Strategic Policy Options

Asia-Pacific Environmental Innovation Strategies (APEIS) Research on Innovative and Strategic Policy Options (RISPO) Strategic Policy Options I. Title of sub-theme: Development of environmentally sustainable transport systems in urban areas II. Title of strategy: Reducing emissions from vehicles III. Title of strategic policy option: Introducing vehicle fuel standards IV. Brief description of the policy option (Summary) Vehicle fuel standards are set to limit the levels of components in fuels that cause air pollution. Reduction in emission is due primarily to the application of pollution control technologies in vehicles and the role of fuel quality is to facilitate the use of such technologies. However, emissions of some pollutants depend on the fuel quality, i.e., on the level of pollutants in the fuel. Such substances in the fuel may undergo little or no transformation during the combustion process. Lead in gasoline and sulphur in gasoline and diesel belong to this category of pollutants. Roadside and ambient air quality deteriorates due to the increasing concentration of pollutants such as lead, hydrocarbons, and sulphur from vehicles and setting fuel standards could reduce these emissions. In cities where the above noted pollutants are a major threat to air quality, fuel standards as an environmental policy could mitigate the problem. This needs to be carried out with the close cooperation of national or local government, oil manufacturers and distributors, and end-users. This option has been shown to be effective in combating air pollution in many Asian countries, for example, Thailand, Bangladesh, China, and Singapore. - Objectives (What): To improve the urban air quality by reducing ambient concentration of key pollutants - Environmental areas: Air pollution Urban environment - Applicable geographic area and socio-economic conditions: Geographic conditions: Cities, where emission from vehicles is the primary source of pollution - Socio-economic conditions: Strong commitment on the part of the government Cooperation among the relevant stakeholders - Stakeholders: By whom: National government, oil refineries, oil dealers and distributors For whom: Vehicle drivers/riders and the general public, particularly those who are directly exposed to the exhaust from the vehicles. 1

- Time span (By when): Generally, it takes some time to implement fuel standards. A step-by-step approach allows adequate time for all the stakeholders involved to make necessary adjustments. However, it also depends on the political and socio-economic conditions, which are country as well as city specific. For example, the program to shift from leaded to unleaded gasoline in Thailand took five years (1991-1995), while it was virtually done overnight (in one year) in Bangladesh. In some countries, only selected cities may be targeted initially. For example, in India leaded gasoline is banned in the capital city Delhi, while unleaded gasoline is available in other cities. In China, leaded gasoline was first replaced by unleaded in Beijing, and unleaded gasoline was made available in Shanghai, Guangzhou, and several other major cities later. - Expected impacts: Fuel standard reduces ambient concentration of the pollutants, which has considerable impact on the health of the urban population. V. Background (Rationale) The high economic growth experienced in many part of the world Asia and elsewhere has resulted in worsening air quality caused by high emission of pollutants, primarily from the transportation sector. In cities, for example, Bangkok, Beijing, and Shanghai, tailpipe exhaust from motor vehicles has become a major contributor to local air pollution. To improve the air quality in these cities, development of pollution control strategies from such mobile sources becomes a priority. Among the various options, implementation of an improved vehicle fuel standard can help in reducing the ambient concentration of major pollutants, (such as lead and sulphur) and thus leading to improved air quality in cities. Lead does not exist naturally in gasoline but must be added to it. Since the early 1970s, however, there has been a steady movement towards reducing lead in gasoline and increasingly, the complete elimination of lead. Figure 1 shows the timing of lead phase-out in different markets. All modern gasoline-fuelled vehicles being produced today can operate satisfactorily on unleaded fuel, and approximately 90 per cent of these are equipped with a catalytic converter that requires the exclusive use of lead-free fuel. Source: ADB, 2003 Figure 1: Phase-out of lead in different markets 2

Among a variety of approaches to reduce automobile fuel consumption, fuel standards have been widely implemented in many countries. They include, fuel taxes, fiscal incentives, research and development (R&D) programs, technology mandates and targets, and traffic control measures. While some of these measures are designed to promote fuel efficient vehicles, others are designed to curb travel or vehicle demand (Sauer and Feng, 2004). (For additional information, please refer to analytical background paper II-1) An evaluation of diesel fuel in Europe shows that reduced sulphur in diesel can lower particulate emissions. For example, lowering the diesel sulphur level from 2,000 parts per million (ppm) to 500 ppm reduced the overall particulate from light-duty diesels by 2.4 per cent and from heavy-duty diesels by 13 per cent (ADB, 2003). Figure 2 shows the current and proposed sulphur levels in diesel in Asia, Europe, and the United States. Gasoline specifications for vehicles in Asia and Europe have been compiled in analytical background paper II-1 (for examples of gasoline quality standard in China, please refer to analytical background paper II-2). A variety of other approaches to reduce automobile fuel consumption have been introduced in different parts of the world such as the fuel economy standards in China. Figure 2: Current and Proposed Sulphur Levels in Diesel in Asia, European Union and United States Source: ADB, 2003 Note: a Under consideration, b Marketed. 3

VI. Critical instruments Design, planning and management: Overall program management An agency or body should be responsible to take into consideration the different aspects of implementation of fuel standards, such as, advantages of improving the fuel standards, problems to be tackled, financial issues, infrastructure requirements, distribution, price regulation, developing the plan and time frames, etc. Strong political commitment is a prerequisite for the success of the program. The success in Thailand was due to the Energy Policy and Planning Office (EPPO), which spearheaded this strategy and worked in close collaboration with other stakeholders. The participation of various other stakeholders such as government agencies, automobile companies, oil companies, and the general public, ensured their consensus in support and implementation of phasing out leaded gasoline (please refer to GPI in Thailand). The National Environment Council of Bangladesh adopted a resolution to switch to unleaded gasoline (in 1998), and subsequently, the Ministry of Energy made the decision to go lead free. High-octane unleaded gasoline was imported to bridge the gap between domestic supply and demand. In 1997, the State Council, China s highest government body, issued an order for the prohibition of the production, sale, and use of leaded gasoline in China and completely phasing out the sale of leaded gasoline across the entire country by 2000. Economic instruments: Price regulation Price regulation in the petroleum market helps promote a particular fuel type against other. Lower levies can be used to implement the introduction of stricter fuel standards. (For further information please refer to the analytical background paper II-3) The lower levy imposed on unleaded gasoline in Thailand made it 0.3 baht/litre (1 US$ ~ 40 baht in 2004) cheaper than its leaded counterpart. This policy was quite effective and raised the share of the unleaded premium to 30 per cent of total premium gasoline sales in only 30 days after its introduction. To promote the use of unleaded gasoline, tax on leaded gasoline was raised in China so that it would not cost less than unleaded gasoline. In the case of lower-sulphur, rapid introduction of low-sulphur fuels was successfully implemented by adopting a tax policy that results in higher pump costs for higher-sulphur fuels in Hong Kong, China (ADB, 2003). Economic instruments: Support for fuel producers Considerable expense incurs in the refineries when there has to be a change in the quality/characteristics of the fuel. Support for refineries to introduce the necessary technologies for the change in fuel quality may be necessary, and assistance from the government of other multilateral institutions such as the World Bank may be needed. This will also provide the necessary incentive for the refineries to convert to cleaner fuels fairly quickly. For example, the World Bank provided financial support for the restructuring of the Bangchak refinery in Thailand to enable the refinery to produce unleaded gasoline. The Bank s financial role was largely catalytic, to attract the participation of commercial financing (GPI, Shift from Leaded to Unleaded Gasoline in Thailand). 4

Partnerships: Cooperation among the stakeholders Institutional mechanisms may also play a leading role in successful implementation of fuel standards. They could involve a variety of stakeholders from government, the private sector, and civil society. The displacement of leaded gasoline by unleaded in Thailand was a result of active participation of government, oil companies, auto manufacturers, and the general public. The success not only depended on the design of safe and realistic oil specifications, but also on rapid refinery adjustment and an appropriate distribution system, which contributed to the swift phase-out of leaded gasoline. Regulatory instruments: Step-by-step approach to induce fuel change Requiring change in fuel within a short time period can cause confusion in the market and society. To avoid the situation, introducing tighter fuel standards step-by step can induce gradual but effective change. In Thailand, after production of unleaded gasoline was started in 1991, a timetable for the phasing in of lead removal was created. It was made mandatory that the maximum lead level in gasoline be lowered to 0.15 gram per litre by 1 January 1992, that unleaded premium gasoline 95 research octane number (RON) be made available by 1 January 1993, and that all car manufacturers install catalytic converters on all new cars to be sold after 1 September 1993 (http: info.tdri.or.th/library/quarterly/text/j91_2.htm). Regulatory instruments: Combination with emission standard Fuel quality is closely related to emission standard. For example, use of catalytic converters to reduce emissions from two-stroke engines requires the use of lead-free fuel. Therefore, stricter emission standards can promote a change in fuel quality. In Australia, a more stringent emission standard introduced in 1986 necessitated the use of unleaded petrol; leaded petrol was to be phased out by 1 January 2002 or even earlier in some cities. Western Australia phased out the leaded petrol on 1 January 2000 and Queensland was to do so on 1 March 2001 (EA, 2001). VII. Impacts of the instruments selected a. Impacts on the driving forces for environmental degradations Fuel standards can promote shifts to the fuels having less content of pollutants. Through the implementation of a fuel standard in Thailand, the share of unleaded gasoline use in motor vehicles increased, and the share of vehicles using unleaded gasoline increased. b. Impacts on the environment and socio-economic conditions Improving fuel quality has a direct influence on the ambient air quality. For example, the shift from leaded to unleaded gasoline in Thailand brought a dramatic decline in ambient lead concentration from about from 0.30 µg/m 3 in 1991 to 0.09 µg/m 3 in 2000 (PCD, 2002). Health impacts are reflected in the lower blood lead levels of the population. In Bangkok, a decrease in blood lead levels among children and traffic policemen has been observed (PCD, 2002). In Bangladesh, lead concentration in the ambient air of Dhaka decreased by about twothirds through the introduction of unleaded gasoline, resulting in considerable savings in health maintenance costs (Biswas et. al, 2003). A marked drop in nitrogen oxide and carbon monoxide in the air was experienced in the first few months after banning leaded gasoline in Beijing (People s Daily Online, 1999). 5

VIII. Evaluation of the policy option ( Analysis A-) a. Sustainability: Impacts of a fuel standard can be sustained if a continuous supply of standard fuels is available in the market at reasonable prices. Production of fuel can be sustained if there is sufficient demand. This seems to be case in countries where the fuel quality has been improved. Required infrastructure such as gas stations and transport of cleaner fuel to gas stations needs to be put in place to support the implementation of the strategy. For example, gas stations in Thailand were assisted to supply unleaded gasoline to the consumers. b. Equity: A fuel standard promotes social equity. The improvement of air quality generates more benefits to the poor, because they are more exposed to the ambient environment compared to the rich. Specifically, in the case of Bangkok, blood lead levels have shown a decrease in school children and the traffic police, who are directly affected by leaded gasoline effects. c. Efficiency: If higher fuel standards were only to raise refinery costs and these were ultimately passed on to the consumers, national output in terms of productivity, inflation, living standards, etc would be affected. But, there are numerous benefits arising from adopting improved fuel standards. Production cost of unleaded gasoline is higher due to additional cost involved in refinery. However, this is neutralized by reduced maintenance costs, and potential health benefits which are estimated at US$ 0.12 per litre for a 20 per cent reduction in airborne lead in Bangkok (Sayeg, 1998). Monetary valuation of the benefits from unleaded gasoline use are estimated to be 7 billion baht, which is 32 times the cost (PCD, 2002). Thus, the complete removal of leaded gasoline use in Thailand has proved to be cost-efficient. The benefits of phasing out lead in the US outweighed costs more than ten times (www.unep.org/pcfv/documents/sadcmikewalshpres.ppt). Generally, countries can recover five to ten times the cost of shifting to unleaded gasoline use in terms of economic (savings in engine maintenance and improved fuel efficiency) and health benefits (reduced health costs). The US studies reveal that switching from leaded to unleaded gasoline may increase engine life by as much as 150 per cent (http://www.worldbank.org/transitionnewsletter/m&j96/art5.htm). Benefits assessment of the improved fuel standard in Australia conducted by Environmental Economics Unit of Environment Australia indicated considerable health and environmental benefits from adopting cleaner fuel. d. Effectiveness: Implementation of a fuel standard has lead to the production and use of cleaner fuel. Unleaded gasoline has replaced leaded gasoline in many countries including China, India, Thailand, Japan, and the air quality has also improved. e. Relevance: Implementation of a fuel standard can help reduce the pollution level from the transportation sector. This can be achieved through price regulation, development of appropriate technologies, and stakeholder partnership. 6

IX. Implementation issues (e.g. Resources required, social acceptance, and political acceptance. Other issues related to the implementation of SPO) Resources required to implement the fuel standard include sufficient capacity to produce cleaner fuel. Additional resources are also required which are associated with the supply and distribution, for example, adjustment in gas stations to supply unleaded gasoline. Implementing a successful systems approach to setting fuel standards requires institutional mechanisms that involve a variety of stakeholders from government, private sector, and civil society. In countries where such an institutional mechanism is not yet in place, it should be created (for additional information, please refer to analytical background paper II-4). X. Applicability and limitation (Necessary conditions for successful adaptation/acceptance) A fuel standard is applicable when it is backed by technological innovations on fuel quality. It cannot be implemented unless the government is seriously committed to this strategy. The vehicle fuel standard can be very effective with a combination of other strategic policy options such as an emission standard, fuel taxes, alternative fuel vehicles, etc. Adopting stricter emission standards may lead to using standard fuels while alternative fuel vehicles which are more efficient and produce lower emissions compared to the conventional vehicles could also be adopted for better results of enforcing vehicle fuel standards. In the case of the study carried out for Bangkok, implications of alternative vehicles on final energy consumption and environmental emissions have been assessed. The results show that in 2005, it can be expected that the reduction of final energy consumption is about 1,182.8 ktoe while that in 2010 and 2020 it is 2,363.2 ktoe and 2,277.1 ktoe, respectively. About 6,071 tons of CO2 can be mitigated in 2010 while the figure will reach up to 6,295 tons in 2020. A survey in 1989 indicated that about 87 per cent of passenger cars produced in Thailand during the past ten years could use unleaded gasoline all the time. These were mostly Japanese-made cars and several models of European cars. As for the remaining cars whose engine valve seats were not hardened, they could also run on unleaded gasoline, provided leaded grade was used for every fourth or fifth fill (Chongpeerapien, 2001). Thailand and Pakistan have demonstrated the possibility of the production of unleaded gasoline ahead of target. Bangladesh was successful in eliminating leaded gasoline use in quite a short period (in one year s time), which shows that a comprehensive phase-out programme can result in speedy achievement. On the other hand, the phase out of lead in Mexico was severely hampered, because price policies and market liberalisation efforts failed to influence refinery and consumer behaviour. Production of low sulphur fuel requires additional refining processes such as hydro-processing and higher-severity hydro-treating. While these processes could reduce the level of sulphur in fuels, they may also affect fuel properties such as the natural lubricity of the fuels, natural antioxidants that help prevent the fuel from forming gums and sludge. Low-lubricity fuels can result in premature wear and even catastrophic failure of fuel system components. A fuel's antioxidation properties are particularly important in modern fuel systems, where the fuel is exposed to high temperatures (Diesel Trends, 2004). The other drawback of low sulphur fuels is that they can be more corrosive compared to the conventional fuels. Also, they can have very low electrical conductivity which may cause a 7

safety concern with components such as high-velocity pumps, where fuel can be exposed to significant static electrical charges. (http://www.lubrizol.com/dieseltrends/trends9/environmental.asp) XI. Related Good Practices Shift from leaded to unleaded gasoline in Thailand XII. Analytical background paper ( Analysis B-) Analytical Background Paper on Introducing vehicle fuel standards References ADB, (2003). Cleaner Fuels, Policy Guidelines for Reducing Vehicle Emission in Asia [http://www.adb.org/documents/guidelines/vehicle_emissions/cleaner_fuels.pdf]. EA, (2001). State of Knowledge Report: Air Toxics and Indoor Air Quality in Australia, Environment Australia (EA). PCD, (2002). Unleaded Gasoline Policy: Health Benefits For School Children and Traffic Policemen in Bangkok Metropolitan Administration, Pollution Control Department (PCD), Ministry of Natural Resources and Environment, Bangkok. People s Daily Online, (1999). China to Ban Leaded Gasoline, People s Daily Online, 3 December (based on http://fpeng.peopledaily.com.cn/199912/03/eng19991203t104.html). Biswas, S. K.; Tarafdar, S. A.; Islam, A.; Khaliquazzaman, M.; Tervahattu, H., and Kupiainen, K., (2003). Impact of Unleaded Gasoline Introduction on the Concentration of Lead in the Air of Dhaka, Bangladesh Air and Waste Management Association, November (based on www.awma.org/ journal/showabstract.asp?year=2003&paperid=1139). Sayeg, P., (1998). Successful Conversion to Unleaded Gasoline in Thailand, World Bank, Washington. Sauer, A., and Feng, A., (2004). Comparison of Passenger Vehicle Fuel Economy and Greenhouse Gas Emission Standards around the World, Pew Centre on global climate change. Diesel Trends, (2004). Environmental Regulations [http://www.lubrizol.com/dieseltrends/trends9/environmental.asp] (23 December 2004) www.unep.org/pcfv/documents/sadcmikewalshpres.ppt http://www.worldbank.org/transitionnewsletter/m&j96/art5.htm http: info.tdri.or.th/library/quarterly/text/j91_2.htm 8