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Archived Discussion - January 2002

Regulating Fuel Markets for Cleaner Air

Moderated by Masami Kojima

Abuses in fuel markets are common. Some abuses pose serious health and safety threats to consumers. For example, adding lead to gasoline downstream of refiners, as happens in Central Asia, increases the ambient concentrations of lead, retarding the intellectual development of children. Adding lead also harms the health of those who do it and damages the catalytic converters of vehicles. The harm caused by other forms of abuse is less dramatic but still significant. Tax evasion, including smuggling, affects the public welfare through lower government revenues. Consumers pay higher prices in the case of short-selling, a common form of abuse even in industrial countries.

What is the best way to tackle these abuses? A menu of options includes:
  1. Monitoring and enforcement: The traditional approach, where a government agency monitors fuel quality and trade, and penalizes those who are not in compliance. Monitoring in turn may be sub-contracted to private operators. There are varying levels of technology that can be used for monitoring quality, ranging from traditional tests to bio-coding or chemical marking.
  2. Self-policing: Oil majors monitor their own franchisees and disenfranchise them if they are caught cheating on gasoline octane, short-selling, or selling other companies' fuels. These firms try to increase their market share by establishing a reputation for consistently providing high quality products and service.
  3. Collective punishment: In some regions, if one firm is found to be in serious violation of fuel quality standards, the fuel specifications for the entire region are tightened as a punishment. This encourages all firms to "behave" and monitor each other.
  4. Public recognition of quality by a third body: An independent body may award seals of approval (which are displayed prominently at filling stations) to those operators who comply with regulations.
  5. Informal monitoring: Consumer organizations may monitor abuses. They may enlist the help of lawyers' associations to bring suits against those found to be in violation, or journalists to publicize their findings.
  6. Minimizing incentives for abuses: One way of virtually eliminating the adulteration of one fuel by another is to reduce the retail price differences (between kerosene and diesel, and between kerosene and gasoline), so that there are no gains to be made by adding one to another. But such a move would have other serious consequences (such as pricing kerosene out of reach for the poor who need it), so that this approach should be driven by other considerations (such as the need to raise more government revenue).

Discussion Questions

But which strategies would be most effective for controlling abuses in fuel markets? What are the minimal conditions needed to pursue the above and other strategies? What steps can governments take to enhance the effectiveness of market-based approaches? Where there is weak governance and limited capacity for monitoring and enforcement, how do we go about building a culture of compliance with regulations and standards? And what can readers tell us about fuel abuses in their own countries? How have operators tried to "beat the system"? How have such abuses been combated (successfully as well as unsuccessfully)?

Notable quotes
"As the final concern is about the quality of air, the policies and issues relating to fuel abuse are only one part of the solution and should be seen that way."
- A.R. Sihag

"In order to effectively combat air pollution due to fuel adulteration government must commit to an effective monitoring and enforcement practice."
- Pramod Dabrase

Background reading
Abuses in Fuel Markets: How to Protect Consumers and Public Health, by Masami Kojima and Robert Bacon
(PDF, 157KB)

Cleaner Transport Fuels for Cleaner Air in Central Asia and the Caucasus, ESMAP

Encoded Fuels, by Thi Chang
(Word, 24KB)

Petroleum Taxes: Trends in Fuel Taxes (and Subsidies) and the Implications, by Robert Bacon
(PDF, 167KB)

Transport Fuel Taxes and Urban Air Quality, by Ken Gwilliam, Robert Bacon, Masami Kojima and Kseniya Lvovsky
(PDF, 355KB)
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