Environmental impact based fuel pricing: Towards a new era of conscious citizens and social equality

India’s crude oil import bill is $ 90.3 bn in the first half of 2022, a rise of 76% due to volatility in international crude prices on account of geopolitical conditions.

fuel pricing, crude oil import, crude oil prices, natural gas
The increasing fuel cost has had little impact for those who can afford it. 

By Air Marshal R Radhish AVSM VM

As per recent data provided by the Ministry of Petroleum, as of October 2022, India consumes 5 million barrels of petroleum per day, a growth of 3% compared to an average global growth rate of 1%. This year (2022-2023), India is pegged to consume around 220 to 230 MMT. India’s crude oil import bill is $ 90.3 bn in the first half of 2022, a rise of 76% due to volatility in international crude prices on account of geopolitical conditions.

India is the third largest importer of crude oil and imports 55% of natural gas requirements and 85% of the oil it processes. Despite all odds, the Government has managed to keep inflation under control through several policy interventions. With no foreseeable change in the current geopolitical conditions, it is time for all stakeholders, including the end consumers, to ensure that petroleum products are consumed efficiently, thereby making the last drop count.

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In April-May 2021, when our country was struggling with the deadly second wave of COVID-19, fuel prices had breached historic highs in most parts of the country. The populace most affected by this steep rise in fuel prices were the ones who were perhaps the lowest per capita consumers but whose lives and livelihoods were intricately linked to the price of fuel. If one goes for an early morning walk along Shanti Path in New Delhi, one sees motorbikes and scooters overloaded with fried snack packets speeding through relatively empty streets to reach their customers in some remote part of the city.

The vehicles are overloaded and stacked in such a manner that may be unsafe for the rider; however, he takes the risk since every penny saved contributes to a better tomorrow for the family. On the contrary, once the temperature rises in summer, one will find many vehicles parked at various places along the streets or at taxi stands, keeping the engine running for air conditioning to keep the vehicle cool while the driver rests or sleeps inside. Traffic lights are the best place to assess the attitudinal difference towards the rising fuel cost. The increasing fuel cost has had little impact for those who can afford it. 

The environmental effect on our attitudes towards fuel consumption has also become acutely visible. Every winter, air quality and pollution adversely affect the populations of large swathes of Northern India. While the problem is exacerbated by stubble burning, construction activities etc and weather conditions such as calm surface winds, low temperature, inversion layer, and reduced heating from the sun resulting in a ‘bottling up’ effect on the poor-quality air, the role played by the indifferent use of fossil fuels cannot be ignored. A recent study by Greenpeace Southeast Asia and the Centre for Research on Energy and Clean Air has put the economic cost of air pollution for India at $150 billion or 5.4% of its GDP. 

The time is right to explore the aspect of economising fuel consumption at an individual level. Fossil fuel is a precious and dwindling resource used across the spectrum of our population for power generation, mobility and other purposes. However, the impact of the fuel becoming costlier is not felt uniformly across the spectrum. There needs to be a way to price fuel as per its economy of usage so that the impact of its cost can be reduced on the less affluent while its uneconomical use by the affluent can be addressed accordingly.

The basic concept would involve a system by which a vehicle’s fuel consumption rate is tapped into and used as an input to calculate the cost of fuel when it is vended at a fuel station. Every modern vehicle comes with a fuel economy indicator on the odometer. The same data can be transmitted through a transmitter, e.g. Bluetooth, to a receiver at a fuel vending station where the vehicle is being topped up. Once this figure is known, it can be used to cost the fuel that has been vended. Every vehicle can be given a unique code to ensure that it carries the unique signature of that vehicle, including its registration number, type and class of vehicle, owner’s details etc., which would ensure that any fraud attempt can be detected and penalised. 

Different sizes of engines and different classes of vehicles have different fuel consumption parameters. Many vehicles, for example, an ambulance or a fire tender, are only sometimes meant to be used economically. Hence, some benchmarking would have to be done to include this factor in the pricing matrix. Then there are public utility, commercial, and private vehicles that also need some distinction in the fuel costing algorithm. This aspect also can be dovetailed into the matrix to prevent costs getting passed on to the consumers of public services. Similarly, the base factor for a basic motorcycle and a luxury car can be benchmarked separately. The present pricing matrix for fuel includes cost prices along with central and state taxes. A component of the taxes can be made into an “Environmental Impact” tax. This component can be decided based on the fuel economy factor and the class of vehicle mentioned earlier.

The present pricing matrix has no incentive for economic consumption within a vehicle class. For example, if a driver manages to abide by all the principles of fuel saving while driving, they would achieve better fuel economy within that vehicle class and should get access to cheaper fuel. If incentivised for costing the fuel vended, the attitude towards fuel saving would have multi-fold advantages. It would encourage the driver to continue using fuel economically throughout that vehicle’s life.

It would have the added benefits of better engine performance,  lower emission, lower maintenance costs, and an overall improvement in our mindset towards the economic consumption of fuel. The base parameter cost for different vehicle classes could be fixed by an extension of the same logic used to fix fuel prices today.  Similarly, for other non-vehicular engines, e.g. generators, pumps etc., factors such as engine fuel efficiency as well as hours of usage can be used to dynamically price fuel based on a sliding rate as is in vogue for electricity. 

The advantages of such a scheme would be multifaceted. The most beneficial effect would be the overall reduction in fuel consumption through a change in our attitude towards the importance of efficient fuel usage. The consumers who run smaller and more efficient vehicles will be the most significant beneficiaries.

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An autorickshaw driver earning a daily income to feed his family will pay less for fuel than a high-end, high-performance luxury car owner. Both would be encouraged to use fuel wisely. The environment will be another significant beneficiary. Economical consumption of fuel would have a two-pronged effect on the environment; reduced emissions due to better fuel efficient engine running, and reduced consumption leading to reduced emissions.

A graded, environmental impact indexed fuel pricing policy can have several other multi-layered positive connotations which may go beyond basic fuel-based issues and have a greater impact on the national economy across different sectors. As per existing policies, a vehicle is supposed to have a fixed life, beyond which it is supposed to be scrapped. As of now, it is determined purely by the calendar life and condition of the vehicle, but its overall fuel efficiency or contribution to the environment through its life is not considered.

In effect, there’s no incentive to run the vehicle efficiently. However, suppose we introduce the condition of the engine measured in terms of the lifetime fuel economy of the vehicle as a factor that finally determines the scrapping age of a vehicle. In that case, we can incentivise fuel economy, better engine handling, and better driving habits.

If the engine is in good shape, but the chassis or the body is not in good condition, the engine could be reused on any other vehicle or used as a spare. The fuel efficiency data could also be used as a determinant for assessing the potential for pollution, thus encouraging the drivers to continuously monitor the pollution potential of the vehicle themselves, as against the extant policy of time-based pollution checks.

The automotive industry and engine manufacturers for other fuel-based engines will be incentivised to develop more fuel-efficient engines. The hardware and software required for capturing and transmitting fuel efficiency and engine use data will give rise to new job opportunities.

Sceptics might argue that many things have been taken for granted. The scheme demands that there is internet connectivity of adequate bandwidth at all fuel vending stations; that the vehicle would have a mechanism to measure dynamic fuel economy; that the vehicle would have Bluetooth type of data transfer capability; and that the vending point would have the capability to sense that data and generate The cost of the fuel vended, dynamically. However, one is reminded of the scepticism expressed when plans for AADHAR and UPI were announced. We all can reap the benefits of these schemes today.

Dynamic, environmental impact indexed fuel pricing will be a unique Made in India initiative which will harness our progress in data connectivity, our indigenous capability to design and implement unique solutions and our drive towards social equivalence of all citizens.

The author is an Indian Air Force Officer.

Disclaimer: The views expressed in the article are purely of the author and, it does not in any way represent the official IAF or Govt of India position on the subject. Nor does it reflect the official position or policy of Financial Express Online

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First published on: 10-02-2023 at 15:29 IST
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