1. 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

2. Pricing, taxation and incentives and cleaner fuels governance/policy Regulations Fuel 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

3. What are the sources of cleaner fuel supply in Asia? CountryRefinery Capacity 1000s B/D Day 2004 China5818 ( new capacity planned) Japan4531 South Korea2598 India2513 Singapore1255 Taipei China1159 ( new capacity planned) Indonesia1056 ( new capacity planned) Thailand876 Australasia864 Malaysia544* Philippines333* 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

4. Regulations Fuel 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

5. CountryIndustry structureDominant Enterprises ( public ownership%) BangladeshpublicEastern Refinery Ltd. HK China(no refineries) Indiapublic/privateReliance, Indian Oil Corporation (82%), Hindustan Shell Indonesiapublic/ transitionalPertamina (100%), BP, Petronas, Shell, Conoco JapanprivateNippon Oil, Cosmo/ J. energy, Showa Shell/ Exxon, Tonen/Idemitsu Malaysiapublic/privatePetronas (100%), Shell, Exxon, Conoco Pakistanpublic/private Pakistan State Oil (49%), PRPC, Iranian Oil, BP, ERI Philippinespublic/privatePetron (40%), Pilipinas Shell Caltex PRCpublic/ privateCNPC (90%), Sinopec (55%), CNOOC, BP, Exxon, Total SingaporeprivateShell, Exxon, Singapore Refining Co. South KoreaprivateSK Corp., LG-Caltex, Hyundai Taipei Chinapublic/privateChinese Petroleum Corp.,Formosa Thailandpublic/privatePTT (68%), Shell, Esso (Exxon) Vietnam(no refineries) Regulatory Framework: Industry Structure Source: US DOE, 2005; APERC, 2005; Petroleum Intelligence Weekly, 2005

6. Regulatory Framework: Pricing &Tax Source: Metschies, 2005; APERC, 2005 Country Gasoline $/liter Nov. 2004 Diesel $/liter Nov. 2004 Pricing SystemTaxation/Subsidy Regime Crude (Brent) =$0.27/liter Bangladesh$0.59$0.34controlled/transitionallow taxation HK China$1.54$1.00markethigh taxation India$0.87$0.62transitionalmedium taxation Indonesia$0.27$0.18controlled/transitionalsubsidies Japan$1.26$0.95markethigh taxation Malaysia$0.37$0.22controlled/transitionalsubsidies Pakistan$0.62$0.41transitionallow taxation Philippines$0.52$0.34marketlow taxation PRC$0.48$0.43controlled/transitionallow taxation Singapore$0.89$0.55marketmedium taxation Sri Lanka$0.72$0.41transitionalmedium/low taxation South Korea$1.35$0.95markethigh taxation Taipei, China$0.71$0.55transitionalmedium taxation Thailand$0.54$0.37transitionallow taxation Viet Nam$0.48$0.32controlled/transitionallow taxation

7. 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.

8. 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.

9. Regulations Fuel 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

10. 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

11. 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

12. Cleaner Vehicle Incentives Tax Incentives Plan for Euro 4 Diesel Vehicles in Singapore 1 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 tax6 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  No ARF rebate Source: Land and Transport Authority OMV (Open Market Value) is the basic price of the vehicle determined by customs ARF (Additional Registration Fee) is typically 110% of OMV

13. Cleaner Vehicle Incentives in Asia CountryVehicle 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.

14. 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.

15. 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.

16. Thank you boyle@hq.unu.edu