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Vehicles and taxation for biofuels in developing countries.
by Hakan Falk, "Energy Saving Now"
Introduction.
Road taxes or road tolls have a very long history that dates back to ancient times when you had to pay for entering towns and cities. It was also often used as a levy for safe passage and for "protection" through "dangerous" areas, controlled by the tax collectors. Merchants and other road users had to pay "road taxes" and carry "insurance" against "accidents", both at land and sea. It was a profitable business. Taxation is still enforced, only now by the police, who are supposed to work for the people.
Vehicle taxation, certification, testing and insurance are also still a very important business. The beneficiaries have changed and today you probably get more value for the money. In many parts of the world, the police work for the people and the honesty and quality is gradually getting better. We call those parts democracies after the Greek word Demo for people and Kratein for rule, the meaning of democracy is therefore "the rule of the people". Nearly half the countries in the world are now "representative democracies", which means that the people elects representatives (politicians) that will govern and make up the rules for the country.
The ways we travel have changed, the horses are replaced by vehicles with engines both at land and sea. We have also added air as another medium for travel and transport. The fuels have changed, the taxation and insurance are much more sophisticated.
The world has developed to be more and more dependent of energy and each countries representatives have to ensure, that the country has enough for its sustainable development. This is of course mostly a match of the country's availability and needs of energy, which can be achieved by control of consumption and production.
In this article we have assumed a choice of biofuels as the alternative fuel economy.
Choice of Biofuels as basic fuel economy.
I have based this suggestions for vehicle certification and taxation for biofuels in developing countries on biofuels. The reason is that I cannot really see any other economically viable routes for developing countries. The reasoning for my standing on this are discussed in,
The choices of fuel economies, an introduction. and
Biofuels.
It is very difficult to find viable energy alternatives for developing countries, other than renewable sources like biofuels, solar, wind and hydro electric. The good news is that combined with energy efficiency, the mentioned sources can permit a continuous and positive development. The situation is in fact more difficult for developed countries, who must make substantial changes in habits, attitudes and engineering practices to maintain their position, they will almost need to start again from scratch. If you follow the debate and analysis, it is mostly about timing and not if it needs serious implementation. There are also some discussions about alternatives like a hydrogen economy, that will take large investments and is open to doubts of its viability.
In one way the situation is easier for developing countries, because the possible development direction is clear and the bag of existing waste in usage is less. It is ample possibilities to study the mistakes of developed countries and learn from them.
Certification and taxation as Energy policy tools.
We could use vehicle/product certification, road and energy taxes as efficient ways of supporting building activities, infrastructures and energy conservation, which is the most common and strongest argument for them. The major taxes involved in this are,
- Vehicle "sales and registration taxes".
A large number of countries have the normal sales tax or VAT on the sales of vehicles, but also a special sales tax that are dependent on the price, size and type of vehicle. They also have "registration fee", which in theory should pay for the cost and maintenance of the vehicle registry. Vehicles are classified in sizes and types. It is normally prepared for further classifications, technical and statistical data. It is an opportunity for developing countries to develop systems that will encourage a vehicle stock profile that are more in line with the interests of the country's energy situation.
A connection between the "sales and registration taxes" and fuel economy and flexibility is far more in the interest of the developing country, than follow a traditional model of a developed country. The vehicles can be divided in types and classes as today. In each class a model vehicle can be chosen, that is available and that represents low fuel economy, good environmental standards and which can utilise biofuels. Then taxation levels can be set relative to this model, which would encourage better performance and discourage worse. This would make it easier for good technologies to compete and penalize the worse performers.
- Annual "road taxes".
The philosophy of annual road taxes are a continuation of the "sales and registration taxes" and will follow the same model for vehicle classes, fuel efficiency and environmental standard.
- Fuel taxes.
Fuel taxes are the most effective tool for influencing the vehicle development, fuel types and vehicle usage. They are also a major contributor to financing of society services.
Europe have a taxation of fuel, were the price at the pump is around 70% tax. The theory for this was that it would force the development of more fuel efficient cars and encourage voluntary restrictions of use. It worked well, with Europe now having the best fuel efficiency in the world. It also made it more beneficial and economical to have diesel vehicles.
A weak point is that the governments have become oil dependent, by having such a large part of indirect taxes coming from fuel. In fact, during the latest price crises, Blair in the UK refused to lower the fuel taxes. The argument was the negative effect this would have on financing the state services.
Europe has a price structure that is perfect for introducing bio fuels, if the original theories would be adhered to. By easing biofuel taxation, the price at the pump would not have to change with the introduction of bio fuels. The EU has studied various options and the advantages of their utilizarion, especially biodiesel, increase in their uptake has been agreed to by the member states. France, Germany, Austria etc. are very active in biodiesel implementation. Some of the new members of EU have even more aggressive implementation schedules.
We can see "Energy taxes" as an efficient way of supporting energy conservation, which is the most common and strongest argument. In practise it has also become one of the most effective methods to depress alternative energy solutions. High energy taxes have the effect of depressing the economy, not because of the tax, but its influence in economic cycles. There are many arguments for and many against high energy taxation. If we could instead use the taxes to even out the economic cycles, it could be as efficient as interest rates.
The illusions of economy and taxation.
The politicians like indirect taxes because it reduces psychologically the importance of tax issues in election campaigns. It also give possibilities of manipulating the people. For years now, we have seen this restating of purposes and/or of definitions, all geared up to make issues less transparent. If the politicians had the same stringent accounting rules as corporations today, they would be in big trouble. Look only on the MTBE additive case in US, were the lawmakers are trying to cover up for the oil industry.
Taxation income can either go into a general pot or it can be ear marked for special purpose. Even the earmarked funds finally end up in the general pot. It is easy to exemplify,
- The basic principle is that any spending by government or citizens, that does not have a major direct or indirect impact on trade balances with other countries, is only effecting the internal economy and GDP. The building and construction sector can be such a sector. For discussion purposes, I will claim that this is close to follow the famous 20/80% rule, were 20% is the real remaining benefit and the 80% is subject to recycling in the tax system. It is similar to the 20% of product manufacturing cost, that are regarded as sound basis for manufacturing business.
- Import/export balances are mirroring the countries external trade and in some sectors also the countries dependence of import for vital products like food and energy. Many developing countries are in a poverty trap by selling their produce cheap and buying expensive energy, this is reinforced by international "free trade" and "banking" organisations maintained by developed countries. There are large benefits to be drawn by a better taxation control of these situations, combined with local energy production.
- If the society creates a tax income *that is not* ear marked for a defined purpose, the income will be directly subject to allocations in a general yearly budget and the competence of politicians. It will create activities that are in its turn subject to taxation and further allocations. We can simplify this and call it the operational budget and activities for a country. In the budget will be some items that are investments on the longer term and will effect the society in coming budgets for taxation and spending. The governments and politician have claimed to be able to control this in the best interest of the country.
- The traditional way of controlling and influencing economical cycles with a general operational budget, have been to encourage/discourage behavior in the economy using interest rates. This was originally done by government and politicians, but most developed countries discovered the necessity of dealing with this by an independent non politic expert authority. There are now more and more evidence that their work becomes more difficult with the appearance of unstable oil prices and other energy crises, the influence of energy costs are substantial on economies.
- If the society create a tax income *that is* ear marked for a defined purpose, the income will be subject to project driven allocations and the competence of educated specialists. Almost all developed countries that I know of, started this way with vehicle and fuel taxes. The funds were ear marked for the build up of infrastructure and support of the transportation sector. This does not take away the fact that the major part of the funds finally, through salary and consumption taxes, ended up as taxes in the operational budget. The real benefit was the fact that the funds were project related and released in a controlled manner, often to even out economic cycles and to support employment.
- By using a flexible "ear marked" taxation system and energy planning, managed by an independent expert authority similar to existing ones for interest rates, large improvements can be achieved for developing countries. The responsibility for the authority would be the development of infrastructure, energy support system, development of biofuel economy and alternative energy sources in general for the society.
The option of using fossil resources have already expired for developing countries and the developed countries are on notice. We must do more than gamble on technologies that are promising, but not "ready for use". We cannot afford to have the future generations to be caught "with the pants down" and we have some serious responsibilities to create the right environments where developing countries can develop.
Fossil fuel vs. biofuel taxation.
It is not really correct to compare locally produced biofuels and fossil fuels from a taxation angle. The reason is that the level of taxes trough out the chain are different. To exemplify this we can again look at a few samples,
- If we look at an import of a refined product that is arriving in a country. In most countries it does not add any value or generate taxes until it starts to be pumped of the ship. Then the local work (income tax) and equipment (company taxes) will generate income and taxes, followed by the distribution and the petrol station that generate work and equipment usage. First after that the fuel tax will be added and generate tax income.
- If the local country has the refining capacity for product production, the imported product have a lower value and the production process will add work and equipment usage also.
- If we then talk about locally produced biofuel, it will be many more stages that generate taxes, based on the creation of more work and equipment values from farming, processing, transport etc.
Generally it is said that in US the oil price for Brent crude have to be $40 to $45 per barrel, to equalize biofuels price at the pump of fossil fuels and with the same fuel taxes. The realities are different, because if you compensate biofuels for already paid taxes in the local production, that are not paid locally for fossil fuel, the level for equalization is more likely around $30 per barrel and it is not very costly subsidies to bring the competitive level down under $25 per barrel. Saying this, you then can understand why OPEC target range is $25 to $30 per barrel and why they are so nervous about it.
It does not take a lot to understand that subsidies to make biofuels competitive at the pump is a very positive and cheap way of incentives for the trade balance, local economy and employment. Subsidies will probably be nullified only by its economic benefits and the benefits from environmental and social effects make it a very profitable exercise for the country as a whole.
Management of taxation and energy policies.
It is clear that fuel taxes can have an equal or larger influence on economies than interest rates, but the politicians and economists do not really appreciate it. I am in some ways a supporter of fuel taxes, but not in the way they are applied today. It could be as powerful, important and efficient as interest rates and already has the same effects on society. In the developed rich countries, it should be used more intelligently. High energy taxes in a developing country could have a direct negative effect on the development.
The influence of interest rates are constantly monitored and adjusted by experts, but energy taxes that might
have more influence does not get the same attention. A good suggestion would therefore be to create a financial and/or parliamentary body that can monitor and change fuel taxation in the same way as is common with interest rates. What every country need is an Alan Greenspan of energy taxation and allocation. Responsibilities for such a body could be,
- Creating and maintaining short and long term Energy Plans.
- Develop and support programs for efficient and environmentally friendly energy use.
- Creating, monitoring and maintaining flexible vehicle and fuel taxation systems that support the Energy Plans.
- Creating, monitoring and maintaining flexible energy taxation systems for other renewable energy systems for industry and domestic usage, that support the Energy Plans.
- Managing and coordinating with other bodies for economic development, the funds from the energy project related tax systems.
- Creation, development and financial support a biofuel based economy.
- Creation, development and financial support the use of solar, wind or other renewable and sustainable energy systems.
- Monitor and adjust Energy Plans, when other suitable "ready for use" technologies arise.
By having independent bodies for management of economy and energy, the government and parliament will have the necessary expertise to develop, implement and manage the best possible solutions for coming generations. It will generate sustainable economic capacity to develop the other necessary systems for education, business, employment, health, security, defense, human rights etc.
Hakan Falk
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