Archive for September, 2013

contextualizing china’s fuel pricing announcement

Saturday, September 28th, 2013

Cross-posted on the ICCT Staff blog.

A few days ago, China’s National Development and Reform Commission (NDRC) announced a new pricing policy for higher quality fuels. The policy calls for the prices of China IV gasoline and diesel (50ppm sulfur content) to be increased by 290 and 370 RMB/ton, respectively. The prices of China V gasoline and diesel (10ppm) are to be raised a further 170 and 160 RMB/ton, respectively. The new pricing changes are designed to encourage and assist China’s refineries to meet the fuel quality improvement timeline announced by the State Council earlier this year. That timeline calls for nationwide supply of China IV gasoline by the end of 2013, China IV diesel by the end of 2014, and China V gasoline and diesel by the end of 2017.

The pricing changes appear to be the first steps in implementing State Council calls in October 2011 and February 2013 to use progressive fiscal policy to encourage the supply of higher quality fuels. Additional fiscal policies, for example a fuel tax adjustment differentiated by fuel quality, will likely be announced separately by the Ministry of Finance (though the timing of any additional MOF policy announcement is uncertain).

To understand better and contextualize what the NDRC pricing numbers actually mean, let’s look at the answers to some relevant questions:

1) What does it mean for the NDRC to set the price of fuel per ton?
The price of fuel in China is controlled by the NDRC, rather than being market-driven (though China has been slowly revising its pricing policy to better reflect the international price of crude). The NDRC sets the prices, per ton, to be paid to refineries in China for a variety of different petroleum products including gasoline and diesel used in motor vehicles.

2) How is the per-ton price of fuel linked to the per-liter cost to consumers at the pump?
Changes in the per-ton prices set by the NDRC usually directly result in changes in per-liter prices at the pump. For example, in their 9/13 regular fuel price adjustment notice, the NDRC announced the per-ton price change while also directly estimating the impact on prices at the pump. But in that case, the price changes were due to recent changes in the international crude price, a slightly different case.

Regarding the upgrading to China IV and V fuels, the NDRC explicitly stated in a follow-up Q&A that refineries and consumers should both bear a portion of the cost of the higher quality fuel. Although the NDRC has not detailed what those portions should be, the recent announcement implies that the cost burden to be absorbed by the refineries is not included in the announced price changes. This would imply that the primary burden of the additional price will be passed on to consumers. Even so, in their original announcement, the NDRC noted that additional subsidies and fiscal incentives may still be used to ensure that the cost burden of the higher quality fuel is not too great, especially for poorer consumers. Therefore, it’s unclear now what the final per-liter pump price increases will be.

3) What is the current price of fuel in China?
The price of fuel varies by region in China. The current, per-ton prices for gasoline and diesel in China are around 9500-9700 and 8700-8900 RMB/ton, respectively. (Note: the prices are higher in cities like Beijing and Shanghai which have already upgraded their fuel quality.)

A ton of gasoline yields about 1379 liters. A ton of diesel, which is denser, yields about 1190 liters. Assuming average nationwide per-ton prices of 9600 RMB for gasoline and 8800 RMB for diesel, we can roughly estimate per-liter prices of about 6.96 RMB/liter for gasoline and 7.4 RMB/liter for diesel ($4.35/gallon for gasoline and $4.62/gallon for diesel). (Note: the the WSJ reported Tuesday slightly lower nationwide weighted average pump prices of $4.21/gallon (gasoline) and $4.36/gallon (diesel).)

4) If the increased price per ton is passed entirely to consumers, what will the impact be on prices at the pump?
The total NDRC price increases for upgrading from China III to V gasoline and diesel are 460 and 530 RMB/ton, respectively. This is equivalent to 0.33 RMB/liter (0.21 USD/gallon) for gasoline and 0.45 RMB/liter (0.28 USD/gallon) for diesel. If these price increases are entirely passed to consumers, they will result in cost increases of about 4.8% for gasoline and 6.0% for diesel.

5) How did the NDRC determine the price increases?
In the Q&A posted on their website, the NDRC explained that the price increases were based on comprehensive investigations and audits of Sinopec and PetroChina refineries which have already been upgraded to be able to produce China IV and V fuel, as well as experience from Beijing and Shanghai. (Beijing has already implemented China V fuel, while Shanghai is currently transitioning to China V.) The NDRC’s nationwide price adjustments for the China III->V transition are identical to the price adjustments used in Beijing and Shanghai for upgrading from China II to China V.

6) Are the price changes enough to cover the increased cost of refining higher quality fuel?
A 2012 ICCT study suggested that the additional cost to produce China V (10ppm) fuels in China would be just 0.04 and 0.11 RMB/liter for gasoline and diesel, significantly less than the NDRC’s announced price increases. This implies that the announced price adjustments should be way more than adequate to cover the required refinery upgrades and increased production costs for China V fuel. Even before additional fiscal policy measures from MOF are implemented, this pricing certainty will be instrumental in incentivizing China’s refineries to move ahead with the upgrades in order to meet the fuel quality timeline.

7) What about compliance and enforcement?
Finally, it’s important to note that the NDRC announcement included an entire paragraph on the importance of and mechanisms for ensuring compliance and enforcement of the fuel quality. In addition to asking multiple ministries (MEP, MOFCOM, SAIC, AQSIQ, NEA, and others) to work closely together, the NDRC even calls on the media and public to play a role in supervising improvement efforts and calling out illegal activity. Combined with the price increases, this further underscores the Chinese government’s deep commitment to ensuring the fuel quality timeline is met and commensurate air quality improvements are achieved.

massive new state council air pollution control plan

Thursday, September 12th, 2013

China’s State Council today released a massive new air pollution control plan, the latest in a string of Chinese government actions (and promises of future actions) following January’s “airpocalypse.” This is certainly the highest profile and most wide-reaching plan we’ve seen so far, underscoring the attention being paid at the highest levels of government to improving air quality throughout the country.

I tweeted my thoughts tonight as I read the plan, but before I go to bed I’ll summarize a few highlights here.

First let me say that I have little expertise on topics beyond motor vehicles and ambient air quality monitoring. Some of the initial reporting (Reuters, WSJ) has focused on the plan’s announcements related to power generation, coal consumption, industrial emissions, etc. I’m not commenting on those here not because they aren’t important, but just because that’s not what I work on.

That having been said, here’s what really impresses me about the plan:

Major focus on regional coordination to improve air quality across broad air basins as opposed to working city-by-city. The three big regions mentioned repeatedly in the plan are the greater Beijing region (including Beijing, Tianjin, and Hebei), the Yangtze River Delta region (including Shanghai, Zhejiang, and Jiangsu), and the Pearl River Delta region in Guangdong. This is great news because, as I have noted, air pollution is absolutely a regional problem that requires regional solutions. Nice to see this being acknowledged by the State Council in such a foundational way.

– The plan establishes a system of binding ambient air quality improvement targets. I have previously written about how this is important for closing the loop between emissions and the air people are actually breathing, as well as for keeping officials accountable for environmental improvements that are tied to human health benefits. The specific targets in the plan are 10% reductions in PM10 concentrations for most cities, and 25%/20%/15% PM2.5 reduction goals for the greater BJ/YRD/PRD regions. The goals are all 2017 goals vs. 2012 baseline. There are some nice comments in the plan about the investigation and disciplining of officials who fail to meet the goals (though no specifics on penalties).

– Specific to motor vehicles, the plan reinforces the existing national fuel quality improvement timelines, but also establishes a new goal that China 5 gasoline and diesel (10ppm sulfur content) must be supplied to the three key regions by the end of 2015.

– The plan proposes massive scrappage goals for older, high polluting vehicles. China has hinted several times at goals to scrap all yellow-label vehicles (defined as Euro 0 gasoline and Euro 0, I, II diesel vehicles), but I’ve never seen such a clear goal codified before. The plan states that all YLVs nationwide should be scrapped by 2017. For the record, China had like 15 million yellow-label vehicles in 2011. That’s a huge number of vehicles to scrap. The plan also calls for “basically” scrapping all YLVs in the three key regions (5 million vehicles) by 2015, and scrapping all pre-2005 operational YLVs nationwide by 2015.

That’s the good news. Unfortunately, I wasn’t uniformly delighted by the plan. I am less than impressed by the following:

– I’m not sure why the plan sets PM10 reduction targets (as opposed to PM2.5) for some cities. PM2.5 is harder to control, but also more dangerous than PM2.5. China has new PM2.5 air quality standards and is completing a nationwide PM2.5 ambient air quality monitoring network, so why not jump straight to evaluation metrics based on PM2.5?

I’m deeply disappointed that the plan doesn’t call for any new vehicle emission standards. In this respect, the plan is much weaker than the plan Beijing released less than two weeks ago. Fuel quality improvements are critical because they enable more stringent standards to take effect. Scrappage programs are great, but they are most effective when the replacement vehicles are as clean as possible. Why would the State Council release such a comprehensive plan that doesn’t include any mention of upgrading vehicle emission standards? It is a strange and glaring omission to me.

Final note: here’s what I wish it said about vehicle emission standards: “taking advantage of the upgraded fuel supplies, China VI vehicle emission standards will be implemented in the three key regions in 2015, and nationwide in 2018.”

beijing’s comprehensive new motor vehicle emission control plans

Friday, September 6th, 2013

Earlier this week, Beijing’s government “declared war” (宣战) on PM2.5, releasing its most aggressive, detailed plan to date to reduce emissions and improve air quality. The overall goal of the plan is to reduce Beijing’s PM2.5 concentration about 25% from 2012 levels by 2017. The targets vary by district, but the overall average for the city – and the target for the most densely populated areas – is 60 ug/m3. Achieving this target would represent dramatic progress for the city, though even at 60 ug/m3 Beijing’s air quality would still be nearly double China’s ambient air quality annual standard (35 ug/m3).

Still, the plan is impressive in its breadth, specificity, and detailed assignment of responsibility. For each of the 84 separate measures described, the leading agencies – and even name of the person(s) on the hook – are mentioned.

Several of the key features of the plan have already been summarized by the media (e.g. Reuters, Xinhua, CRI). But I thought it would be worthwhile to translate and take a closer look at some of the specific actions related to motor vehicle emission control (Section 3 of the plan). The 22 measures described (#21-42) represent a truly comprehensive and world class approach to controlling air pollution from cars, buses, and trucks in the city. Beijing already has mainland China’s highest fuel quality (10 ppm S) and most stringent tailpipe emission standards (China V). Completing the following plan would cement Beijing’s position not just as a leader within China but as one of the world’s leading cities in terms of motor vehicle emission control.

Selected vehicle emission control measures from Beijing’s 2013-2017 Clean Air Action Plan:

#21: Control total vehicle population in the city to less than 6 million by the end of 2017. Given that the population of vehicles in Beijing already well exceeds 5 million, this will almost certainly mean reducing the current monthly new vehicle quota of 20,000.

#22: Reduce fuel consumption in the city by >5% in 2017 as compared to 2012, primarily through the promotion of new energy vehicles, small vehicles, and reducing overall vehicle use.

#23: Increase the cost of vehicle use through various measures, including progressive parking pricing and a congestion charge (though it should be noted that that the plan only commits to researching this, not to implementing it).

#24: Restrict vehicle use by time and location, including more strict controls on vehicles registered outside Beijing. Beijing already has such restrictions, but they will be expanded. For example, beginning in 2014, only China III and higher certified vehicles will be eligible to receive permits to regularly enter the 6th ring road. After 2015, only China IV and higher light-duty vehicles will be eligible for permits to enter the city, and yellow-label trucks (China II and older) will be banned altogether.

#26: Upgrade vehicle emission standards for on-road vehicles and off-road engines.

  • By the end of 2014, all new heavy-duty diesel vehicles should meet the China V standard, while all new heavy-duty diesel vehicles used in the city center should be equipped with DPFs. In addition, 100 public buses should meet the China VI standard (pilot), and Beijing EPB should begin research on the “Beijing 6” standards for LDVs.
  • Beginning in 2015, all off-road equipment must meet the Tier 4 standard or better.
  • By 2015, Beijing EPB will complete an ORVR standard and implementation plan for gasoline vehicles.
  • Strive to implement the China VI standards in 2016.

#27: Improve fuel quality by establishing a China 6 standard for local fuel quality and strive to implement it in 2016. Beijing has the potential to surpass Europe (currently at Euro 5) in this regard.

#28: Scrap one million older vehicles, including all yellow-label vehicles by 2015. Beginning 2014, preferentially support the replacement of vehicles with hybrid and energy-saving vehicles with displacement <1.6 L. This would presumably be an extension/expansion of Beijing’s existing scrappage programs, which are already China’s most successful. (Latest stats: Beijing scrapped nearly 150,000 vehicles in the first half of 2013.)

#29-37: Incredibly specific targets for introducing clean and alternative fuel vehicles (electric, hybrid, natural gas, etc.) in the public bus, taxi, long-distance bus, municipal service vehicles, freight, and low-speed vehicle fleets.

#38: Strive to have 200,000 new energy and clean energy vehicles in the city by the end of 2017.

#41: Strengthen in-use vehicle supervision and fuel quality compliance, including greatly expanding the number of random emissions inspections, building a full remote sensing network with 150 sets of equipment by 2016, and increasing the number of fuel quality checks including vapor recovery system evaluations.

#42: Set energy reduction standards for the transportation sector, including fuel consumption standards for freight vehicles. This will be interesting as it’s unclear what authority Beijing has to set or enforce such standards.

It’s really quite an impressive list. In many cases, there is significant additional detail beyond what I’ve described above, plus there are additional measures on public transit that I didn’t include here.

So, will it work? We’ll see. In any case, at this point it’s hard to imagine anything else Beijing could be doing beyond what’s in this plan to control emissions within its borders. Unfortunately, much of Beijing’s pollution is regional in nature, drifting in from the surrounding provinces. Hopefully, Beijing’s aggressive action demonstrated in this plan will spurn equivalent aggressive, comprehensive action at the regional and national levels.