Costs and Benefits of Reduced Sulfur Fuels in China

1. Costs and Benefits of Reduced Sulfur Fuels in China Asian Development Bank, Manila May 22, 2006 Katherine Blumberg International Council on Clean Transportation

2. 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

3. 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

4. Mismatched vehicle and fuel standards

5. 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

6. 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

7. 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

8. Forecasted Vehicle Emissions Emissions reductions with vehicle standards Additional reductions possible with improved fuels Current vehicle regulations will greatly reduce emissions

9. 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

10. 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

11. 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

12. 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

13. 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.

14. 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.

15. 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.

16. Near-Term Fuel Quality Scenarios

17. 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

18. 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

19. 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

20. 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

21. 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 Blumberg Research Director, ICCT kate@theicct.org