Can good economics clean up Mumbai's air?
Rediff News
August 22, 2007

Can good economics work to clean up the foul air Mumbai breathes? Last summer some of Mumbai's BEST buses began using cleaner diesel instead of regular diesel, which cuts down emissions of dirty air. The fuel is made by combining methanol and vegetable oil to make methyl ester commonly called bio-diesel. The buses use a blended fuel, adding one part of this to 19 parts of regular diesel. The bio-diesel supplied to BEST is cheaper compared to regular diesel by around Rs 2 a litre. Around 80 buses from the corporation's 3,400-strong fleet are being run on the blended fuel as a pilot project.

As part of another project conceived by The Energy and Resources Institute, around half of the 90-odd boat-owners at Mumbai's Gateway of India have begun using blended diesel in their boats. The boat-owners who ply rides to Mandwa and Alibag on the mainland, Elephanta island and the Jawaharlal Nehru Port Trust, and ferry tourists around the harbour buy the cleaner fuel at slightly less (around 80 paise less) than regular diesel which costs around Rs 34 a litre.

An order of the Supreme Court got Delhi to clean up the air by running buses on CNG, but perhaps Mumbai could do it without intervention by the courts? Not so easy. The fuel-supplying company subsidises the price of the bio-diesel sold to the boat-owners and BEST by over a fourth of the actual cost (around Rs 45 a litre) to match the government-subsidised price of diesel. The subsidy is being offered as an incentive to get consumers to convert to the clean fuel, and the company says it cannot continue it for much longer. If blended diesel got more expensive than regular diesel, would the boat-owners and BEST continue to use it? They might not.

Tests conducted by TERI on the boat emissions show that using the 5 per cent blended fuel cuts significant levels of air pollution, so it is worth figuring a way to continue to use it. In fact, according to TERI, an increase in the proportion of bio-diesel to dirty diesel from 5 per cent to 20 per cent in the blended fuel will drastically reduce emissions. So the cleaner Mumbai's air gets, the more its residents may have to pay for it. BEST chief Uttam Khobragade says he will not buy the blended fuel if it is more expensive than regular diesel. With the price of vegetable oil soaring, the price of bio-fuels is unlikely to fall anytime soon.

This is probably the point at which public policy must intervene. City authorities must decide whether cleaning up the city's air is worth the extra cost, and pass the cost on to bus or boat passengers, or alternatively, the government should switch the subsidy it provides on regular diesel (by some estimates, this is currently as high as 11 per cent) to blended diesel to encourage its use. There are sound economic and environmental reasons why public transport should be subsidised, and even if one were to contest the need to subsidise tourists who take a boat ride at the Gateway, it makes little sense to subsidise a dirty fuel and penalise a clean one.

There is, of course, the option of using CNG, which is both a cleaner and cheaper fuel. Khobragade reckons it will cost about Rs 500 crore (Rs 5 billion) to convert BEST buses to CNG, but the cash-strapped corporation cannot afford to pay for it. Instead, he has a plan. He has written to the government to defer the Rs 40 crore (Rs 400 million) in tax the corporation pays each year for the next 10 years.

Once this is done, BEST could raise Rs 500 crore (Rs 5 billion) as a loan and use the tax saved to pay it off over the next decade.In which time it would have made savings by using a cheaper fuel in its buses, and possibly be able to pay the deferred tax to the government. That sounds like a plan, one that could be a big step towards cleaning up the city's air.