Tax the bad and fund the good to cut toxic risk from diesel vehicles

• New analysis from CSE shows even after diesel price deregulation wide tax differential remains. This can continue to fan dieselisation if additional steps are not taken to disincentivise dirty diesel 
• Diesel fuel and vehicle technology must meet the cleanest benchmark to cut toxic risks from all uses. Notify emissions standards roadmap immediately to leapfrog to clean diesel (10 ppm sulphur) to enable Euro V and Euro VI standards
• Implement fiscal strategy to create clean fuel fund to enable refineries to meet their promise of clean fuel within a tight deadline.
• India’s fuel taxation and pricing policy cannot remain insular from public health and climate concerns when pollution levels are increasing rapidly across cities

New Delhi November 28, 2014: The Centre for Science and Environment expresses deep concern over continued dieselization based on outdated vehicle technology and dirty diesel. Though diesel price deregulation and the consequent lowering of price differential between petrol and diesel has made an immediate dent in the rate of increase in dieselization of car segment, low tax diesel continues to lure consumers. Added to this is ever increasing demand from road based freight and bus transport that has made transport sector the largest user of poor quality diesel. This is fouling up the air and our lungs. CSE demands additional tax measures to control dieselization and create clean fuel fund to introduce clean diesel quickly to cut public health risks.

The air quality data available from the Central Pollution Control Board (CPCB) shows diesel emissions related pollutants – particulate matter and nitrogen oxides are a serious concern in Indian cities. While in 2009 about 102 cities monitored exceeded the standard for PM10, in 2012 this has increased to 137. In 2009 about 58 cities were classified as critically polluted for PM10 level, but in 2012 this has increased to 92. Similarly, in 2009 about 10 cities exceeded the standards for nitrogen dioxide. This increased to 13 cities in 2012 and more have come into the bracket of high pollution. In the meantime, Delhi has begun to report significant increase in pollution level this winter. Since October the PM2.5 levels have remained significantly elevated and during smog episodes the levels have gone as high as 3 to 4 times the standards.

India cannot afford to dieselise at the current level of fuel and technologies. Cheap diesel creates incentive for more driving and for bigger cars. This results in more fuel use; more toxic pollution per km; more warming per litre of carbon rich diesel burnt; and, more warming due to its heat absorbing black carbon emissions. The WHO has branded diesel particulates as class I carcinogen for its strong link with lung cancer. Diesel related pollution -- tiny and toxic particles and nitrogen oxides -- are increasing in Indian cities. There are also severe energy impacts of steady shift towards bigger diesel cars and SUVs. The price of diesel does not reflect the polluter pay principle.

The key highlights of CSE assessment are as follow:

• Leapfrog emissions standards to cut the toxic risk: It is shocking that nearly six months have lapsed after the Auto Fuel Policy Committee has submitted its recommendations on emissions standard roadmap for vehicles and fuels to the Union Ministry of Petroleum and Natural Gas but no action has been taken to further tighten the recommendations and notify the roadmap. As of today there is no legal mandate for the automobile industry and the refineries to meet more improved emissions standards in a time bound manner. This is unacceptable at a time when air pollution has emerged as the fifth largest killer and rapid shift towards diesel cars and SUVs is compounding particulate and nitrogen oxide pollution in cities; and inciting energy guzzling. India cannot afford to dieselise based on poor quality of diesel and put public health at serious risk. The current emissions standards of Euro IV and Euro III are 9 to 14 years behind Europe. Any further delay will make India a laggard in the global automotive sector by 2020.
• Diesel price deregulation, though a positive step forward, should not breed complacency about this being sufficient to control dieselization: While it is true that people can be less sensitive to absolute level of transport fuel prices in the short run and may even buy and drive more if the income levels rise, they are however immensely sensitive to price differences between fuels. If cheaper fuel is available in the market like cheap diesel, there will be a substantial shift towards that. This danger continues to lurk given the tax differences between diesel and petrol.
• Fuel tax differential is still a lure. Equalise the fuel taxes: It is possible to do so by adjusting both petrol and diesel taxes in a revenue neutral manner. Small cut in petrol excise can be easily compensated by small increase in diesel excise. Studies have shown that the trucking -- which is often cited as a reason for not changing diesel prices -- has higher elasticity for the trend in GDP and less for diesel prices. The trend in fuel pricing shows that after complete petrol price deregulation in 2010 when the international oil price pressures had skewed around 2011 and after, the price differential between price differential between petrol and diesel was the highest at Rs 24.73/ litre or 60.45 per cent (taking year end prices). After gradual diesel price deregulation started in January, 2013, the price differential between the two fuels reduced further to Rs 19.91 or 41.78 per cent differential. Post complete deregulation in October, 2014 diesel prices fell to Rs 53.35. The current price differential in Delhi is Rs 10.93 or 19.65 per cent. This is still substantial to make diesel fuel an attractive choice. The tax differential also acts like a ‘subsidy’ for diesel cars. As diesel is easily substitutable with petrol in cars, the revenue losses from each litre of diesel that replaces a litre of petrol in a car is also enormous.
• Disincentivise diesel cars with additional taxes: Principally low tax fuel and polluting fuel should not be encouraged for use in personal cars. Discourage dieselization of the car segment that has other choices of fuels. An additional tax upfront at the time of purchase and also an annual tax can be effective in nullifying the perverse benefits for car owners and users stemming from low taxed diesel. Furthermore, state taxes can be rationalised to address this issue. The market information suggests that diesel price deregulation coupled with economy slow down may have arrested the increasing trend in the share of diesel cars in new car sales. But the global oil prices are also down now. If that gets rising again and the price difference between diesel and petrol further widens the dieslisation trend is likely to skew again. This demands additional tax measures not only to control dieselization but also to push the market towards clean diesel for all segments of vehicles including trucks and buses. Moreover, the growth rate of diesel car segment has been particularly high over the last few years. When the overall market had slowed down during 20112-13, the SUV sales had increased by about 43 per cent. If the diesel cars maintain a growth rate of at least 20 per cent it will be double that of the existing fleet soon. In India several official committees have asked for special and additional taxes on diesel cars to neutralise the incentive of cheaper diesel fuel.
• Need Clean Fuel Fund for rapid roll out of clean diesel: Fiscal strategies are needed to meet the cost of refinery upgrades to meet clean fuel benchmark of 10 ppm sulphur fuel and related parameters by 2018-19. While the refineries will have to be held accountable for adhering to a strict deadline, additional steps can also be taken to help fund the transition. The Auto Fuel Policy Committee recommendation has already included this strategy. The committee has recommended a few measures including differential pricing of Euro III and Euro IV fuels and additional cess on fuels to generate additional revenue and create a dedicated Clean Fuel fund. These and more measures as practiced globally including differential taxation of clean and dirty fuels, capital subsidy to the refiners etc, can be explored and adopted for implementation in India.
• CSE has assessed several possible methods of raising additional funds: These include equalising the excise duty of petrol and diesel fuels; clean fuel cess; and additional duty on diesel cars. These have enormous potential to generate additional revenue that can be taken to the Clean Fuel Fund for framing fiscal support to clean fuel production and roll out clean diesel quickly to implement Euro V and Euro VI emissions standards within a tight time frame. Only at these levels of emissions standards effective emissions control technologies are possible in diesel vehicles to reduce toxic and warming particulate matter.
• Learn from Europe’s experience: The European experience shows that dieselisation can not be the plank for meeting climate and clean air goals. As much as 50-70 per cent dieselisation of car segment has been reported in different countries of Europe because of price difference between petrol and diesel fuels and CO2 mitigation efforts. Europe has neither been able to meet its CO2 target nor its cities been able to meet air quality goals. In a most stunning development last week is the landmark judgment from Court of Justice of European Court that has reinforced the obligations of all member states to have clear action plan to meet the air quality standards. The United Kingdom was dragged to the court by the civil society groups for breaching Air Quality Directives. Since 2010 about 40 of its zones have recorded nitrogen oxide levels higher than the standards and diesel vehicles have been implicated for it.
• Other governments taking tough measures on diesel: Several developing countries have discouraged diesel cars. In Brazil diesel cars are not allowed because of the policy to keep taxes lower on diesel. In China, taxes do not differentiate between petrol and diesel fuel. Diesel cars are less than 1 per cent of all cars in China. Beijing does not allow diesel cars as a pollution control measure since 2003. Sri Lanka has imposed several times higher duties on diesel cars compared to petrol cars and have reduced diesel car sales. In Denmark, Germany and several other European countries the tax on diesel cars including annual taxes is higher than the petrol cars. Also in cities like Paris diesel car operations are not allowed to reduce the peak pollution levels during severe smog days. This brands diesel cars as more polluting.

India needs to move quickly to cut the toxic risk from dieselization. Costs of improving vehicle technology and refinery cannot be an excuse to delay the timeline. Instead, implement fiscal measures to leapfrog to clean emissions quickly to protect public health. Fuel pricing and tax reforms cannot happen in isolation, cut off from the concerns over health, energy and climate.

For more on this, please contact Souparno Banerjee at souparno@cseindia.org / 9910864339.