November 17, 2010

life in financial markets: fuels on fire

Recently, I wrote an editorial for the publication I work for on the issue of diesel-run SUVs and cars. 

Here is what I wrote:

Fuels on fire
The car market in our country has been on a roll in recent years notwithstanding the intervening global depression period of 2008 and early 2009. While car manufacturers--Indian or foreign--selling cars, including SUVs (sports utility vehicles) to Indians have all the reason to be mightily pleased with such a trend there is an underlying unpleasant side-effect that India as an ecological landscape is experiencing. 
In the last few years, almost all the high-end cars sold in India have been diesel. These cars, that includes sedans and SUVs, have costed upwards of Rs 7-8 lakh. Advocates for a less-polluted environment have always opposed the dieselisation of the car fleet. They have associated the deteroriating air quality in the cities to the sharply rising levels of tiny particulates of size less than 2.5 microns and nitrogen oxides, both of which arise more out of diesel exhaust emissions than from petrol vehicles. 
So nothing new was being said by union environment minister, Jairam Ramesh when he told the delegates of a UN conference on environment last week that in view of the growing carbon emission levels of India's transportation sector it was criminal for diesel subsidies to be used up in increasing part by large-sized cars and SUVs. It is estimated that these passenger vehicles gobble up 20 to 25 per cent of all diesel sold in the country. 
As a concept, discouraging the use of diesel passenger cars is ideal for climate change mitigation purpose but there are practical difficulties. Particularly if the solution being touted is differential pricing of diesel -- higher for cars and normal rates for trucks, tractors, power generators, agricultural pumps, railway trains and industrial use. Enforcing differential diesel prices at the retail outlet would be extremely difficult. 
One viable alternative was spelled out by a section of a February 2010 report of a government-nominated expert group on a viable and sustainable system of pricing of petroleum products headed by Kirit Parikh. After commenting that there was no economic reason to subsidise diesel car and SUV owners it laid out a formula to collect the same level of tax that petrol car users pay from those who use a diesel vehicle for passenger transport. 
Illustrating through an example and use of discounted rate over a 10-year life of a vehicle, the group stated that a petrol car owner who drove 8000 km a year and got an average mileage of 13.5 km per litre was paying Rs 10,000 more excise duty per year than what he would if he drove a diesel car. The calculation culminated in a figure of Rs 80,000 additional excise duty diesel cars should be required to pay. While this figure may seem low to some, the assumptions of car usage, mileage and discount rate can always be updated and fine tuned to levels that truly reflect the average of the use of passenger cars in the country. 
Whatever be the challenges in finding a solution to the dieselisation of the car industry in India, one has to be found and soon. Even in the US, where governments and consumers are wary of paying more for fuel-efficient vehicles there is heightened awareness of harmful effects of fuel-guzzling SUVs. India is racing ahead on the way to become a consumerist society but it does not have the knowledge and the maturity to deal with the negative environmental side effects. 
Whether unwitting or not, the subsidy being enjoyed by rich diesel car and SUV owners is neither wise nor sustainable.

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