The Hindu Business Line : Right way to introduce fuel economy standards

TOYOTA'S PRIUS, with hybrid technology, on display at the recent International Engineering and Technology Fair in New Delhi... Policy measures may be more effective in achieving greater fuel efficiency. — Rajeev Bhatt

"Tougher average fuel economy standards are essential for significantly increasing new vehicle efficiency across the fleet. Current fuel economy standards should be averaged for each category and set. Thereafter they may be increased by 8 per cent per year during the Eleventh Plan and 5 per cent beyond the end of the Eleventh Plan... Vehicle manufacturers will protest and say `it can't be done' or `it will cost a fortune,' but will comply, as experience in the US indicates when the original US CAFE standards were debated. The car manufacturers complied with the original standards at reasonable cost and with high consumer acceptance."

If you think this is a typical proposal put forward by environmental activists, trying to better regulate fuel usage by the ever-growing number of vehicles, you are wrong. This is what the Draft Report of the Working Group on Petroleum and Natural Gas Sector for the Eleventh Plan says on fuel economy standards for Indian vehicles.

The Integrated Energy Policy (IEP), released in August 2006, says: "The automotive industry should be asked to achieve higher fuel efficiency standards in stages, so as to reach at least twice the current efficiency levels. Companies reaching defined milestones first should be given large cash awards along with fiscal incentives based on outcomes." These committees have a modest stand: adopt fuel economy standards for vehicles. That is, a car should give a certain minimum mileage; and this minimum will keep on increasing each year.

IMPORTANCE OF fuel-efficiency

According to Government data, about one-third of the country's total consumption of petroleum products is accounted for by cars, trucks and other vehicles. Consumption of petrol and diesel in India grew at 7.3 per cent and 5.8 per cent per annum respectively between 1980-81 and 2004-05. In the Eleventh Plan period too petrol and diesel are expected to maintain a CAGR of 4.3 per cent and 3.6 per cent respectively.

On the demand side, over the last few years, vehicle sales have increased more than 15 per cent each year. While the population of India's six major cities increased 1.9 times from 1981 to 2001, the number of motor vehicles went up over 7.75 times in the same period.

The transport sector is one of the most significant contributors to global CO{-2} emissions and this is one of the biggest challenges the world is facing today. Many countries have started working on the policy framework to address these emissions.

Though not an issue as of now for India, it would be a prudent strategy to intervene at this stage and try to control the growth of CO{-2} emissions. The transport sector contributed around 10 per cent of the total CO{-2} emissions in the country in 1994, a time when vehicle sales figures were not news. It would be interesting to look at the statistics today. Fuel economy standards have proved one of the most effective tools in controlling oil demand and greenhouse gas (GHG) emissions in many regions and countries the world over.

Setting standards

For example, in the US, if fuel economy had not improved, petrol consumption (and crude oil imports) would be about 2.8 million barrels a day higher than it is, or about 14 per cent of today's consumption.

For Japan, the fuel economy standards for petrol vehicles were reached five years ahead of the target year of 2010. And in China, nine regions have established or proposed their own motor vehicle fuel economy or GHG emissions standards.

Adopting fuel economy standards will not only help check the growing consumption of petrol and diesel, it will also reduce the transport sector's contribution to accumulation of CO{-2}; not to speak of conventional air pollutants such as particulate matter, oxides of nitrogen and hydrocarbons. This is no rocket science. The less fuel we burn per km travelled, the less will be the emissions. India's fuel efficiency achievements have languished over the years. A car bought in 2006, for instance, gives the same mileage as one bought in 2000! No wonder, the consumption of petrol and diesel is soaring.

leave it to the market?

Market-driven or command and control are the two basic approaches for any policy intervention. Which should be followed in the Indian context? Auto manufacturers and economists are unanimous — it should be left to the market.

Fuel-inefficient vehicle manufacturers will suffer, as consumers are expected to make a rational decision and, hence, opt for a more fuel-efficient vehicle. But does this argument really work? Over the years, having been left to market forces (without fuel economy regulation) Indian vehicles fare poorly when fuel efficiencies are compared with other countries for the same weight category. On the contrary, a segment-wise analysis of vehicular sales shows increasing share of heavier segments. While sales of segment A3 (mid-size 4001-4500 mm), which are, on an average, more fuel-inefficient than segment A2 (Compact 3401-4000 mm) or A1 (mini up to 3,400 mm), constituted 12 per cent of the total passenger vehicle sales in 2001-2002; in 2004-05, they constituted 17 per cent.

Consumers are interested in buying heavier, more powerful vehicles, which also happen to be more fuel-inefficient; the data corroborate that. Or else, how do you explain the increasing popularity of utility vehicles (the most fuel-inefficient category), sales of which saw a 92 per cent increase in 2005-06 over 1995-96. This is quite contrary to what the automobile industry and free market experts would like us to believe. No wonder regulators the world over do not rely on the market.

What, then, is the way forward? First, try to implement the recommendations of various committees. If the government finds it difficult to implement standards as of now, it should take further the last Budget's intervention. Instead of reducing excise for smaller cars, it should increase excise on heavier, more fuel-inefficient vehicles, particularly the utility vehicle segment. Implement this differential taxation policy for commercial vehicles also.

Two-wheelers fare better than other vehicles and , each year, new models are introduced with better fuel-economy levels. This process must be incentivised. And, second, we need an integrated policy for addressing fuel economy standards; focussing merely on one vehicle category/segment will not work. Should we, then, look forward to the Budget and/or Eleventh Plan for the right policy signals?

(The author is Senior Lecturer with the University of Petroleum and Energy Studies, Dehra Dun. The views are personal and do not represent those of the institution he belongs to.)

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