Environmental improvement is the main justification for governments to promote the use of autogas and other alternative fuels. Pollution and global warming caused by rising concentrations of greenhouse gases in the atmosphere are prime examples of market failure, since the market fails to put a financial value or penalty on the cost of emissions generated by individuals or organisations. Air quality and the climate are, in economists’ parlance, public goods, from which everyone benefits. Damage done to the environment is known as an external cost or externality. Governments have a responsibility to correct these failures, to discourage activities that emit noxious or greenhouse gases and to make sure that each polluter pays for the harm he causes to public goods.
Levying charges on polluting activities is effectively a way of internalising these environmental externalities, although placing an exact financial value on them is extremely difficult and inevitably involves a large degree of judgment. A large number of studies have attempted to assess the health and economic costs of different types of emissions, including greenhouse gases. The social cost of carbon, for example, is the marginal cost of emitting one extra tonne of carbon (as CO2) at any point in time. Estimates vary widely according to the assumptions made and methodological approaches used. A recent survey of estimates of the cost of carbon averaged $158 per tonne of CO2, but ranged from just $4/tonne to over $5 500/tonne (Yohe et al., 2005).
In principle, the most economically efficient approach to internalising external costs is one that relies mainly on financial incentives, i.e. a marketbased approach. In other words, the effective market price of the activity that gives rise to an environmental externality should be adjusted through the application of a tax and/or subsidy large enough to reflect the value or cost of that externality. Once an appropriate fiscal framework is in place, consumers and producers should be free to make informed economic choices according to their own preferences. In the case of road transport, that involves taxing or subsidising transportation in such a way that the financial costs to end users of the different fuel and vehicle options reflect their associated environmental costs.
In practice, developing effective transport and energy policies that take account of environmental externalities is extremely complex – even if reliable quantitative estimates of external costs can be obtained. It is impractical to apply taxes and subsidies exactly according to actual vehicle usage and the actual emissions produced during use. And emissions trading schemes are similarly impractical for fuel use in the transport sector given the large number of users. Financial incentives have, thus, generally focused on fuelbased taxes, as they are simpler and politically less sensitive than measures that impact vehicle use directly, such as road pricing – even though evidence suggests that pricing vehicle use can be very effective.
The earliest widespread experience of differential taxation to support environmental goals was the introduction of unleaded gasoline, where lower taxes relative to leaded fuel were extremely effective in accelerating its uptake. More recently, similar incentives have been focused on encouraging the use of lowsulphur diesel and alternative fuels. The case for lower fuel taxes for to achieve environmental objectives is well established, though they may have to be significantly lower and their introduction needs to be well-timed to be effective (ECMT, 2001). In principle, economic efficiency demands that the excise taxes levied on any given fuel should be applied at the same rate to all users, commercial and non-commercial.
Most governments deploy other complementary approaches that target vehicle use and modal choices rather than just the prices of transport fuels, as such broader approaches tend to be more effective in practice in reducing emissions – especially of greenhouse gases – from road vehicles (OECD, 2003). Such approaches seek to internalise implicitly the external environmental costs of road transportation. They may be aimed specifically at encouraging the use of clean fuels, including autogas and other alternative fuels, or discouraging the use of more polluting fuels.
In practice, there is wide range of options at the disposal of policymakers within the normal policy-toolbox to promote the supply and use of alternative fuels, including autogas. The main approaches that governments could or do deploy are financial incentives and regulatory measures. Other measures include support for technology development and public awareness programmes.
Financial incentives can be directed at the fuels themselves or vehicles that are able to use them. Fuel incentives – the main measure that the countries surveyed in this report use to promote autogas – can take the form of a lower rate of excise duty (and/or sales tax) or its complete exemption. In some cases, commercial vehicles may enjoy a rebate on fuel taxes. These measures directly reduce the cost of running an alternative fuel vehicle (AFV) vis-à-vis gasoline and diesel vehicles and shorten the payback period on converting or acquiring the AFV. Since differences in excise duty show up in prices at the pump, the measure is also highly visible, raising public awareness of the potential cost savings from using alternative fuels. The lower the rates of duties and taxes relative to other fuels, the bigger the financial incentive to switch.
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This Guide discusses the rationale for economic incentives, why autogas makes sense, gives examples of successful incentive programs in a variety of countries.