Efforts to squeeze more from every drop of available oil are being made worldwide. And why not? After all, many energy analysts say that world oil production has already peaked, or is very close to its peak.
In this context, the recent baby steps taken by the Indian government towards setting up fuel-efficiency norms for the automobile companies are welcome. Currently, nearly 95% of petrol and 62% of diesel in the country are used as vehicular fuel. This demand is growing at an explosive rate, not very happy news for a country that depends heavily on imported oil for energy.
Similar fuel-efficiency norms exist in the US, Japan and the European Union. China introduced them in 2004. So, government mandated norms, which prescribe the minimum a car or truck must be able to travel on a litre of petrol, are used in many parts of the world. There is no reason why India should not write these into its legal system.
But such diktats should be part of a buffet of policy choices—rather than operate in splendid isolation. New technologies such as fuel cells must be encouraged. Price incentives, too, should be used. There is no reason that a country like India, which has such terrible levels of energy efficiency, should offer subsidies to users of fossil fuels. Market pricing of energy would help promote better use. Finally, a better network of roads and railways will also help save oil in the long run.
The big issue with fuel-efficiency norms for automobiles will be costs. It is almost certain that automobile companies will have to invest in new research and retool their production lines if they have to roll out more fuel-efficient cars. It is not easy to estimate how high these costs will be.
Equally important, it is not clear who will bear the costs —the producers or the consumers? Underlying this question is identifying the individuals who will pay the extra money required to produce automobiles that use fuel more sparingly, and design incentives to target them.
Let’s say companies are expected to bear the higher research costs. That means lower profits for investors. But companies can pass on costs to consumers through higher sticker prices for cars, trucks and two wheelers. These are fixed costs that have to be paid upfront. On the other hand, higher costs of fuel at petrol stations will amount to an increase in variable costs that will have to be paid every time you pull into a petrol station for a refill. The economics has to be well thought out.
Rational policy will entail the design of incentives for the better use of fuel. A variety of policies will need a variety of incentives. A mix of incentives such as tax breaks for more fuel-efficient vehicles, taxes on hydrocarbons and incentives for research and development (R&D) efforts towards developing such technologies are possibilities. These can flank the proposed norms for fuel efficiency.
Policy success in this venture means ensuring there are no “rollbacks” on these standards. They need to be uniform, both by vehicle type and size and by fuel, whether it is petrol or diesel. In case the government makes an exception in favour of one category or another, the system will break down. The inexorable logic of prices and the signals they generate will ensure that demand moves towards the cheaper, “exceptional”, case. Such a scenario is not unlikely in view of the current petrol versus diesel split.
Due to the difference in diesel and petrol prices, almost all car manufacturers have moved towards diesel variants of the models on offer in a big way. Diesel cars now account for 30% of new car sales, a figure that is likely to grow in the future.
Further, diesel is a far more polluting fuel than petrol, adding several times more in terms of particulate matter and various nitrogen oxides.
Uniform efficiency standards across the board are not a luxury, but a necessity.
What incentives are needed to ensure fuel economy? Write to us at email@example.com