The case for ZEV mandates in India and elsewhere

Opinion published in the Business Line in India on Dec 13 In case the link (below the figure) is behind a paywall, full text is below

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In the article ‘The benefits and challenges of transitioning away from oil’ (businessline, December 5), this author described why relying exclusively on financial subsidies to drive adoption of zero emission vehicles (ZEVs) such as battery electric vehicles (BEVs) and hydrogen fuel-cell vehicles (FCVs) is unsustainable.

There is also the fact that despite steep declines in international battery prices and substantial government subsidies, BEVs are costly, and adoption is slow. India, therefore, needs a new strategy to increase competition, bring greater scale, drive down costs and accelerate adoption using less tax subsidy per vehicle.

There are but four main ways a government can reduce pollution, or more generally, get people to behave socially responsibly. Economic theory suggests the simplest and efficient way is to tax or fine bad behaviour (and, of course, ensure enforcement). This is the idea behind a carbon tax which will make carbon emissions costly and drive adoption of and innovation in less-polluting practices.

Another is to provide financial inducements (example, subsidies, tax credits) for investing in clean technologies which people might otherwise find too costly. An example is the 23 per cent rebate on GST for BEVs which is at 5 per cent as opposed to 28 per cent for petrol/diesel vehicles.

A third way is to mandate or obligate specific actions people can or cannot undertake. Examples include requiring diesel vehicles to switch to compressed natural gas, mandating power distribution companies to procure renewable electricity, or mandating automakers to sell ZEVs. The last is in focus here.

A fourth approach is nudging people to take voluntary action. Examples include appeals to conserve energy or not to litter. We will not discuss voluntary approaches here further as there is little evidence that they can be relied upon when the stakes are high.

In reality, the first option of pollution taxes might not even suffice because of other reasons why people’s actions deviate from what is socially best. A subsidy, the second option, is popular but imposes a burden on public finances and also does not penalise people who may not take the subsidy and continue polluting.

The third route, a mandate or obligation to adopt clean technologies, does not burden public finances directly but like a pollution tax, tends to attract opposition from obligated parties. But a mandate may be welcomed by some businesses who are cleaner than the average firm and will gain a competitive advantage from such a regulation. To give a specific example, automakers that make generally more fuel-efficient vehicles will benefit from an increase in minimum fuel economy standards.

Likewise, automakers who have already made investments in ZEVs will have less to lose from a ZEV mandate relative to those that sell only petrol/diesel vehicles. This is why a mandate may yet represent an acceptable middle ground that balances environmental, economic, and political objectives.

ZEV obligations (ZEVO) typically require auto original equipment manufacturers (OEMs) or automakers to meet annual sales targets. In addition to the theoretical reasons above, there exist practical justifications for ZEVO.

First, India already provides substantial subsidies for ZEVs. Yet most OEMs appear to not be investing aggressively in ZEVs. And with a further four- to five-fold increase in subsidy outlay from FAME II is planned to FAME III, the net burden on automakers from ZEVO could be small.

Second, looking at solar, wind, biofuels, and BEVs worldwide shows that where these technologies have been scaled up and commercialised, mandates have been employed together with subsidies.

Purchase obligations

Third, India has the equivalent of ZEVO in electricity, which are called renewable purchase obligations (RPO), which requires Discoms to procure renewable energy and have been successful in growth of solar and wind facilities.

ZEVOs could have a similar effect on battery technology.

Fourth, even within the transportation sector, stringent obligations have been imposed on the auto industry in the form of Bharat Stage emission norms which have been complied with promptly, despite increasing vehicle cost.

Fuel economy standards are another example of obligation on auto sector being successful. Political will overcame industry opposition to regulations aimed at reducing pollution. A policy like ZEVO is the logical next step for India. Specific annual targets are not discussed here but these are typically set to ramp up slowly in initial years and steeply in later years.

ZEVO should be designed to allow trading of credits between firms and to a limited extent across segments, say, between bus and truck sales. It could also be designed to exempt lower priced cars to reduce the burden on buyers of small cars who tend to be the least wealthy among car buyers.

ZEVO could be designed with additional features to increase flexibility and reduce compliance costs. Policymakers could consider complementary obligations on operators of large fleets of cars (such as Uber, Ola), buses (both public and private) and trucks to ensure ZEV comprise a certain share of their fleet, or comprise a certain share of annual kilometres.

An example of such a policy is the California Clean Miles Standard on ride-sharing and on-demand delivery platforms operating in California. Mandates on oil market companies and petrol stations to acquire credits for selling electricity or hydrogen can help bring private investments in charging and fuelling infrastructure and make ZEVs more attractive to buyers.

In conclusion, a binding ZEV obligation on automakers with gradually increasing annual targets and financial penalties for non-compliance is the key missing element in the policy ecosystem.

The writer is an Associate Professor at UCLA in the Institute of the Environment and Sustainability and Dept. of Urban Planning

Twenty years of biofuels in twenty minutes

Webinar on Carbon Footprint of Biofuels held on Dec 5th by the Journal Carbon Footprints

Video Recording LINK  - Twenty years of biofuels in twenty minutes

LINK

The benefits and challenges of transitioning away from oil for India

This is an opinion piece published in the Business Line in India on Dec 5

In case this LINK is behind a paywall, here is the full text

Updated - Dec. 06, 2023 at 10:01 AM.

Electric transportation, despite its high upfront cost, tax revenues foregone and jobs lost, seems to be the best option. The issue here is to make policy to meet multiple goals

DEEPAK RAJAGOPAL

There appears to be a consensus in India that it should undertake serious efforts to address climate change without compromising its economic future. Although transportation currently accounts for only about 10% of India’s energy-related carbon emissions and despite the fact that it is currently cheaper to reduce greenhouse gas (for simplicity, carbon) emissions from electricity generation, there are strong reasons to already begin a transition to low-carbon transportation future that will eventually lead to a net-zero carbon transportation. 

Firstly, emissions from transportation can be mitigated in several ways such as slowing growth in private vehicles especially cars, increasing public-transit ridership, raising fuel economy of vehicles, and growing the share of rail freight. While each of these is worth pursuing, to achieve serious reductions in carbon in the longer run a transition away from oil is inevitable. Reducing oil consumption will also help improve energy imports and could help improve balance of trade and energy security depending on what and how much of it needs to be imported and from which countries.

Secondly, as challenging as it is to transition away from coal, moving away from oil-based transportation is far more challenging. For one, while there are multiple clean alternatives to coal including solar, wind, nuclear, hydro, and geothermal, there exist few alternatives that are obviously low-carbon and require little transformation of the infrastructure. Moreover, whereas electricity is a commodity that people don’t relate to personally and psychologically so long as the power flows when they need it, transportation and vehicles have a personal connection that cannot simply be reduced to cost per kilometer unlike a cost per unit of electricity. Lastly, government revenues from petroleum use are 8-fold and 13-fold greater than that from coal and electricity respectively.

Biofuels are one potential low-carbon alternative that can largely use the existing infrastructure. However, their water footprint is an order of magnitude or two greater than for oil, they require farm chemicals that pollute soil and water, and their tail-pipe emissions do little to reduce urban air pollution. Another alternative is Hydrogen which today is made from natural gas and is more carbon intensive as transportation fuel. Hydrogen made by splitting water using solar and wind energy is prohibitively costly. But even if its cost can be brought down in future, it will require tremendous amounts of potable-quality water. This leaves battery electric vehicles (BEV) as the only alternative to oil today with no tail-pipe emissions, low water footprint, already cleaner than petrol/diesel and will get greener as electricity gets greener. But BEVs are not without their own challenges such as higher upfront cost, lack of charging infrastructure, time for refueling, need for scarce critical minerals not available domestically, high end technology for making battery cells which needs to be imported, and high cost of recycling batteries. 

There are also macro-economic challenges of moving away from oil. An obvious one is the burden of subsidies on public finances. The FAME II 2019 scheme for BEVs had an outlay of Rs 10,000 crore  over 5 years but this amounts to only 0.04% of India’s annual budget of Rs 45 Lakh crores for 2023-24.  It has been reported that FAME III might have an outlay of Rs 40,000 to 50,000 crores.  The National Green Hydrogen mission announced in 2023 has twice the total outlay of FAME II across 7 years or 0.06% of current annual budget. These seem small but so is the total number of vehicles these subsidies can support.  FAME II aims to help adoption of a mere 5500 electric buses (<1% of India’s bus fleet) and 55000 cars (1% of annual sales of cars and commercial vehicles). 

Then there are implicit subsidies which are foregone revenues from the GST rebate on EVs (5% versus 28% for petrol/diesel cars) and lost excise and VAT on petrol and diesel which account for about 50 % of their retail price.  Currently oil products generate 90% of excise and central excise accounts for 12% of all central taxes (including state share) while VAT is major source of revenue for states. In a peer-reviewed paper published in the journal Energy Policy earlier this year titled “Implications of the energy transition for government revenues, energy imports and employment: The case of electric vehicles in India”,  I estimate that on a per vehicle basis, each petrol or diesel vehicle generates more than six-fold greater taxes for the central and state governments combined over its life relative to a BEV today. In fact, GST and fuel excise and VAT over the life of car amount to as much as the upfront cost of a mid-size car. What this paper also shows is that despite their upfront cost, BEVs can have a lower total cost of ownership even in the absence of any subsidies, and they help reduce total imports and carbon emissions. Finally, BEVs generate less total employment across their life as they require fewer components to be manufactured, assembled, maintained, and replaced. 

This is not to suggest that India should temper its ambitions for transitioning away from oil. Instead, it reveals the need for a more sustainable and well thought out long-term strategy that does not rely solely on subsidies, which already are substantial. Simply reducing the GST rebate runs the risk of making BEVs even costlier which will slow adoption. Implementing a carbon tax on fuels can help but this will also decline if the intended effect of reducing fossil fuel consumption comes to pass. Policymakers also need to plan for additional job creation to compensate for low labor intensity of an electrified transport sector.