Petroleum price: Reduce price and add a green tax

BANGLADESH is now poised at a historically opportune moment to initiate a "green tax" on carbon-emitting fuels. International oil prices are low, but prices of motor oil and diesel have remained high in the domestic market. The government has been mulling an adjustment in price, i.e. a lower price, but there are many considerations keeping it from taking this path. However, there is an alternative to lowering price of petrol and diesel precipitously to reflect import costs. The government can split the benefit of current lower procurement price with the consumers, by letting price per litre slide down to let's say Tk. 50 per litre, and add a new 20 percent green tax.

As of February 22, 2016, the price of gasoline in Bangladesh is EUR 1.12 per litre which is 30 percent higher than the average world price of gasoline: EUR 0.86. The price of diesel in Bangladesh is EUR 0.77 per litre which is 5 percent higher than the average world price. Whether the government ought to peg the price of petrol at EUR 0.86 per litre (roughly Tk. 73) or not will depend partially on the cost of distribution through oil companies Padma, Meghna, and Jamuna. The government earns between Tk. 36 and Tk. 55 in duties, taxes and profit from each litre of fuel oil sold in the domestic market, according to a BPC official. According to another source, Bangladesh Petroleum Corporation (BPC) said it gained a profit of Tk. 15 to Tk. 40 per litre by selling various petroleum products.

Understandably, and not without strong economic and political rationale, the government has been dragging its feet for some time before it comes up with a plan to make price adjustments. Price of crude oil could bounce back, and it has been happening slowly but surely in recent weeks, and prices are, from a political consideration, easier to lower than raise. The arguments in favour of letting the current price of petroleum products stay where they currently are appear to be very strong. According to a World Bank study, "Since the prevailing prices of motor spirits, octane and jet petrol have been accepted by the public, there is no compelling reason for lowering them." And the prime minister recently pointed out that the government had subsidised oil prices when international prices were high, and BPC needs to clear up all its past liabilities and so do other state owned enterprises (SOE).

However, as the government and other stakeholders weigh the options to adjust prices of petroleum products to bring it in line with cost, two conflicting considerations are worth keeping in view. First of all, the price of petrol must reflect the cost, including procurement, shipping, processing, and distribution by the oil marketing companies. As is well known, in the past "pass-through coefficient" for Bangladesh was one of the lowest as compared with other South Asian countries. This resulted from the practice of subsidising certain oil products, but now can be institutionally phased out since the BPC chairman said that the company is earning a profit of Tk. 40 per litre of octane, Tk. 35 per litre of petrol, Tk. 20 per litre of diesel and kerosene, and Tk. 15 per litre of furnace oil. Secondly, all carbon-emitting fuels should be priced "fully", meaning the cost to the environment or the external cost needs to be paid by the user. But a carbon tax or green tax was difficult to consider when oil prices were high.

However, in the changed environment and the oil bonanza, this may be a good time to put it back on the table. And if set efficiently, and publicised through a process of awareness campaigns, a green tax could result in a win-win position for the government. But will the public show an appetite for a higher price of energy? Yes, they did in the past even when there was very little apparent rationale for the raise. A case in point is the recent price hike of gas (26.29 percent) and electricity (2.93 percent) against the backdrop of a fall in global oil prices. A reduction in retail price combined with the creation of a green energy fund would enable the public to become aware of the environmental impacts of fossil fuels, as well as provide them with an insight into the operation of market forces in the oil market. In EU countries, lower price at the pump has also enabled some governments to raise the diesel tax to bring it in line with petrol tax.

A few caveats; first of all, the "green fund" must be earmarked or sequestered for appropriate environmental projects. Alternatively, a "rainy day" fund may be created for any upward shocks from the energy market.  Secondly, the government must transition to a regulatory regime of regular price adjustments. There are many mechanisms to minimise the risk to the government in switching to this "regulated free market", but it has fewer risks than the current practice. Thirdly, in line with the reforms, the fund may also be invested in creating a petroleum reserve or an investment plan for the green fund, including some hedging on future oil prices.

Finally, if we restructure the price of energy as suggested, it would be necessary to undertake a mass education campaign in order to garner public support. As a report by BIDS and IISD appropriately outlines, "Good practice includes a clear communication campaign, stakeholder consultation, transparency about fuel prices, and monitoring of the impacts of implementation, with adjustments if necessary".

The writer is an economist and the author of a recent book, Economics is Fun: Short Essays for the Masses.