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Costs and Benefits of Reduced Sulfur Fuels in China

Asian Development Bank, Manila

May 22, 2006

Katherine Blumberg

International Council on Clean Transportation

ICCT

About ICCT

• Dedicated to improving the environmental performance and energy efficiency of transportation throughout the world

• Council is composed of the government officials and leading experts on transportation and air quality

• At its first meeting in 2001, held in Bellagio, Italy, the group produced a landmark consensus document describing best practices for government regulation of the transportation sector

• This and other documents are available on the website: www.theICCT.org

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Purpose of the study

• Study in cooperation with State Environmental Protection Administration (SEPA), Energy Foundation, Tsinghua University and ICCT

• The vehicle fleet is growing rapidly and health impacts of vehicle emissions in China are already substantial

• Demonstrate the tremendous public health benefits of a already adopted vehicle standards and show the additional benefits to be gained from introducing corresponding fuel standards

• Help policy-makers determine the best approach to introduction of improved fuels

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Mismatched vehicle and fuel standards

China’s schedule for adoption of vehicle

emissions standards

EU Certification sulfur (ppm)

China’s fuel standards for sulfur (ppm)

Beijing’s fuel standards for sulfur (ppm)

Year LDV & HDV Gasoline / diesel

2005 Euro 2 500 / 500 500 / 2000 (500 recommended)

150 / 350

2008 Euro 3 150 / 350 50/50 (proposed)

2010 Euro 4 50 / 50

2012 Euro 5 (HDV only)

10 / 10

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Cost benefit analysis methodology

• Mobile source emissions modeling (59 cities plus rest of China)

• Impact of reduced emissions on exposure

• Quantification and valuation of health benefits of reduced exposure to mobile source emissions

• Determination of added vehicle and fuel costs

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Mobile Source Emissions

• Emissions were modeled based on adjusted MOBILE5b and PART5

• Benefits of improved fuels were calculated considering sulfur impacts on different technology groups

• Impacts were drawn from a review of major projects around the world

0

0.5

1

1.5

2

2.5

Euro 1 Euro 2 Euro 3 Euro 4 Euro 5

Vehicle Technology

Ad

just

men

t Fact

or

2000 ppm

500 ppm

350 ppm

50 ppm

10 ppm

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Vehicle Population

• Vehicle fleet projected to grow based on GDP

• Estimated a saturation value of 0.20 vehicles per capita - 10x growth in per capita ownership

• Travel distances per vehicle were decreased with fleet growth

• Motorcycle population was projected based on total vehicle population and motor vehicle population

0

20000

40000

60000

80000

100000

120000

1985 1990 1995 2000 2005 2010 2015 2020 2025Year

Veh

icle

Pop

ulat

ion(

Thd

.)

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Forecasted Vehicle Emissions

Current vehicle regulations will greatly reduce emissions

Emissions reductions with vehicle standards

Additional reductions possible with improved fuels

0

10

20

30

40

50

60

70

80

2005 2010 2015 2020 2025 2030

PM

(1

0,0

00

ton

s)

Euro 2 vehicle stds, 500 ppm fuels

Euro 2, 3, 4 & 5 stds, 500 ppm fuels

Euro 2, 3, 4 & 5 stds, matching fuels

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Human Exposure

• Vehicles sources are in close proximity to people breathing

• Intake fraction (iF) – a measure of the ratio of the amount of pollutant inhaled to the amount emitted

iF = Population Intake/Total Emissions

• Primary analysis for 59 cities with populations currently over 1 million

• Only considered direct PM emissions and secondary PM formation from NOx emissions

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Valuation of mortality

• Averaged Value of a Statistical Life (VSL) from studies conducted in mainland China on willingness-to-pay (WTP) to avoid premature mortality impacts of air pollution: US$(2005)129,600

• Values from other regions (Taiwan, Thailand, Europe, and the US) were 4-12 times higher than results from mainland China, when adjusted by GDP per capita (on a Purchasing Power Parity (PPP) basis)

• Elasticity of 1.4 for VSL in China (also lower than findings from other countries), implying that VSL rises more quickly than GDP

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Valuation of other health benefits

• Used ratio of the Chinese to US willingness-to-pay to avoid a cold 4.5:120 (3.75%) to adjust EPA values for ongoing health impacts: Source: Zhou and Hammitt 2005

• Chronic bronchitis• Acute bronchitis• Asthma attacks• Restricted activity days

• Chinese cost of illness (COI) used for discrete health impacts:

• Respiratory hospital admissions• Cardiovascular hospital admissions

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Forecasted GDP and VSL growth

• GDP per capita in China is expected to increase by more than a factor of 4 from 2005 to 2030 (Source: Chinese Academy of Social Sciences)

• With an elasticity of 1.4, VSL grows faster, increasing by a factor of 8 by 2030

• Values for other health impacts increase at the same rate as GDP

0

1

2

3

4

5

6

7

8

9

2005 2010 2015 2020 2025 2030

Gro

wth

Value of a Statistical Life

GDP per capita

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Other Benefits - Not Quantified

• Ozone impacts – may be relatively significant in China, due to high and increasing ozone levels.

• Agriculture – may be more significant in China than in Europe or the US, partly due to the lower values placed on mortality and morbidity impacts

• Visibility, tourism, and environmental & material damage – may also be significant, due to the growing importance of the tourism industry and the fragility of ancient buildings and artifacts.

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Costs

• Linear programming model used in 2002 was updated to include publicly announced refinery additions through 2010. Additional capacity was assigned as needed to allow Euro 5 fuel production without capacity constraints.

• Capital cost investments were assigned to a fuel quality based upon the year in which they were expected to be online. Capital cost factors supplied by Petrochina and Sinopec for the 2002 study were inflated by 35% to reflect 2005$ and other possible higher costs. Operating costs were based upon the capital/operating ratio in US EPA estimates.

• To evaluate current regulations, vehicle costs were assigned based on incremental costs of improved standards. Maintenance savings were not considered.

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Incremental Fuel Costs

• Model showed sufficient refinery capacity is planned or in place to meet Euro 2, 3, and 4 standards for 2005, 2007, and 2010.

• Additional capacity will be required for Euro 5 fuels.

Fuel Quality Basis FuelCapital Operating Total

US cents/gal US cents/gal Yuan/liter

Euro 2 (500 ppm sulfur)

2005 added Baseline for gasoline and diesel

Euro 3 (350 ppm diesel, 150 ppm gasoline)

2007 plannedgasoline 0.28 0.62 0.9 0.02

diesel 0.63 0.63 1.3 0.03

Euro 4 (50 ppm sulfur)

2010 plannedgasoline 0.34 0.77 1.1 0.02

diesel 0.93 0.93 1.9 0.04

Euro 5(10 ppm sulfur)

Added capacity beyond plans

gasoline 0.94 2.11 3.1 0.07

diesel 2.28 2.28 4.6 0.10

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Near-Term Fuel Quality Scenarios

2005 2008 2010 2012

Baseline

Vehicle Standards

Euro 2 vehicles Euro 3 vehicles Euro 4 vehicles Euro 5 HD vehicles

Fuel QualityEuro 3 BeijingEuro 2 elsewhere

Euro 4 BeijingEuro 2 elsewhere

Near-Term Fuel Quality Improvement Scenarios

Scenario A Euro 2 Euro 3 Euro 4

Scenario B Euro 2 Euro 3 gasoline only Euro 4

Scenario C Euro 2 Euro 3 Euro 4 Euro 5 diesel only

Scenario D Euro 2Euro 3 Shanghai & GuangzhouEuro 2 elsewhere

Euro 4 Shanghai & GuangzhouEuro 3 elsewhere

Euro 4

Scenario E Euro 2Euro 3 new vehiclesEuro 2 others

Euro 4 new vehiclesEuro 3 others

Euro 4

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Net benefits in the near-term

• Fairly subtle differences in timing

• Scenario A (Euro 3 & 4 fuels matched to vehicle standards) has highest net benefit

• Scenario C (Euro 5 fuels in 2012) increases the costs as additional benefits lag slightly

• Scenario D (early introduction into select cities) has low costs and positive benefits

• Scenario E (matching fuels to new vehicle sales) has the lowest net benefits and implementation is impractical

-600

-400

-200

0

200

400

600

800

1000

1200

2008 2009 2010 2011 2012

Net

Ben

efit

s (m

illi

on

US

$)

Scenario A

Scenario B

Scenario C

Scenario D

Scenario E

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Net benefits in the long-term are tremendous

• From a baseline of Euro 2 standards, net benefits of fuels and vehicles are additive• Adopted vehicle standards will have dramatic benefits in coming years• Improved fuels would provide a substantial additional benefit

-20

0

20

40

60

80

100

120

140

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Net

Ben

efi

ts (

Billion

US

$(2

00

5))

Euro 2, 3, 4, and 5 fuels

Euro 2, 3, 4, and 5 vehicles(500 ppm fuel)

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Conclusions (1 of 2)

• China’s aggressive timetable for adopting Euro standards will provide tremendous public health benefits, increasing over time

• The full benefits of improved vehicle standards will not be realized until they are matched by corresponding fuel standards– In 2030, corresponding fuel standards will add more than 35

billion in public health benefits, at less than 1/10 the cost– In 2030, fuel and vehicle standards together will have a benefit-

to-cost ratio of 17 and a net benefit of US$(2005)130 billion

• The costs are reasonable and recoverable, in fuel price or with tax incentives. As fuel prices rise, the incremental costs of cleaner fuels become less significant (at current prices ~1-2% of cost) and are within market price variability

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Conclusions (2 of 2)

• Beijing, and other cities that follow suit, will reap benefits due both to accelerating the timeline and adopting the complete regulatory package, vehicles and fuels together

• The next steps in vehicle emissions standards in Europe -- proposed Euro 5 (LDV) and expected Euro 6 (HDV & LDV) -- are likely to provide significant benefits for China as well

• Due to the rapidly growing fleet, China must continue to act quickly to catch up on emissions standards -- this should include adoption of the full regulatory program, including vehicles and fuels

• Necessary but not sufficient: Must ensure that vehicles are meeting certification and in-use emissions standards

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Thank you!

Thank you to some of my collaborators: • He Kebin, Fu Lixin, Liu Huan, and Yu Zhou, Tsinghua

University

• Michael Walsh, International Consultant

• He Dongquan and Gong Huiming, Energy Foundation

International Council on Clean Transportation (ICCT)www.theICCT.org

Kate BlumbergResearch Director, ICCT

kate@theicct.org