Making Bharat VI affordable

Clean air

Public anxiety is building over severe pollution levels in Delhi and the health toll of air pollution in India as a whole. At a recent hearing of the long-standing case on air pollution, the Ministry of Environment and Forests filed an affidavit with the Supreme Court of India that proposes leapfrogging to Bharat VI vehicle emission and fuel quality standards by 2020. Speeding the adoption of these standards will bring substantial air quality and health benefits, but the standards also mean an increase in vehicle costs. While we’ve made the case that benefits far exceed the costs in the long term, there are legitimate concerns that some costs may hurt small business owners. Nearly 80 percent of truck operators in India own less than five trucks, and it is not uncommon for a single truck shared between two or three owners. Initial purchase price of the truck is a major concern for these operators. To answer to those concerns, India should consider establishing a national vehicle scrappage program.

Fortunately, in most cases the costs to transition to Bharat VI can be absorbed by consumers. The additional cost to meet Bharat VI fuel standards is very low when considered on a per-liter basis. Investing in ultra-low sulfur fuels (ULSF – fuels with <10 ppm sulfur content) will increase production costs by about 0.8¢ (Rs. 0.50) per liter , which wouldn’t be very significant even when compared to the currently low prices of diesel fuel (76¢ or Rs. 47 per liter) and petrol (92¢ or Rs. 57 per liter).

On the vehicles side too, the increased costs to go from Bharat III/IV (currently in place in India) to Bharat VI would not be very large for most vehicles. Petrol-fueled cars and two- and three-wheelers would incur upgrade costs under $80 (Rs. 5,000). Diesel-fueled cars and three-wheelers would incur greater costs, but this would likely incentivize consumers to opt for petrol-fueled vehicles instead, especially as the fuel price gap between diesel and petrol narrows. In any case, one can make the point that consumers of all these vehicle types (whether petrol or diesel) are relatively affluent, and therefore obligating them to pay a bit more to clean up India’s air wouldn’t impose a large burden on the country as a whole.

The same argument can’t be made for consumers of heavy-duty vehicles (HDVs). The cost of upgrading a Bharat III truck or bus, with an initial purchase price of around $30,000 (~Rs. 20 lakh), to Bharat VI could reach $5,000 (Rs. 3 lakh). The customers for these types of vehicles are not normally India’s up-and-coming urban middle class, but rather small- or medium-scale transporters and city and state road transport corporations. A 15% percent increase in upfront investments to purchase a new vehicle would cut into their profit margins. The repercussions could be further price hikes in the costs of goods and public transport, and/or a sharp decline in new vehicle sales during the switchover to Bharat VI standards. The latter would have serious repercussions for air quality in India, because the longer it takes for the old, high-polluting HDVs that ply India’s roads to be replaced with cleaner vehicles, the longer it will take for Bharat VI standards to achieve major emission reductions from the heavy-duty fleet.

This is where implementing a nationwide HDV scrappage (or vehicle replacement) program at the same time Bharat VI standards go into effect could make a difference on all fronts. Under such a program, HDV vehicle owners would get a subsidy to replace their older (Bharat I, II or III), but still operational vehicle with a new Bharat VI vehicle at the price of a Bharat V equivalent vehicle. On the economic front, subsidies to offset the price increase of Bharat VI vehicles would take the burden off transporters and goods carriers, and they would let the automobile industry produce Bharat VI vehicles without worrying about declining sales. On the environmental side, hastening the replacement of older HDVs with Bharat VI HDVs will not only reduce PM emissions by more than 99 percent, but considering that newer trucks are much safer on the road, additional road safety benefits themselves might justify the cost of the program.

A successful HDV scrappage program that India can emulate is California’s Carl Moyer Program. A particularly appealing feature of the Carl Moyer program is that vehicle replacement subsidies are given depending on estimated emissions reductions. Vehicle owners must provide details regarding the operation of the older vehicles and how emissions would be reduced with the purchase of new vehicles. In doing so, there are additional checks to ensure that all vehicle regulations are being enforced. Local-level policymakers are involved in the implementation of the Carl Moyer Program along with state-level agencies to ensure that local-level benefits are realized. And even after subsidies are paid, government authorities follow up with vehicle owners to ensure there is no fraud and that the program is, in fact, achieving its goals.

Of course, the Carl Moyer Program is not free. From 1998 to 2011 the program cost the state of California $680 million (Rs. 4080 crore) to reduce emissions from over 24,000 HDVs. Initially, the state paid for the program out of its budget, but since 2004 the introduction of a small vehicle registration surcharge has provided most of the funding for the program. And despite the costs, the Carl Moyer Program has been repeatedly extended and expanded by California’s state legislature and voters, which speaks to its popularity and success.

In the Indian context, an HDV scrappage program does not have to be permanent. Implementing a five-year program (2020 to 2024) would allow the country to gradually absorb the shock of higher HDV costs while also reaping air-quality benefits. And in the long term, the benefits of cleaner air, a safer vehicle fleet, and a healthier populace would far outweigh the investments. In short, instead of fretting over leapfrogging to Bharat VI emission standards, we should embrace them.