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
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