Toward Sound Economic Incentives for CNG Buses in Metro Manila

1. Toward Sound Economic Incentives for CNG Buses in Metro Manila Jose Logarta Jr. Action for Economic Reforms Clovis Tupas Alternative Fuels, Philippine Department of Energy

2. Objectives • Present rough outline of Philippine CNG-Bus program • Situate it in the overall scheme of air quality improvement efforts. • Evaluate economics of program • Discuss tentative recommendations

3. Background • Diesel buses account for about 4.4 to 8% of mobile emissions in Metro Manila, according to some inventories • There are at least 10,000 buses serving the area; at least 1/3 traverse the busiest highway (EDSA) • There are other important externalities associated with their operation under the currentregulatory regime, which breeds a situation close to “open access,” resulting in excess pollution and congestion. Incentives facing drivers aggravate traffic conditions

4. Background • We cannot as yet rank a switch to natural gas among other options to improve air quality in terms of cost effectiveness • However, there is a great probability that this would yield net social benefits • One recent study (IES-Transport sector) yielded an annual health benefit (mortality and morbidity) of $1843 per switched bus. This might be an underestimate because of some problems in the modeling of impacts.

5. Costs of Switching (OEM) • The present value of incremental costs of switching has been estimated to be at least $39,000 (AED-EETP,2003). This is basically the incremental capital cost used by the authors. • This translates to a required price difference of 13 cents per liter between diesel and CNG, and an annual subsidy of $3,800 per year: • subsidy=rpd +png-pd • where rpd is price difference; png is price of natural gas; pd is price of diesel • At a diesel price >32 cents per liter, no fuel subsidy is required

6. DOE Natural Gas Vehicle Program for Public Transport Philippines has about 3Gw of NG supply. Balance of 300 MW available for transport Goals • enhance energy supply security in transport sector through diversification • promote use of natural gas as a clean alternative fuel Target: less than 10% penetration by 2013

7. Incentives • Income tax holiday for entrants • Duty discount for industry equipment • Automatic issuance of certificates of compliance with emission standards to NGV’s • Preferential franchises on newly opened routes • Accelerated issuance of environmental compliance certificates for NGV facilities • Financial packages from government finance institutions

8. The Pilot Program Involves • Government (DOE,etc), gas field operator, and bus companies • 100 to 200 buses plying routes traversing about 100 km south of Metro Manila • A mother-daughter network for refuelling • A guaranteed price difference (13 cents/liter). At current diesel prices, there would be no fuel subsidy required • A credit subsidy worth $4 million ($20,000 per bus)

9. Observations • Current trends in both the cost of CNG (OEM) buses and in price of diesel obviate need for subsidies, though competitive price for CNG with future entry of imports is not yet certain • While these trends might make it appear that subsidies in pilot program are superfluous, these might be justified if only for its startup/demonstration effect. The pilot also provides laboratory conditions for investigating barriers to entry. • Government target for NGV penetration appears modest in light of the above

10. Recommendations • A tax on diesel to sustain the current price gap is feasible and would additionally raise revenues • The required tax (6 cents per liter) means an incremental bus fare of about 10%, but this is already built into current fares because of recent adjustment • The tax can be phased in as world prices drop • This is feasible given an emerging political consensus to address the worsening fiscal problem