Providing Low-Sulfur Fuels for Transportation Use: Policy Options and Financing Strategies in the Chinese Context

Abstract

Good fuel quality is an essential component of any strategy to reduce air pollution from transportation sources.  Studies have found that the benefits of clean fuels, in combination with stringent standards for new vehicles, greatly outweigh the costs.  Because improving fuel quality requires significant investments to upgrade refineries, a key question for government policymakers is to determine how refinery upgrades will be paid for to meet standards for low-sulfur fuel.  The capital costs to improve the refineries are certainly large, but refiners have been able to recover these costs through slightly higher fuel prices or with the help of innovative financing arrangements and/or government assistance. 

The sulfur levels in Chinese fuels are high by international standards.  Sulfur levels in diesel fuels were 2000 ppm and 800 ppm in gasoline fuels through 2005.  In 2005, a new standard took effect requiring sulfur levels to be no higher than 500 ppm for gasoline nationally, and 350 ppm in Beijing as of July 1.  It is well known that Chinese domestic crude oil is typically low in sulfur, which is why most of China’s refineries are not equipped to desulfurize crude oil.  In 2004, China became the fourth-largest importer of oil in the world, at 2.4 million barrels per day, and most of these crude oil imports were high in sulfur, resulting in high-sulfur refined products available to consumers. 

This short paper is intended to outline the primary policy options available to the Chinese government to ensure that low-sulfur fuels become widely available in China to provide cleaner air and the ability to deploy more advanced vehicle technology.  The paper will review options for how China could support refineries, either through pricing mechanisms, tax incentives, direct subsidies, or innovative financing mechanisms, and the advantages and obstacles to each option will be discussed. Brief case studies of how other countries handled these issues are reviewed.  The feasibility of the policy options in the Chinese context is assessed.