Policy measures to finance the transition to lower sulfur motor fuels
Provides an overview of international experiences related to financing motor fuel desulfurization by introducing fiscal and other policy measures from Japan, Hong Kong, the United Kingdom, Germany, and the United States. Policies showcased include tax differentials at the pump, tax incentives or subsidies for refiners, and regulatory mandates with flexibility.
Among the paper’s conclusions:
- To accelerate the supply of low sulfur fuel, governments may choose to implement regulatory mandates (setting lower sulfur standards) and leave it to the market to determine the cost burden that will be passed on to consumers. Compliance flexibilities, such as credit trading, can help alleviate any hardship that approach may entail.
- Governments can also use various policy tools to reduce the financial burden on refiners. Setting differentiated tax rates on lower sulfur fuels compared to higher sulfur fuels, providing tax reductions/credits to refiners that provide lower sulfur fuels, and directly subsidizing the supply of lower sulfur fuels are all common financial measures and have showed success in encouraging early and rapid adoption of lower sulfur fuel in various countries and regions.
- Fiscal incentives are almost always combined with regulatory mandates on fuel quality, with the regulation serving as a “backstop.”
- Fiscal incentives can stimulate rapid transition to lower sulfur fuels, even ahead of the regulatory schedule. But whatever the fiscal incentive chosen, it must manifest in a price differential at the pump that favors the lower sulfur fuel, as consumers will not make the shift if the cleaner fuel is not competitively priced.