The Role of Pricing, Taxation and Incentives for Introducing

Cleaner Fuels in Asia

Grant Boyle, ADB Consultant

May 22, 2006, Manila, Philippines

Developing Fuel Quality Roadmaps for Conventional Fuels in Asia

Pricing, taxation and incentives and cleaner fuels governance/policy

RegulationsFuel Specifications & Standards

Regulatory Framework

-Industry structure

-Pricing regime

Market Instruments

-Differential fuel taxation/pricing

-Indirect impact of clean vehicle incentives

-Direct subsidies /Incentives

Stakeholder Consensus Building

-Public outreach/promotion

-Government coordination & negotiation

What are the sources of cleaner fuel supply in Asia?

Country Refinery Capacity1000s B/D Day 2004

China 5818 ( new capacity planned)

Japan 4531

South Korea 2598

India 2513

Singapore 1255

Taipei China 1159 ( new capacity planned)

Indonesia 1056 ( new capacity planned)

Thailand 876

Australasia 864

Malaysia 544*

Philippines 333*

Vietnam ( new capacity planned)

Domestic Refinery Upgrades?

Regional Imports? (Singapore, South Korea, Chinese Taipei, Japan, Australia, India…)

Global Imports? ( Middle East…)

Source: BP Statistical Review 2005; *APERC, 2005

RegulationsFuel specifications & standards

Regulatory Framework

-Industry structure

-Pricing regime

Market Instruments

-Differential fuel taxation/pricing

-Indirect impact of clean vehicle incentives

-Direct subsidies /Incentives

Stakeholder Consensus Building

-Public outreach/promotion

-Government coordination & negotiation

Country Industry structure Dominant Enterprises ( public ownership%)

Bangladesh public Eastern Refinery Ltd.

HK China (no refineries)

India public/private Reliance, Indian Oil Corporation (82%), Hindustan Shell

Indonesia public/ transitional Pertamina (100%), BP, Petronas, Shell, Conoco

Japan private Nippon Oil, Cosmo/ J. energy, Showa Shell/ Exxon, Tonen/Idemitsu

Malaysia public/private Petronas (100%), Shell, Exxon, Conoco

Pakistan public/privatePakistan State Oil (49%), PRPC, Iranian Oil, BP, ERI

Philippines public/private Petron (40%), Pilipinas Shell Caltex

PRC public/ private CNPC (90%), Sinopec (55%), CNOOC, BP, Exxon, Total

Singapore private Shell, Exxon, Singapore Refining Co.

South Korea private SK Corp., LG-Caltex, Hyundai

Taipei China public/private Chinese Petroleum Corp.,Formosa

Thailand public/private PTT (68%), Shell, Esso (Exxon)

Vietnam (no refineries)

Regulatory Framework: Industry Structure

Source: US DOE, 2005; APERC, 2005; Petroleum Intelligence Weekly, 2005

Regulatory Framework: Pricing &Tax

Source: Metschies, 2005; APERC, 2005

CountryGasoline$/liter Nov. 2004

Diesel$/liter Nov. 2004

Pricing System Taxation/Subsidy RegimeCrude (Brent) =$0.27/liter

Bangladesh $0.59 $0.34 controlled/transitional low taxation

HK China $1.54 $1.00 market high taxation

India $0.87 $0.62 transitional medium taxation

Indonesia $0.27 $0.18 controlled/transitional subsidies

Japan $1.26 $0.95 market high taxation

Malaysia $0.37 $0.22 controlled/transitional subsidies

Pakistan $0.62 $0.41 transitional low taxation

Philippines $0.52 $0.34 market low taxation

PRC $0.48 $0.43 controlled/transitional low taxation

Singapore $0.89 $0.55 market medium taxation

Sri Lanka $0.72 $0.41 transitional medium/low taxation

South Korea $1.35 $0.95 market high taxation

Taipei, China $0.71 $0.55 transitional medium taxation

Thailand $0.54 $0.37 transitional low taxation

Viet Nam $0.48 $0.32 controlled/transitional low taxation

Impact of Rising Oil Prices

• In October 2005, Indonesia increased diesel prices 105% Rp 2100 ($US 0.22) to Rp 4300 ($US 0.46) and gasoline prices from 88% Rp 2400 ($US 0.26) to Rp 4500 ($US 0.48).

• In 2005 Malaysia forewent a fuel sales tax, which amounted to RM7.9 billion (US$2.2 billion). As of March 2006, pump prices had risen 40% for gasoline and 100% for diesel since October 2004.

• China: PetroChina lost 19.8 billion Yuan (US$2.4 billion) on refining and fuel sales in 2005.

In 2005, the government gave Sinopec a payment of Rmb9.42 billion (US $1.18 billion) to compensate for its refining losses.

2006 introduced a ‘special revenue charge’ on crude oil producers; varies according to international crude prices between 20% and 40% on prices exceeding US$40 per barrel.

Implications of Regulatory Framework for Cleaner Fuel

• Controlled pricing regimes can preclude opportunity to pass costs of cleaner fuels on in consumer prices.

• Does preferential tax treatment for diesel have cleaner fuel implication? (Also, subsidies to kerosene may encourage fuel adulteration).

• Less competitive, protected markets will not move to cleaner fuels unless mandated by government or may not be prepared to do so.

• Industry structure and ownership influences financing arrangements.

RegulationsFuel specifications & standards

Regulatory Framework

-Industry structure

-Pricing regime

Market Instruments

-Differential fuel taxation/pricing

-Indirect impact of clean vehicle incentives

-Direct subsidies /Incentives

Stakeholder Consensus Building

-Public outreach/promotion

-Government coordination & negotiation

Cleaner Fuel Incentives

Source: HM Customs and Excise,2000- in Environment Canada, 2000

1 pence per liter

2 pence per liter

3 pence per liter

Cleaner Fuel Incentives in Asia

HK China 1991: ULG average HK$ 0.52/ liter ($US 0.07) less tax than LG over 8 years

Malaysia 1991: ULG retail price 2.65% lower than LG

Philippines 1999: ULG 1 peso/liter ($US 0.03) less than leaded

PRC 2000: LG tax raised to maintain same price as ULG

Singapore 1991: LG raised 0.12 $S/liter ($US 0.07) over ULG

Thailand 1991: ULG 1 THB/liter ($US.0.04) less excise tax than LG

HK China 2000: 50 ppm diesel HK$ 0.89/liter ($US 0.11) less than 500ppm diesel

Japan 2004: direct subsidy US$90 million over 3 years to 2006, accounting for 2-4% of actual industry investment for 10ppm refining capacity.

PRC 2006: Higher recommended prices: diesel ( 340 yuan/ton) and gasoline ( 360 yuan/ton) prices in Beijing over ( 150yuan/ton) for diesel and ( 250yuan/ton) for gasoline country-wide to cover costs of Euro 3 standards in Beijing.

South Korea 2004: 50ppm 277 won/liter ($US0.27) less sales tax for 1 year

Taipei China 2004: 50ppm $US 0.3 less tax

Unleaded

Euro Spec/ULSD

Cleaner Vehicle Incentives

Tax Incentives Plan for Euro 4 Diesel Vehicles in Singapore1 Jun 04 – 31 Dec 05

1 Jan 06 – 30 Sept 06

1 Oct 06 – 31 Dec 07

1 Jan 08 onwards

Euro IV Diesel Passenger Cars

Special tax

•6 times the road tax 4 times the road tax

Euro IV Diesel Taxis

ARF rebate

•100% OMV 80% OMV 40% OMV No ARF rebate

Euro IV Diesel Buses & Commercial Vehicles

ARF rebate

5% OMV 5% OMV 5% OMV No ARF rebate

Source: Land and Transport AuthorityOMV (Open Market Value) is the basic price of the vehicle determined by customs ARF (Additional Registration Fee) is typically 110% of OMV

Cleaner Vehicle Incentives in Asia

Country Vehicle Incentive

Japan 2001: 25%-75% tax reduction for gasoline and diesel vehicles meeting higher NOX emissions standards.

PRC 2005: 4000 RMB ($US 495.00) subsidy for scrapped or dismantled buses and trucks used for 8-10 years.

Singapore 2006: Euro 4 taxis get 40% rebate on Additional Registration Fee and Euro 4 buses and commercial vehicles 5%. Euro 4 passenger cars 30% lower rise in Special Tax than non Euro 4 vehicles.

2003: Additional Registration Fee (assessed as 110% of market value of the vehicle) exemption for Euro 4 buses and commercial vehicles, and taxis.

Conclusions

• The global experience shows that regulations are instrumental in establishing the market for cleaner fuels. Tax advantages and incentives have helped accelerate and support cleaner fuels globally and in Asia, but have not acted as substitutes for regs.

• Asian countries have managed to introduce cleaner fuels quickly without incentives, especially importing countries.

Conclusions

• Market pricing that allows refiners to pass higher costs of cleaner fuels on to consumers may be the most important fuel pricing policy issue concerning cleaner fuel investments. High international prices in recent years have illustrated the non-sustainable nature of subsidized fuel prices in general, as well as the feasibility of letting retail prices rise, but also the challenges of fuel poverty.

• Over the short term, advantageous pricing and taxation for cleaner fuels can be adopted, based on existing industry structures and pricing regimes.

Thank you

boyle@hq.unu.edu