Craft taxes to improve fuel economy of cars, CSE tells finance ministers

• New CSE study says that state-sponsored car boom, without any efforts towards making cars more fuel-efficient, is inciting oil guzzling that the country cannot afford

• CSE’s missive to finance minister P Chidambaram warns that India can see a worsening of the energy crisis if urgent tax corrections in the forthcoming Union budget are not introduced to avert oil guzzling, dieselisation and more pollution

• Ministry should not buckle down under pressure from the car industry for more tax cuts or let them expand their polluting diesel car fleet
   

New Delhi, February 15, 2007: “India is in the grip of an impending energy crisis. We are consuming more oil than ever before, and the growing transport sector is guzzling a lot of this oil. The 2007-08 Union budget must address this linkage between vehicles and energy insecurity,” says a new study on fuel economy in the transport sector, released here today by the Centre for Science and Environment (CSE). The study goes on to suggest a range of measures which the Union budget could introduce to tide over the crisis.

Based on the findings of the study CSE has proposed a set of immediate tax correction to the Union finance minister P Chidambaram to deal with the challenges of motorisation, pollution and energy insecurity. “It is unfortunate that the oil price shock of last year has receded so fast from public memory. There is no policy urgency to address deepening of energy insecurity due to rising number of cars supported by tax incentives,” says Anumita Roychoudhury, associate director, CSE and the leader of the study team.

Union budget must address the linkage between vehicles and energy insecurity
The transport sector is the single biggest user of oil and oil products – using up around 30 per cent of the total consumption in the country. Almost all the petrol used in the country is consumed by private vehicles, which also account for consumption of 62 per cent of the diesel in the transport sector. More and more vehicle manufacturers are introducing diesel variants. If the numbers and usage of cars grow unchecked and the government fails to introduce fuel economy standards to make them more fuel-efficient, India will hurtle towards a serious energy crisis.

Since 2001, the Union budget has lowered taxes on cars successively resulting in a phenomenal increase in car numbers. According to industry estimates, car sales crossed the one million mark in just 11 months in 2006. Urban Indians are increasingly spending more on conveyance, and in the absence of organised mass transport, are relying heavily on personal vehicles. After food, transport accounted for the largest part of household budgets. Therefore, higher oil prices hurt.

So far, given the relatively lower level of economic growth, the market has favoured small cars and two-wheelers. As small engines use less fuel, the average fleet-wide fuel consumption has remained low. “But unfortunately, as our new analysis shows, with economic growth there has been a steady shift towards bigger cars that guzzle more fuels. While the share of the smallest cars with 800 cc engine displacement size have dropped from 21 per cent in 2001 to 11 per cent in 2004, the sales of mid-size cars has grown from 12 percent in 2001-02 to 17 percent in 2004-05. The share of bigger cars is also increasing steadily,” says Roychowdhury. The Union budget does not account for this shift towards larger engine variants.

CSE is concerned that the car industry, in the meantime, is taking advantage of the tax concession for small cars allowed in the last budget to sell more diesel cars. The more relaxed limit for defining a small diesel car has increased diesel car sales and toxic pollution phenomenally. Carmakers make tall claims about the fuel efficiency of their products, but there is almost no official data or a certification system to back them. While a large number of countries have begun to enforce fuel economy standards for vehicles, India is shying away.

The roadmap: some suggestions for the finance minister

• Enforce mandatory fuel economy standards. Fiscal policies targeted at energy efficiency should be linked to fuel economy of vehicles and promotion of advanced technologies like hybrid electric vehicles. The budget must link the tax structure to the fuel economy standards of vehicles.

• Raise taxes on all cars, but maintain a differential in favour of small cars and fuel-efficient vehicles. We understand that the Indian car industry is demanding more tax cuts -- this time on bigger cars. It is important to note that the carmakers operating in Indian market manufacture more fuel-efficient cars in the global market than they do in the Indian market. Our regulations will have to push the industry to produce the most fuel- and emissions-efficient vehicles and the tax policies will have to enable this.
  
• Discourage diesel cars without efficiency and clean emissions standards. The car industry is pushing diesel cars in the name of fuel-efficiency, but these cars are several times more polluting than petrol cars. India’s most popular small diesel car is more than 20-30 per cent less fuel-efficient and 50 per cent more polluting than its counterparts in Europe. The price of diesel is also kept lower, which in turn leads to cheaper motorisation of private transport. Diesel cars are already 30 per cent of the new car sales and are expected to be 50 per cent of the new car sales by 2010. Strangely, the government is unconcerned about the loss of revenue because of the use of diesel in private automobiles.
  
• Either stop the use of diesel in cars or equalise petrol and diesel fuel prices in cities: The lower price of diesel, along with tax sops provided by the government, is now leading to increasing use of this “poor” person’s fuel by the richest car owners. It is ironical that cars from Mercedez Benz to Toyota are today driven on this fuel. Reports which indicate that taxes on diesel will be further lowered as an anti-inflationary measure can be very detrimental if additional steps are not taken to either restrict the use of diesel fuel for personal vehicles – cars and SUVs -- or reduce the difference between petrol and diesel prices substantially in cities.
  
• Impose environment cess on diesel cars. This cess should be based on the externality associated with high emissions of PM and NOx, and also the potent carcinogenicity of diesel fumes that has been established by international health agencies and accepted as the basis of regulations.
  
• Give incentives for public transport buses that emit less and use less energy per passenger. Public transport can reduce both energy and pollution impacts of motorisation significantly. But there is very little policy recognition of this fact. On the contrary, tax policies make public transport bear a higher tax burden. A World Bank estimate shows that the total tax burden per vehicle kilometer is 2.6 times higher for public transport buses than cars in India. Even though a wide variety of state taxes affect the prices of buses, the Union budget will have to give the right signal by removing the excise duty on buses. This will make the bus expansion programme under the Jawaharlal Nehru National Urban Renewal Mission more cost-effective.

The answer to the formidable challenge that India faces today, says Roychoudhury, “does not lie in reducing or subsidising the cost of fuel. It will lie in reinventing our patterns of mobility and in ensuring fuel efficiency of our cars. We must introduce fuel economy standards and mandate a roadmap for the future. Many countries, including China, have introduced such standards, primarily for energy and environmental security.”

Letter to P Chidambaram (pdf)