduction in congestion or emissions. A similar concern is expressed about the MRTS (Mass Rapid Transit System) under construction in Delhi now. For instance, some experts have argued that the cost-effectiveness of metro rail systems needs to be evaluated carefully: "Current evidence suggests that metro rail systems, especially the construction of two or three lines at great cost, do not help in reduction of private vehicle use, congestion or pollution." (Mohan and Tiwari, 1999, p. 1595, emphasis added) It is also important to consider the policies discussed above in a holistic manner to ensure that they are implemented effectively. For instance, mandating strict emission standards without providing unleaded gasoline would be impractical since the primary means for meeting such standards, catalytic converters, work only with unleaded fuel. This observation has particular resonance in the Indian context where stringent emission standards enforced by the Supreme Court for Delhi (Euro I and II standards) in 1999 may be difficult to meet on a long-term basis due to poor fuel quality. 10. For Indian motor vehicles it is estimated that driving at 10 km/hour can increase fuel consumption by 126 to 298 percent (depending on the type of vehicle) as compared to an optimum speed of about 40 km/hour (AIAM, 1996). 11. Operating costs (rupees/kilometer) can be viewed, ceteris paribus, as a product of fuel price (rupees/liter) and the inverse of fuel efficiency (liters of fuel/kilometer). Thus, a sufficient condition for operating costs to fall is that the decrease in the latter outweigh the increase in the former (in percentage terms). 12. As Pargal and Heil point out “.... all measures to reduce congestion increase the incentive to drive since the time costs of congestion are a factor in weighing the costs and benefits of private vehicle operation. If the road supply increases, the actual volume of traffic and resultant emissions may also increase, so the net impact of the policy on air pollution may be less than anticipated. However, expanding the supply of roads may provide the right incentives if access is priced to reflect the opportunity cost of the new roads.” (op. cit. p. 675 emphasis added) Similarly, any demand management policy (to reduce private motorized travel) would only work fully if viable public transport (or non-motorized alternatives) were available. As such, a "supply" of public/alternative transport is an integral part of this policy. It is also true, however, that there is a 'chicken and egg' problem here in that the viability of public transport depends on adequate demand for it. In other words, demand management (tolls, taxes, etc.) is often a prerequisite to wean commuters away from private modes of travel towards public transport and for the latter to break even. This issue again is highly relevant for Delhi where it is often debated whether demand management policies will work in the absence of a viable alternative to private motor vehicles. In the context of CAC policies also such as inspection and maintenance (I&M), it is important to strengthen institutional capability as a complementary measure. In sum, it is important to bear in mind the complementarities, perverse incentives and implementation issues that policies to address vehicular pollution may create. Finally, from an economic perspective it is be important to rank these policies on the basis of cost-effectiveness, that is, in terms of cost per unit emissions reduced. While this is difficult given the synergies and cross-cutting nature of policies discussed above, it is nevertheless important. In particular, given the expensive nature of some CAC policies it is imperative that such an analysis be undertaken. We return to this issue in the penultimate section below. INTERNATIONAL EXPERIENCE WITH MBIs IN ADDRESSING VEHICULAR POLLUTION Table 4 provides examples of policies that have succeeded as well as those that have not, as well as tips for implementation. It also clarifies key issues related to the selection and implementation of transport policies. Similarly, as Table 3 shows, several countries use MBIs to control vehicular emissions. Few of these instruments, however, are of the textbook emission tax or tradable permit variety. Most of them would be classified as indirect price-based instruments, that is, those that alter prices of outputs or inputs that are complements or substitutes to vehicle emissions. In particular, the use of differential tax rates to encourage use of unleaded petrol (or cleaner fuel in general), is widespread. A good example of a direct price-based instrument in terms of the discussion in the second section would be the deposit refund system for old cars in Greece and Norway and for automobile batteries in Rhode Island, United States. The toll system in Bergen, Norway and the Area Licensing Scheme (ALS) of Singapore are particularly good examples of user charges. In general, there are important lessons here for India as discussed below. Policy Implications of International Experience • Focusing on reductions in emissions per kilometer, as in the United States, has only a limited impact on aggregate vehicular emissions since it does not affect VKT. On the contrary, in the US even as cars became cleaner, vehicle miles traveled by an average driver doubled between 1970 and 1988. In other words, while technical fixes have been used in many countries such as the US, they are not in themselves enough to curb vehicular emissions. Behavioral modifications are crucial. • With respect to curbing demand for travel by private motor vehicles while it is important to provide a viable "supply" of public transport as an alternative, the two measures need to go hand in hand. There are two reasons for curbing demand for private travel in the context of augmenting supply of public transport. First, this ensures adequate usage of the public transport alternative and second it also ensures that there is no net increase in private travel as a consequence of reduced congestion. • If sequencing between supply augmentation and curbing demand is necessary, the latter should precede the former. Otherwise, for Delhi in particular it has been noted that increased availability of road space, wider and more bridges across the river Yamuna, etc., simply create incentives for more private travel. Similar outcomes are possible for the proposed MRTS that may nullify the projected reduction in vehicle emissions. • The experience of Mexico City and Seoul show that incentives for private car ownership and use undermine air pollution and transport efficiency goals. In Delhi (as in the rest of the country) subsidized loans by employers (government, public sector and private companies) for purchase of motor vehicles, also undermine efforts to curb vehicular emissions. Moreover, recent revisions in wages for government employees by the Fifth Pay Commission have also enhanced the ceiling for these loans (even as vehicle prices have declined in real terms). Additional perverse incentives in the form of (inflation-indexed) "transport allowance" not only encourage use of private motor vehicles but also insulate operating costs (mainly fuel) against inflation, thus making private travel demand virtually price inelastic. Such perverse incentives for vehicle ownership and use should be done away with and instead use of public transport by employees should be subsidized. • Economic incentives to scrap older vehicles should be used as in the case of Greece. • Differential pricing of fuels such as petrol and diesel should be used to encourage cleaner varieties as in the case of Sweden, Norway and a host of other countries. • In the context of CAC policies also, such as inspection and maintenance, it is important to strengthen institutional capability as a complementary measure. In Delhi, for instance, the traffic police has a strength of about 2,000 personnel only for managing over 3 million vehicles in the city. ADDRESSING VEHICULAR POLLUTION IN INDIA: A CASE STUDY OF DELHI In this section we focus on Delhi as a case study and critically review various policies for reducing vehicular emissions. As stated earlier, Delhi is a highly motorized city by Indian standards. It has also witnessed a considerable amount of policy actions to address vehicular pollution. In many ways it represents the shape of things to come for several Indian cities that are also rapidly growing and motorizing. We begin by characterizing the policy regime for vehicular pollution abatement in India in general and Delhi in particular, which is essentially CAC in nature. Various shortcomings of the policy regime are highlighted. Current Policies for Reducing Vehicular Pollution in Delhi Vehicular pollution in Delhi is addressed mainly through command and control (CAC) strategies. These policies are a hybrid of central and city government initiatives since Delhi is not a state but (largely) a centrally administered Union Territory. The situation is further complicated by the intervention of the Indian Supreme Court after a series of public interest litigations (PILs) or class action suits were filed. In particular, the court has created an Environment Pollution (Prevention and Control) Authority (EPCA) that reports directly to it and suggests policies for pollution abatement in the city. Supreme Court directives primarily mandate phasing out of old vehicles and conversion of all buses, taxis and 2-wheelers 13. For instance, transport allowance could be given only to those employees who commute by public transport or by ‘chartered bus’ (private buses on contract to carry commuters). to compressed natural gas (CNG). Table 5 lists the timeline for various activities as mandated by the Supreme Court, whereas Table 6 describes the status of implementation of these directives. In addition, the central government has enacted a number of laws for the control of air pollution (which includes motor vehicle emissions) that apply to all of India including Delhi. These are Section 278 of the Indian Penal Code 1860, Environment (Protection) Act (EPA) 1986, Air (Prevention and Control of Pollution) Act 1981 (amended in 1987), Air (Prevention and Control of Pollution) Rules 1982, and Motor Vehicles Act 1939 (amended in 1988 and 1994). The government has also notified air quality standards for major air pollutants, such as carbon monoxide, hydrocarbons, oxides of nitrogen, lead, particulate matter, and sulfur dioxide (Table 7). The Ministry of Environment and Forests (MoEF) of the Government of India is the nodal agency that looks into various aspects of vehicular pollution. With respect to motor vehicle emissions in particular, norms are notified under the Environment Protection Act (EPA) by MoEF and apply to the entire country. These are included in the Motor Vehicles Act (MVA) which is enforced by the Ministry of Surface Transport (MoST) since traffic management is primarily its concern. Mass emission standards (gm/km of pollutants emitted) for new vehicles were notified on February 5, 1990. These were revised (made more stringent) in 1996 and again in the year 2000 (Table 8). For the first time, separate obligations for vehicle owners, vehicle manufacturers and enforcing agencies were stipulated. With respect to vehicle owners, the 1990 rules stipulate maximum volumetric concentration of gases in the exhaust for in-use vehicles and it is the responsibility of owners to ensure their vehicles meet these limits. Officials of enforcing agencies (police or transport department) are empowered to check vehicle emissions. Vehicle manufacturers are responsible for ensuring that new vehicles meet the mass emission standards prescribed for them. In addition, fairly stringent Euro I and II emission norms for Delhi were notified by the Supreme Court on April 29, 1999. The notification made it mandatory for car manufacturers to conform to Euro I and Euro II norms by May 1999 and April 2000, respectively, for new non-commercial motor vehicles sold in Delhi. Some of the other policies initiated by the government to combat vehicular pollution particularly in Delhi are: • Unleaded petrol and low sulfur diesel have been introduced. Unleaded petrol was introduced in the four major metropolitan cities (Delhi, Mumbai, Calcutta and Chennai) in April 1995. As per Supreme Court directives, since September 1998, only unleaded petrol is sold in Delhi and is also used by cars without catalytic converters. Contrary to international experience cited earlier, the 14. Mass emission standards refer to gm/km of pollutants emitted by a vehicle during mass emission tests conducted under specified driving conditions. 15. Idling carbon monoxide (CO) for 4-wheeled petrol driven vehicles should not exceed 3 percent by volume. For petrol-driven 2 and 3-wheelers, the corresponding figure is 4.5 percent. 16. As in the case of other emission norms these are mass emission standards stated in terms of maximum allowable amounts of CO, HC and NOx in gm/km. 17. At present these norms apply to motor cars only but the Supreme Court once suggested they be extended to two and three wheelers as well (TOI 1999a). switch from leaded to unleaded petrol in Delhi was not made through differential pricing but by eliminating supply of leaded petrol completely . With respect to diesel, its sulfur content was 1 percent till 1997 when it was reduced to 0.25 percent (known as ELSD or extra low sulfur diesel) for the metro cities and for areas around the Taj Mahal (also known as the Taj trapezium). In September 1999, supply of diesel with 0.05 percent sulfur content (ULSD or ultra low sulfur diesel) to Delhi was commenced. Diesel with 1 percent sulfur content has been completely phased out from the country. Again, as in the case of unleaded petrol, there was no attempt to use differential pricing for encouraging cleaner diesel (as in Sweden and Norway--Table 3). • Compressed natural gas (CNG) has been introduced as a clean fuel in Delhi, Mumbai and Baroda. By installing a CNG kit, petrol vehicles such as taxis and 3-wheelers can be converted to CNG. Inadequate supply of CNG and the high cost of the kit, however, have affected its acceptance among consumers. Again, under orders of the Supreme Court all buses in Delhi were to be converted/replaced by CNG buses by March 31, 2000. • Pre-mixed fuel (petrol and lubricating oil) for use in 2-stroke engines of 2 and 3-wheelers has been introduced at petrol stations in Delhi and elsewhere. This is in response to the fact that drivers often use too much oil in the (erroneous) belief that this is good for the engine (with disastrous effect on emissions). • The role of maintenance in combating vehicular pollution was reflected in a government policy that for the first time in 1989 made a certificate of fitness mandatory for registration of all public and commercial vehicles and for personal vehicles older than 15 years. This does not, however, specifically target the vehicle's emission performance. In addition, as stated above the 1990 vehicle emission rules require all motor vehicles to comply with notified emission standards--it is now mandatory for every motor vehicle to obtain a certificate of pollution under control (PUC) every three months. Only CO, however, is measured. • In Delhi, under Supreme Court orders, commercial vehicles older than fifteen years and taxis and autorickshaws (3-wheelers with 2-stroke engines) older than ten years, are prohibited from operating. This, however, does not apply to the thousands of truck and other vehicles entering the city from other states. From this review it can be concluded that MBIs do not figure among policies for controlling vehicular emissions. The major thrust of regulatory and judicial efforts is towards: (i) enforcing mass emission standards for new vehicles, (ii) volumetric emission limits for in-use private vehicles, (iii) mandating the use of CNG as a fuel by 3-wheelers, taxis and buses, and (iv) retiring old vehicles. With reference to the analytical framework developed above, there is no attempt at demand management to 18. Since all oil refining companies are state owned and prices are administratively determined, the cost of converting to unleaded petrol was not estimated. Further, during the switchover period leaded and unleaded petrol were sold at the same price. 19. To this end, the state owned Indian Oil Corporation Limited (IOCL) invested Rs. 46.7 billion to make process changes at its refineries to upgrade the quality of its petrol and diesel. (TOI 1999b) US$1 = Rs. 47.5 approximately. 20. As mentioned earlier, despite a discernible shift towards cars in Delhi, the major portion of personalized transport comprises two-wheelers. Of these a very high proportion run on two stroke engines and are the main contributors of SPM and HC emissions. reduce vehicle kilometers traveled (VKT) or to create disincentives for the use and ownership of private vehicles. With respect to end of pipe emissions, most of the emphasis is on new vehicles. In-use vehicles have not been given much importance except for volumetric emission limits, that too only for CO. A vehicle's emissions, however, are directly proportional to its vintage. In other words, old vehicles pollute more and incentives for scrapping old vehicles are required. The age composition of Indian vehicles shows that new vehicles (upto 5 years old) constitute only about 37 percent of all registered vehicles with the remaining roughly two-thirds of total vehicle population being older. Among cars and jeeps, only 31 percent are five years or less in age. The data also shows that more than one-third of all vehicles are more than ten years old. In other words they belong to the period when there were no emission norms. Since the 2-wheeler segment was liberalized in the early 1980s, the percentage of 2-wheelers older than 15 years is much less compared to other categories. This pulls down the age profile for all vehicles since more than two-thirds of total vehicles consist of two wheelers. In all other vehicle categories about 40 percent of vehicles are more than ten years old while for buses this figure is nearly 50 percent. While the actual pollution caused by these old vehicles is difficult to calculate, it is obvious from this discussion that a more focused approach towards older in-use vehicles is needed. Further, control of emissions from in-use-vehicles is not in the domain of vehicle manufacturers but in the hands of end users as the vehicles are subjected to a variety of usage, fuels, lubricants and maintenance practices. Proper maintenance alone can reduce emissions considerably. In sum, a twopronged strategy for new and in-use vehicles, respectively, is called for. Policies that mandate clean fuels (with a heated controversy currently raging between CNG versus ULSD) are flawed since they mandate choice of technology and without considering costeffectiveness. Another major policy to address vehicular pollution in Delhi is to build a metro rail system, the first phase of which (55.3 kms.) is to be completed by March 2005 at a cost of 48.6 billion rupees. Supporters of the project claim that it will reduce the pollution load in the city by 258 metric tons daily (TOI 1999c). As discussed earlier, however, it is debatable whether this project will achieve the emission reduction envisaged (Mohan and Tiwari op. cit.) ECONOMIC APPROACHES FOR ADDRESSING VEHICULAR POLLUTION: AN ILLUSTRATION As an illustration we review an economic instrument for reducing new vehicles emissions in lieu of the current emphasis on mandatory emission standards (such as the Euro norms). Thus, with respect to new vehicles the central government could levy an environmental excise duty (EED) in proportion to tailpipe emissions . In other words, manufacturers would be charged EED on each vehicle in proportion to emissions of specific pollutants. Taxes based on this principle already exist in Germany, Japan, the 21. In general, excise duties are indirect commodity-based taxes levied by the central government. They are an important source of revenue. Indirect taxes in India account for almost 70% of total tax revenue. Two major indirect taxes are customs and excise duties which account for 31% and 37% of total tax revenue, respectively. Part of this revenue is ultimately shared with the states. 22. For India, EED was proposed by the Centre for Science and Environment to the Government of India in 1997 for possible inclusion in the Union Budget that year. 23. For instance, in the case of petrol vehicles where three pollutants are targeted, namely, hydrocarbons (HC), carbon monoxide (CO) and oxides of nitrogen (NOx), EED could be calculated as follows: EED = D1(HC) + D2(CO) + D3(NOx). D1, D2, and D3 are rates for EED (in Rs.) per gram/kilometer of HC, Netherlands, and several other countries (Table 3). In Germany, for example, the annual motor vehicle tax is structured so as to provide tax incentives to cars meeting EU emissions standards. Ideally, an emissions tax should be levied on the actual emissions generated by each vehicle per tax period. Two aspects of vehicular emissions, however, make it difficult to implement such a tax: the sources of vehicular emissions are mobile 25 and many. Thus, unlike emissions from stationary sources, a vehicle may travel hundreds of kilometers and emit in many different locations . In addition, there are many of them: Delhi alone has over three million registered vehicles. While these features do not change the basic prescription of internalizing the externality through emission taxes, they make it difficult to administer these taxes in practice. In addition, monitoring actual (in-use) vehicle emissions requires technologies like remote sensing, which have not been applied anywhere in the world so far. In view of the problems mentioned above, EED is recommended as a second best measure. It is easy to administer since it is to be levied on manufacturers of motor vehicles who are few in number. The government already has a machinery in place for the collection of excise duties on motor vehicles. The only difference between a conventional excise duty and EED is that while the former is ad valorem, the latter is levied on the emissions rate for new vehicles, e (see footnote above). The rationale for EED is that producers should be liable for producing an environmentally "dirty" good. It is, of course, true that vehicular pollution does not arise during the production of the good but during its consumption (use). It is also true that how polluting a vehicle is also depends on how it is maintained, and how intensively it is used (total annual emissions = emissions rate per km. x kms used in a year). Nevertheless, there are certain characteristics of a vehicle, such as its engine technology (2 stroke versus 4 stroke, fuel injection versus carburettor) and emissions control technology (e.g., whether it has a catalytic converter or not), that are determined by the producer, and which critically influence its emissions rate, e. In other words, the technology embodied in a vehicle inherently limits how "clean" the vehicle can be. In this context, EED attempts to achieve two objectives: (i) it attempts to recover from vehicle manufacturers the cost imposed by their product on the environment, and (ii) it encourages them to CO, and NOx emitted, respectively. We discuss this further below where actual rates for EED are recommended. A variant of this scheme was first proposed by Mills and White in 1978. 24. In other words, a first-best emissions tax is levied on in-use vehicle emissions at the rate of Rs. x per gram of pollutant, say t. Thus, the total tax bill (T) for a vehicle owner in a tax period is = tax rate (t) x emission rate of pollutant in grams/kilometer (e) x vehicle kilometers traveled (VKT). e is the pollution intensity of the product (the vehicle), whereas VKT is the level of output. For any given tax rate t, a vehicle owner can reduce the tax burden by reducing e and/or VKT. 25. It is for this reason that vehicular pollution is also often referred to as mobile source pollution. 26. In fact, this would be a reason for not having a uniform tax rate t but constructing it as a weighted average of differentiated tax rates on the basis of marginal social damage in different areas where a vehicle travels. The weights would be proportional to the VKT in different areas. For instance, a truck plying in Delhi and rural areas would be charged a tax rate that would be a weighted average of two rates. This procedure would undoubtedly be extremely complicated. 27. Some or all of the burden will be passed on to buyers through higher vehicle prices, who will then share the liability for environmental pollution. The burden sharing will, of course, depend on the price elasticity of demand (see discussion below). It should be noted that in the case of Euro norms as well part of the higher costs of compliance are passed on to consumers through higher car prices. produce cleaner products by giving them an economic incentive to do so--the lower the level of emissions the less is the amount of duty paid. In addition, rather than the all-or-nothing nature of emission standards at present, EED allows vehicle manufacturers to reduce emissions incrementally. Thus, they can reduce their tax bill for each gram/kilometer (or fraction thereof) of emissions reduced. In this sense, EED is a fiscal incentive that should be welcomed by vehicle manufacturers. EED does not mandate technologies for abatement. Manufacturers are free to choose whether and how they reduce emissions: in principle, it would be legal to sell any vehicle, regardless of how dirty it is, provided EED is paid. It is important to mention three limitations of EED, and highlight complementary policies that would be required to address some of the incentive effects of EED. Since EED is to be levied on new vehicles, it does not address pollution from in-use vehicles for which separate policies are required. Second, EED is a "blunt" policy instrument to reduce vehicular emissions, since it will also affect vehicles sold in areas where the marginal social damage (MSD) of pollution low--for instance, in semiurban and rural areas. While it is possible, in principle, to set different rates of EED for low/highly polluted areas, this would create enforcement problems. Finally, EED may increase the cost of new vehicles (as would Euro or other emission norms). This, of course, would depend on the costs incurred by manufacturers for vehicle modifications, and the extent to which these costs were passed on to buyers, which in turn depends on the price elasticity of demand. As a corollary the demand for used vehicles (and their prices) may increase. Thus, at the margin potential buyers of new vehicles could decide to postpone their purchase and hold on to their old more polluting vehicle longer, or first-time buyers could choose to buy a second hand vehicle rather than a new one. Separate rates are recommended for 2 and 3 wheelers and for 4 wheelers, respectively (Table 9). The basis for these rates is indicated in Annexure 1. For each vehicle type, there are two duty slabs based on an emissions cutoff, namely, emissions standards for the year 2000. In other words, to avail the lower duty slab, vehicles would have to meet the year 2000 standards for CO, and for HC+NOx. Within each slab, EED would be based on aggregate emissions of CO, HC and NOx. Thus, there is an element of progressivity built into the rate structure. We do not support the view that there should be EED exemption for vehicles that meet the 2000 emission norms since vehicle manufacturers should be encouraged to move faster towards 2000 norms and rewarded if they do so. Granting EED exemption, on the other hand, will not provide an incentive to reduce emissions below 2000 standards. It is also important to emphasize that the marginal contribution of all vehicular emissions to pollution is the same, whether it is a zero emissions vehicle going from zero to 1 gram/km or a "dirty" vehicle going from 19 to 20 grams/km--ceteris paribus, the extra gram from both vehicles impacts equally on air quality. Nevertheless, as we see in the table EED rates for vehicles meeting 2000 standards are only a tenth of those that do not. In addition, these rates could be increased each fiscal year in real terms. A gradual ratcheting up of EED is a crucial component of our recommendations because a key objective of EED is to encourage manufacturers to gradually phase-in changes in technology that result in cleaner vehicles. Manufacturers confronted with EED have three choices: (i) to pay the duty and carry on with business-asusual; (ii) to reduce emissions to the extent possible through minor modifications and invest in R&D (in 28. This is a standard result in all cases of differentiated regulation which create a bias against new sources of pollution (see Gruenspecht 1982). 29. For instance, by using the appropriate component of the wholesale price index (WPI) as the deflator. the shortand medium-run), and at the same time introduce new technologies such as 4-stroke engines for two wheelers, MPFI, etc. (in the long-run), and (iii) introduce new technologies immediately. It should be emphasized that EED does not simply allow a manufacturer to pay and pollute. If the rate of EED were high enough it would not make good business sense for a manufacturer to do so. This makes it all the more imperative that despite starting from a relatively low rate, EED should be increased continuously till it starts having the desired effect in terms of cleaner vehicles. In addition, manufacturers would have to provide a warranty that any vehicle sold would continue to meet its declared level of emissions for a certain number of years and/or mileage. Significant deviation between declared and actual emissions could make the manufacturer liable for extra EED on all vehicles of that make and model. Such measures would safeguard against manufacturers providing carefully engineered "cream puffs" for testing. Implementation of EED would provide flexibility to manufacturers in reducing vehicle emissions. As Mills and White noted when they recommended a similar scheme twenty years ago, "The manufacturers would no longer face all-or-nothing, zero-one deadlines for meeting standards. Instead, they would have proper incentives to plan and pursue research on emissions control in an optimum fashion.... They would no longer have incentives to collude, to delay progress on emissions control, or to bluff or engage in brinkmanship contests with government authorities. They would be rewarded for producing clean cars and for producing control devices that were durable and easily maintained. They would be able to trade off among pollutants and could choose low-cost strategies that were especially good at reducing some pollutants even if they could not reduce others. ..... The problem is important. The means of properly dealing with them are at hand. It is a shame they are not being used." (Mills and White, op. cit., p. 393, 402) COST EFFECTIVENESS OF POLICY OPTIONS Given the variety of potential policy measures for addressing vehicular emissions, some ranking and prioritization among them is required. Since a reasonably accurate cost benefit assessment (CBA) is not feasible given the absence data on environmental benefits of abating vehicular pollution, control measures are analyzed instead in terms of cost effectiveness. The difference between the two is that the latter simply ranks policies in ascending order in terms of cost per ton of pollutant reduced. A policy that has a lower cost per ton as compared to another is deemed cost effective. Unfortunately, a paucity of information and the scope of this paper do not allow us to construct such a ranking for policies for vehicular pollution abatement for Delhi, per se. Instead, we rely on studies done in other developing country cities that face similar problems and where similar options have been considered. In particular, we focus on a World Bank Transport Air Quality Project Management project for Mexico City where the cost effectiveness of interventions similar to the ones we have discussed for Delhi were estimated (World Bank 1992b). Broad categories of pollution control measures examined in the project were: • I&M programs • emission standards for new vehicles • retrofit of in-use vehicles with CNG, catalytic converters, cleaner engines, etc. • replacement of existing high-use vehicles with cleaner new ones • reformulation of petrol and diesel 30. A safeguard already in place to address this concern is the fact that all new vehicles already meet the 1996 emission standards that are a definite improvement over the 1991 standards. Thus, the 1996 standards provide a de facto pollution ceiling. • vapor recovery from petrol distribution and marketing • shutting down of (polluting) petrol refinery in downtown Mexico City • imposition of taxes on petrol to reduce demand and taxes on old vehicles to encourage turnover • paving of unpaved roads To estimate the effect of different emission control measures on pollutant emissions, first the counterfactual (annual emissions that would have resulted in the absence of that action) is estimated. For each action, emissions reduction from the baseline (common to all policies being evaluated) is estimated and compared to the annual cost for each measure. This cost is annualized total cost (capital and operating costs, repair costs and the value of lost time incurred in implementing that action). Cost effectiveness is then calculated by dividing annual cost by toxicity weighted emissions reduction. Policies can then be ranked on the basis of cost effectiveness (US$/ton emissions reduced). A prerequisite for such an exercise is to aggregate different pollutants using toxicity weights (based on their relative noxiousness) to arrive at total emissions, expressed in toxicity weighted tons/year. The reason is that the impacts of emission control measures vary in terms of which pollutants are reduced, and by how much. Thus, aggregation across pollutants is necessary to estimate the cost per ton emission reduced for each control measure. In other words, while costs of all measures are expressed in similar units (rupees) their effects (pollutant reduced) should also be in similar units to allow comparison across measures. One could try and side step this issue by simply comparing policies by pollutant, e.g., cost per ton CO reduced, etc.. The problem with this approach is that any control measure generally reduces more than one pollutant and apportioning the cost of the measure across pollutants becomes difficult . Table 10 shows the cost-effectiveness of selected control measures in Mexico similar to the ones considered above for Delhi. The figures are in ascending order with those in parentheses showing negative marginal cost. Thus, retrofit of minibuses with CNG actually entails a negative marginal cost since annual cost savings on fuel outweigh the capital cost of conversion. The same is true for CNG retrofit for gasoline (petrol) trucks. The table above throws up some interesting results. First, CNG retrofit of buses and trucks is extremely cost-effective. Second, given economies of scale, centralized I&M programs are more cost effective than decentralized ones. Further, targeting high-use vehicles (which are presumably also higher emission vehicles) through I&M, is more cost effective than targeting passenger cars. Finally, the incremental cost of reducing the sulfur content of diesel increases quite steeply. All of these findings are highly relevant for control measures being implemented or under consideration in Delhi. 31. This is essentially a problem of apportioning costs of joint products. The relative weights used in the Mexico project were: lead (85), NOx (4.7), PM10 (2.3), VOC (1.8), SOx (1.4), dust (0.9), and CO (0.04). These weights are relative--they do not add up to 100. 32. The added capital cost of CNG conversion is spread over a period of 5 years (useful life of retrofit) in the Mexico study. In the case of Delhi too, if we take the price difference between diesel and CNG conservatively at Rs. 4/litre, and the fuel efficiency of buses at 12 kms./litre, and an annual usage as 30,000 kms., the break-even period is 3 years (given an investment of Rs. 30,000 for CNG conversion). If this cost is spread over 5 years as in the Mexico study, then the annual cost in Delhi too would be negative (Rs. 4,000). This would then need to be divided by tons of emissions reduced to arrive at the cost per ton. HEALTH BENEFITS OF IMPROVING AIR QUALITY IN DELHI Finally, we turn to an examination of the health benefits from improving air quality in Delhi, since the primary rationale for reducing vehicular emissions is the health benefits from doing so. Table 11 lists WHO and USEPA standards on safe exposure levels for different air pollutants. (NAAQS for India are shown in Table 7). With respect to Delhi, particulate matter (PM) is the pollutant of primary concern with vehicles being responsible for a substantial share. As in the case of cost effectiveness, once again there is inadequate information for Delhi to estimate the marginal effect of vehicular emissions, per se, on the concentration of various pollutants mentioned above . At best, we can examine existing estimates of dose-response relationship between ambient air quality and health endpoints, namely, mortality and morbidity. In other words, given the current state of data we can simply relate reductions in the concentration of, say PM10 (whatever its source may be), to a decline in mortality in Delhi (i.e., a dose response relationship). It is not possible, however, to ascertain the relationship (except in a heuristic manner) between ambient concentration of a given pollutant and the actual amount emitted by vehicles. Even with respect to dose response studies there exists only one estimate that uses actual data for Delhi (Cropper et al. 1998). Other studies on health effect of air pollution use dose response functions for other countries, typically the United Sates. Brandon and Hommann (1995), for instance, extrapolate dose response functions from developed countries to estimate mortality and morbidity due to ambient air quality exceeding WHO guidelines in 36 Indian cities, including Delhi. The pollutants considered are PM, SO2, NOx, and lead. Ozone and indoor air pollution are not considered due to lack of data. They estimate that over 40,000 premature deaths would be avoided if pollutant levels in these cities were reduced to the WHO annual average standard. According to them Delhi alone accounts for 7,500 or almost a fifth of premature deaths. In addition, there are added morbidity effects of air pollution such as restricted activity days (RADs) and/or respiratory symptom days (RSDs). Brandon and Hommann also monetize estimates of premature deaths and sickness by using valueof-life and medical treatment cost figures from the United States (adjusted for Indian income levels). Thus, health costs of air pollution are estimated to be in the range of $0.5 to 2 billion (Table 12), with PM10 and SO2 accounting for over 95 percent of the total. The cost of health impacts for Delhi alone is $100-400 million. Using a similar approach, a more recent study arrives at much higher estimates: 885 to 4,250 billion rupees (TERI 1998). The main reason for these extremely high values is the use of total exposure as an indicator of air pollution. In any event, as mentioned above both sets of estimates should be taken as broad indicators and not as precise numbers. Cropper et al. focus on actual TSP concentrations and mortality in Delhi during the period 199194 and find that "a given reduction in TSP reduces non-trauma deaths in Delhi by a smaller percentage than predicted by U.S. studies," (op. cit. p. 2-3, emphasis added). In fact, they find that a 100 microgram ( g/m) reduction in TSP concentration in Delhi leads to a 2.3 percent reduction in deaths--about onethird of the effect found in the U.S. However, since the age distribution of these deaths is very different in Delhi, that is, much younger people die as compared to the U.S., an improvement in air quality would 33. Given the non-uniformly dispersed nature of vehicular pollutants, not only would this require a complete emissions inventory (including traffic census, origin-destination surveys, etc.), but also atmospheric dispersion data. 34. They use the accepted metric (computed from U.S. studies) that a 10 μg/m change in PM10 leads to a one percent change in mortality. Thus, they estimate that a 141.16 μg/m change in PM10 (which would reduce PM10 to WHO levels), would avoid 7,490 deaths. save more life years than in the U.S. on average. Interestingly enough, Cropper et al. estimate that a reduction in PM10 concentration of the magnitude envisaged by Brandon and Hommann, would result in only 3,430 avoided deaths, less than half of that predicted by the latter (see footnote above). Given that Cropper et al. use actual data for Delhi to estimate the dose response function their figures would seem more plausible. With respect to the role of vehicular emissions in air quality, it was noted earlier that about twothirds (67%) of the pollution load in Delhi was from this source. Applying this proportion to the Cropper et al. estimate of 3,430 avoided deaths one could argue that about 2,300 premature deaths annually in Delhi could be due to excessive vehicular emissions. This back-of-the-envelope estimate could thus serve as an approximate measure of the health benefits of vehicular pollution abatement in Delhi. TABLE 1. Taxonomy of Policy Instruments to Reduce Pollution Policies Direct instruments Indirect instruments Market-based instruments (MBIs) Effluent/emission charges; tradable permits; deposit-refund systems Input/output taxes and subsidies; differential tax rates Command and control measures (CAC) Emission regulations (Sourcespecific, nontransferable quotas) Regulation of equipment, processes, inputs, and outputs Government production or expenditure Regulatory agency expenditures for purification, cleanup, waste disposal, and enforcement Development of "clean" technologies TABLE 2. Taxonomy of Policy Instruments to Control Motor Vehicle Emissions Market based instruments Command and control regulations Direct Indirect Direct Indirect Vehicle • Emissions fees • Tradable permits • Differential vehicle taxation • Tax allowances for new vehicles • Emission standards • Inspection & maintenance of emissions control systems • Mandatory use of cleaner vehicles • Scrapping of old vehicles Fuel • Lead banking • Differential fuel taxation • High fuel taxes • Fuel composition • Phasing out of dirty fuels • Fuel economy standards • Speed limits Traffic • Congestion charges • Parking charges • Subsidies for less polluting modes • Physical restraint of traffic • Designated routes • Restraints on vehicle use • Bus lanes & other priorities TABLE 3. International Experience with MBIs for Control of Vehicular Emissions Australia Increase in petrol taxes. Price differential between leaded and unleaded petrol in favor of latter. Austria Introduced environmental tax on car registration in 1992 based on price of new car and its average petrol consumption. Simultaneously, the VAT rate on new vehicles was reduced. Belgium Cars not satisfying emission standards have higher tax rates. Britain Various vehicle taxes including: sales tax on new cars (17.5%), and an annual vehicle excise duty. Taxes on commercial vehicle sales, ownership and use are higher and more complex than taxes on private cars (vehicle excise duty is based on number of axles and weight). Tax differential between leaded and unleaded petrol has increased over time and now stands at 4.8 pence per litre. The proportion of unleaded petrol in total sales rose to 50% in 1993 compared to a negligible share in 1986. Cost savings in buying unleaded petrol outweighed the fixed costs of converting cars to run on unleaded petrol for all except those doing few miles/year. Chile (Santiago) In 1990, the city allocated bus transit rights and auctioned routes based on fares and types of buses. A tradable permit system for industry was also introduced on fixed sources, with emissions exceeding 1,000 m/hr. Emission tradeoff, however, is not allowed beyond a day, nor across seasons, and property rights are not well defined. Canada (provinces) British Columbia has a tax of C$5 per lead acid battery and some provinces have charges on tires. Leaded petrol has been phased out since December 1990. Denmark Since the mid-1980s, leaded and unleaded gasoline have differential tax rates. In 1994, the market share of unleaded petrol was nearly 100%. Finland Environmental taxes on cars, based on whether or not they are equipped with a catalytic converter. Tax differentiation in favor of lead-free petrol was introduced in 1986. By 1992, the market share of unleaded petrol was 70%. Since 1993, excise tax on diesel favors sulfur-free diesel. Germany Annual motor vehicle tax is structured so as to provide tax incentives to cars meeting EU emission standards. Rates are differentiated by age of the car. Since 1994, diesel engine cars face an additional tax compared to petrol cars. The duty differential between leaded and unleaded petrol is DM 0.10 per litre: market share of unleaded in total sales rose from 11% in 1989 to 80% by 1993. Greece A 1990 law provided exemption from the road surtax and the initial lump sum tax for five years for new cars fitted with a catalytic converter. Exemption was given only when the buyer had scrapped his old car. About 300,000 old cars were scrapped and pollution considerably reduced. In addition, there is a mandatory deposit-refund on car hulks older than 15 years. The system is combined with a tax differentiation, and the refund is payable only if a new car is bought that satisfies EC emission standards. Hungary In May 1992 a tax of 0.7% of the price was introduced on motor vehicle fuels. The revenue is earmarked (through the Central Environmental Fund) mostly for environmental expenditure relating to vehicular traffic, and the remainder for nature conservation and to raise environmental awareness. The tax rate on lead-free petrol is lower than the leaded variety, and consumption tax for new cars with catalytic converters has a discount of Forint 50,000. Ireland The excise duty on leaded petrol is higher than that on the unleaded petrol. TABLE 3. International Experience with MBIs for Control of Vehicular Emissions Japan Tax deductions are available for cars with low emissions, electric cars and cars running on alternative fuels. Luxembourg Excise and VAT rates higher on leaded petrol than on unleaded petrol by a margin of 2-3%. Mexico (Mexico City) In 1990 the price difference between leaded and unleaded gasoline was reduced from 40% to 11% (leaded gasoline being cheaper than the unleaded). By June 1994, the excise tax on leaded petrol was higher than that on the unleaded (though the VAT rate was 10% on both). Netherlands In 1988, environmental charges were introduced on fuels, and in 1990, a carbon (CO2) component was added to the tax base. Sales tax on cars complying with future European standards reduced (and raised for dirtier models). In the 1980s, in the small car market (two-thirds of total market), the percentage of future European standard compliant cars increased from 37% to 70%. Unleaded petrol was made cheaper than leaded petrol--within two months unleaded petrol completely replaced normal petrol in service station forecourts. The carbon tax on motor fuels is too low for significant incentive effects but its revenue funds government environmental investments. New Zealand Fee is levied on lead added to gasoline at the rate of NZ$0.066 (US$0.039) per gram--in effect preferential tax treatment of unleaded over leaded petrol. Norway Taxes are based on the sulfur, carbon and lead content of fossil fuels. The CO2 tax was introduced in 1991 and its revenue represents an important element of the national budget, e.g. in 1994 it contributed 6 billion NKr to state revenues. Since 1986 basic petrol tax differentiates between leaded and unleaded petrol. In 1995, rate differential was introduced for leaded petrol based on the emissions of lead per litre. Introduced mandatory deposit-refund system for car hulks in 1978: new car buyers pay a deposit and a larger amount is refunded on return to an official recovery site. Almost 90-99% of car hulks are returned, and the revenues are used for refunds and financial assistance for collection, transportation, and scrapping facilities. In 1986, the city of Bergen, Norway, introduced a toll system for motorists entering the city between 6 am to 10 pm on weekdays, to reduce congestion and pollution. The rate is differentiated by the loading capacity of vehicles. The system can be improved by designing higher tolls for the peak hours only. The toll revenue (59 million Nkr in 1988) is used to finance the construction of by-passes through the surrounding mountains in order to keep long-distance traffic away from the city center. After the bypasses are completed, tolls will be removed. Portugal The tax differential in favor of unleaded petrol being phased out since unleaded petrol sales as a proportion of total sales are about the EU average. TABLE 3. International Experience with MBIs for Control of Vehicular Emissions Singapore Imposed large “additional registration tax” (besides the flat registration fee) levied as a percentage of cost of the car to restrict ownership (and thereby traffic congestion): rates were 100% in 1976 and 150% since 1983. The tax is reduced if an old vehicle is scrapped when a new one is purchased (to discourage older, more polluting vehicles). In 1990, Singapore also introduced a marketable permits system for rights to own motor vehicles ("certificates of entitlement"). By mid-1992, the vehicle quota premium for standard cars rose to US$ 12,000. This and complementary policies (e.g., ALS) restricted growth in car ownership and traffic. Singapore implemented an Area Licensing Scheme (ALS) to reduce traffic congestion in 1975. Vehicles entering the restricted zone (620 hectares) require a licence on a daily/monthly basis for peak hours. By 1989, the fee was highest for company cars, less for private cars/taxis, and least for motorcycles. The fine for non-compliance was about ten times the daily licence price. In 1988, the average violations/day were 100 while the number of licences/day issued was 12,000. The restricted zone also has higher parking fees and strict enforcement at 28 points of entry. Although car traffic rose after 1977, private car traffic was 64% below pre-ALS flows by 1982 in peak hours (despite growth in income and employment). Complemented with other policies, ALS helped reduce air pollution in the city. South Korea Introduced environmental quality improvement charges (EQIC), notably emission charges, in 1991. The charges were imposed on large facilities (e.g., leisure complexes, hotels, department stores), and vehicles (buses and trucks using diesel fuel) that discharge air and water pollutants. Sweden Product taxes on all fossil fuels since 1991. In 1993, gasoline tax revenue was more than 40% of environmental taxes (latter constituted 6% of total tax revenue). With a tax differential of 0.51 SEK/litre between leaded and unleaded gasoline in 1993, the consumption of former was reduced to less than half of the total. In 1991, diesel was classified into 3 categories by pollution potential, and a special diesel fuel tax differentiated by type of diesel was levied. At the same time, there was a tax rebate for producers of the two types of cleaner diesel since 1991. By early 1993, about 75% of total diesel sales constituted cleaner types of diesel (compared to 1% in 1990), and 25% were of the standard variety. Vehicle taxes (sales and annual taxes) are based on vehicle weight and environmental characteristics. Special tax on cars without catalytic converters, and subsidy on new cars with catalytic converters succeeded in introducing low pollution vehicles at a rate faster than normal. There is also a mandatory deposit-refund for car hulks. Switzerland With a tax differential of ECU 0.04/litre in favor of unleaded petrol over leaded, the market share of unleaded was 65% in 1992. Taiwan Started promoting unleaded gasoline in 1984. In 1989, the price of unleaded gasoline was cheaper than the leaded by a margin of NT$1/litre. Complemented by other regulations on new cars and emissions, the market share of unleaded gasoline increased from 18.7% in 1990 to 51.84% in 1993. The average lead content in ambient air in Taipei decreased from 0.46 g/m in 1989 to 0.18 g/m in 1992. Thailand In 1991, began subsidization of unleaded gasoline to make it slightly cheaper than leaded, in order to reduce atmospheric lead content (1990 USAID study estimated a loss of upto 700,000 IQ points collectively of Bangkok children by age 7, due to elevated blood lead levels). A surtax on leaded gasoline finances the subsidy on unleaded. In Bangkok, unleaded gasoline accounts for 40-50% of the gasoline market. TABLE 3. International Experience with MBIs for Control of Vehicular Emissions United States The federal government introduced a gasoline tax in 1932, while some states already had such a ax as early as 1919 (Oregon). The gasoline tax served as the most important source of revenue for states in 1930s and 1940s. Most of the revenue is earmarked for transportation programs (road/highway construction and maintenance). Federal taxes on motor vehicle usage include a 12% manufacturers excise tax on trucks and trailers, annual use tax on heavy vehicles like trucks, excise tax on tires weighing over 40 pounds, and a “gas guzzler” tax on automobiles with unsatisfactory fuel economy ratings. States have a range of auto taxes and fees. In 1989, revenues from state motor vehicle and license fees were $10.15 billion. In Rhode Island, US, automobile batteries have a mandatory deposit of $5, paid at the time of sale. The dealers hold the deposit (returned if a used battery is returned within seven days of purchase), and are required to return 80% of the deposit funds they hold to the state. The system is considered to be a success. FIGURE 1. Urban Passenger Transport Emissions: Major Determinants and Linkages Source: Pargal and Heil 2000 FIGURE 2. Policies Targeting Urban Passenger Transport Emissions and Their Determinants Policies targeting total emissions Determinants Policies targeting emissions per liter of fuel Determinants Policies targeting liters per passenger kilometer Determinants Policies targeting passenger kilometers travelled Emission taxes Emission permits Fuel efficiency Fuel economy standards Fuel taxes/pricing Fleet size New vehicle quotas Cost of vehicles Licensing / registration fees Paving roads Fuel type Fuel quality -lead contentl -sulf content -volatility -oxygenation Emission standards Fuel quality standards -limited lead content -limit sulphur content -volatility limits -cleaner octane booster Engine type Promote cleaner engines such as 4-stroke Number of trips Urban density/zoning Road pricing/user fees Parking fees No-car zones No-car days Fuel taxes Engine type Technology -catalytic converter -fuel injection -turbocharging