By Julian Wong Dec.7.2008
In: automotive, energy efficiency, oil, policy, transportation

More Petroleum Price Reforms: Move towards the Market and Higher Fuel Tax

The auto industry is front and center of the current financial-energy tsunami.  Detroit is in big trouble, and in need of a life-line.  Chinese automakers are faring better (and some have them tipped to be Detroit’s white knights), but the shakeout  in China has played itself out in petroleum price reforms.

On Friday (Dec 5), the NDRC announced further proposals for energy price reform in the petroleum sector that would come into effect January 1 by indirectly linking domestic fuel prices to international crude oil prices as well as substantially increasing fuel taxes.  The NDRC curiously maintains that the moves will not impact prices at the pump (see FAQ by NDRC, in Chinese only), however, the feeling is that more details to the proposal needs to be released for this claim to be assessed.  Ostensibly, the fuel tax hike will be offset by the recent pullback in crude oil prices, resulting in minimal increases in pump prices in the near term.

The Proposal

In order to align retail fuel prices, which have hitherto been tightly controlled, with international crude oil prices, oil refiners (i.e. Sinopec and PetroChina) will be granted a guaranteed profit margin of 4% above out-of-gate refining costs, subject to a ceiling and the government’s ongoing right to review the price mechanism.  Needless to say, this transition to market-based pricing is hugely significant. The proposed fuel tax increases consist of a an increase in consumption tax on gasoline from 0.2 yuan per liter to 1 yuan and from 0.1 yuan to 0.8 yuan for diesel.  These are significant increases, considering average gasoline prices at the pump are about 6 yuan per liter.  It is also significant that these taxes are set as absolute and are not linked to the price of the underlying fuel, thereby sharpening the incentive for conservation even in an environment of low fuel prices.

The move is consistent with the central government’s macro policy of general energy price reform that is well underway (see previous post on this June’s dramatic energy price hikes), as well as certain policy statements made by the Ministry of Finance on the possible implementation of a wide range of environmental, energy and resource consumption taxes (see last paragraph of this post).  The announcement also comes at a time where crude oil prices on the domestic market have fallen dramatically from a high of US$147 this summer to under $50 currently, and is viewed as an opportunity well seized.  Said Ma Qing, chief economist with CITIC Securities to China Daily:

Its a long overdue move.  The recent slump in oil prices has given the government a good opportunity to push through the reform.

China imports more than half its oil consumed and ranks poorly internationally in terms of energy resource consumption per unit of GDP.  The goal of these price reforms is to move towards a more market-driven pricing mechanism of energy resources, promote more efficient consumption, reduce emissions.  The proposed tax hike also comes just 3 months after taxes based on car size were raised.  The combined effect of that new car tax, progressive fuel price increases over the past half year, inflation worries and a increasingly gloomy macroeconomic outlook had been sufficient to depress car sales growth in recent months.  November has proven no different from October and September.

Strategic Tax-Shifting

But just before you think this is a get-rich-quick scheme by the central coffers, you might be consoled to know that the proposed tax hike approaches revenue-neutral.  Unlike previous direct increases in gasoline and diesel prices, this is an adjustment in fuel taxes rather than a direct adjustment of the fuel price.  This distinction is important as it means that this new revenue goes not to the oil companies, but to the government, which can then redistribute the funds to other uses.  Revenue collected from the increased fuel taxes will replace revenue from six categories of fees (including tolls on second-class roads, and road and waterway maintenance fees), which will be eliminated.

From a transportation policy point of view, this sort of tax shifting is also more equitable in that it taxes every driver according to the amount of miles they drive by sharing the price signal (by spreading the tax/fees burden) across all drivers instead of assessing flat road maintenance fees or concentrating them amongst a specific group of drivers, some of whom just happen to use toll roads more frequently than average but not necessarily drive more. Moreover, the shift of taxes from waterways to the road more meaningfully address the real transportation issues-auto congestion.

Social equity concerns will also be addressed by granting relief for losses incurred by local governments due to the elimination of such fees, as well as grain cultivators, fishermen and taxi-drivers, all of whom rely heavily on fuel-based vehicles or machinery.  Such social equity protections suggests that pump prices will somehow be increased because of the consumption tax hike, contrary to the NDRC’s repeated assurances.

From Tax-Shift to Materials Shift

These actions are very positive green hops forward, and pave the way for the promotion of alternative vehicles such as plug-in hybrid electric vehicles or fully electric vehicles.  China Green Buildings had a couple of good posts on the situation of autos in China, and the prospects for their electrification.

Amory Lovins, the energy efficiency guru of Colorado’s Rocky Mountain Institute has been on the lecture circuit lately, lamenting the narrow focus on electric powertrains, and calls for innovation on other aspects of vehicles, including the dramatic lowering of vehicle body weight by using composite materials.  According to this article featuring Amory’s ideas:

Pinning incumbent automakers’ turnaround on electric powertrains through plug-in electric cars is a myopic view of the available technologies.

Cars can be made half as heavy as they are today by using composite materials such as light but strong carbon fiber, a choice that gives manufacturers more flexibility and reduces costs in production. “Lightweighting” lowers the engineering bar for alternative powertrain technologies as well, he argues. With less weight to haul around, expensive batteries can be smaller and fuel cell vehicles become feasible.

The other technology changes required to set automakers on the right path are aerodynamics and software for remote diagnostics and other tasks.

The writing is one the wall–China has all the ingredients to be the electric vehicle capital of the world.  If it can extend its innovations beyond the powertrains to the rest of the car body, we can really achieve the mobility systems shift that we need.


Coming back to the proposal, we know one organization who will not take kindly to these new rounds of China’s energy price reforms–OPEC.  John Kemp, columnist at Reuters, observes:

In effect, China has started to emulate the successful conservation strategies used in Europe and Japan, where heavy fuel taxes have spurred the use of much more fuel efficient vehicles and much lower energy consumption per unit of output than in the United States and the rest of the world.

Europe and Japan took advantage of relatively low oil prices during the late 1980s and 1990s to raise substantial excise taxes on the consumption of gasoline and diesel. China’s decision to boost the consumption tax on gasoline and diesel looks like it could be the first in a series of phased increases over time, similar to the United Kingdom’s “fuel duty escalator.”

OPEC has long complained about the massive “wedge” these fuel taxes have driven between the pump prices paid by motorists in Western Europe and the net revenue which oil exporting countries actually receive for their crude, but they are widely cited as the most effective conservation strategy.

Saudi Arabia expressed consistent concerns that the recent surge in oil prices would lead to the long-term loss of demand even if prices subsequently fell back. Those fears are now being realized.

May OPEC’s biggest nightmares come true.

Comments (6)

  1. Saudi Stag Party Dec.10.2008@4:36 pm Reply
    Saudi Stag Party Dec.10.2008@4:36 pm Reply

    “May OPEC’s biggest nightmares come true”. I love this line …The nightmare before Christmas, and may we be their scrooges for many an xmas to come ;-)

  2. Rob Earley Dec.17.2008@1:02 pm Reply

    I am still forming an opinion on the gas tax, and have some questions that haven’t been directly addressed anywhere. Basically, as you have stated, the tax is revenue-neutral. However, is it cost-perception neutral?

    I would need somebody with some auto economics knowhow to help me out on this, but it’s my impression that people in China think about all those 6 fees when they buy a car — and in fact, those fees seem to be some sort of disincentive for buying cars, because car consumers associate those fees with the lifecycle cost of owning the vehicle (as opposed to driving it).

    Now, if that disincentive is taken away, and people feel a sense of ease about buying cars because the pressure is taken away from car ownership and put on car use, then I presume this will mean more car ownership.

    Given that people who own cars seem to think “well, I spent this much on a car, how can I not use it regularly,” would this increased ownership not actually result in increased car use — and increased fuel use — and increased traffic/sprawl/obsesity/other bad things associated with personal vehicle ownership?

    I’m kinda thinking that increased gas taxes are a good thing, and that work does need to be done to make non-discretionary driving more socially equitable. But I’m not convinced yet that a revenue-neutral gas tax is a sophisticated or environmentally-responsible enough strategy.

    [rjearley] at []

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