European Directive 2003/17/EC relating to the quality of petrol and diesel fuels

1. Title

Directive 2003/17/EC further amending directive 98/70/EC on the quality of petrol and diesel fuels.

2. Purpose and Intended Effect of the Measure

2 (i) Objective

The primary objective of the directive is to implement the staged introduction of sulphur-free road fuels, starting in 2005 and, subject to review by the European Commission in the case of diesel fuel, requiring 100% provision by 2009.

Additionally, the directive completes the environmental parameters for 2005 and beyond that are outstanding from Directive 98/70/EC and introduces limits on the level of sulphur in fuel provided for use by agricultural tractors and non-road mobile machinery.

2 (ii) The Issue

The underlying purpose of the directive is to enable optimisation of new fuel-efficient vehicle technology that holds the promise of reductions in the emission of Carbon Dioxide from road transport. Scientific evidence is mounting that man-made greenhouse gas emissions are having a noticeable effect on the earth's climate. Carbon dioxide (CO₂) is the main greenhouse gas and emissions from UK road transport account for around 21% of all total UK CO₂ emissions.

European environment ministers have set a target of reducing average carbon dioxide emissions from new cars to 120 grams of carbon dioxide per kilometre (g/km) by 2010 from an EU average of 186g/km in 1995. The main elements of this strategy are the voluntary agreements between the European Commission and European, Japanese and Korean car manufacturers that commit manufacturers to reduce the average CO₂ emissions from new cars in Europe to 140g/km. The target date for this is 2008 for European manufacturers and 2009 for Japanese and Korean manufacturers. These reductions represent a cut in passenger car CO₂ emissions of around 25%, based on 1995 levels.

The commitments of the Voluntary Agreement were concluded on the basis of the fuel quality specifications contained in Directive 98/70/EC. Further manufacturing experience has shown that sulphur-free fuel is necessary to maximise the CO₂ reduction potential of new fuel-efficient engine technology.

Reductions in the sulphur level of fuel, by improving the efficiency of emission control devices such as catalytic converters, will also bring improvements in local air quality by reducing emissions of NOx and particulates both from new and existing vehicles.

2(iii) Risk assessment

Man-made emissions of carbon dioxide (CO2) are increasing the concentration of carbon dioxide in the atmosphere to well above natural levels which is having a noticeable effect on earth's climate. Whilst we do not fully understand all the changes that global warming could bring, there are widespread concerns about the serious impacts of climate change. However effective policies to reduce greenhouse gas emissions are, the world will now experience a significant degree of climate change. This is likely to have far reaching effects on all aspects of the world's environment, economy and society. Predicted effects for the UK include flooding in some areas and water shortage in others, especially in England. At a global level, predicted effects include rises in sea levels and increased threats to health.

This proposal represents one element of a raft of measures being taken to address this issue. In 2001 NETCEN estimated that cars contributed 59% of total road transport CO2 emissions; of which petrol cars contributed 53% and diesel cars 6%.

Evidence has accumulated in recent years to show that day to day variations in concentrations of airborne particles, measured as PM10, PM2.5, Black Smoke or other measures, are associated with day to day variations in a range of health end points. These include daily deaths, admissions to hospital for the treatment of both respiratory and cardiovascular diseases and symptoms amongst patients suffering from asthma. In addition, there is evidence from the United States that long term exposure to particulate air pollution is associated with a decrease in life expectancy. COMEAP [2001] concluded that it was more likely than not that a causal association existed between long term exposure to particles and mortality.

Vehicle research has demonstrated that sulphur in fuels does increase emissions of sulphates that contribute to particulate emissions. Sulphur free fuels can therefore have a measurable impact on reducing emissions of particles.

High ambient concentrations of NOx can increase the sensitivities of airways in the lung and contribute to ground level ozone formation as well as damaging materials and vegetation.

2 (iv) Main provisions of the directive

a. Establishes a timetable for the introduction of sulphur-free road fuels to the European market (sulphur-free meaning fuels containing less than 10 milligrammes of sulphur per kilogramme of fuel). Directive 98/70/EC requires that, from 2005 onwards, the sulphur level in road fuels does not exceed 50 mg/kg. This new directive requires that by 2005, sulphur-free fuels become available "on an appropriately balanced geographical basis" across the European Community to satisfy the needs of that portion of the vehicle fleet whose CO₂ performance can be optimised by the availability of sulphur-free fuel. However, it can also be used in current vehicles to improve NOx and particulate emissions without any detrimental side effects. In the case of petrol, the directive requires the European Commission to develop guidance for recommending to Member States what constitutes "availability on an appropriately balanced geographical basis".

b. Mandates 100% provision of sulphur free road fuel by 1 January 2009 (this date subject to review by the Commission in relation to diesel fuel).

c. Completes those environmental fuel parameters that are outstanding from Directive 98/70/EC, and are applicable for 2005 and beyond. Previous amendments to 98/70/EC contain limit values for a comprehensive range of environmental parameters for EU market fuels from the year 2000 and limited requirements for those fuels for 2005 and beyond (sulphur limits for diesel and octane, sulphur and aromatic limits for petrol). The new directive confirms that the outstanding 2005 parameters will remain unchanged from those required for 2000 and therefore have no added cost impact. They are not, therefore considered further here.

d. Makes provision for national fuel quality monitoring and reporting systems. However, the directive also enables Member States to apply alternative procedures provided that they offer equivalent control.

e. Introduces limits on the level of sulphur in fuel provided for use by agricultural tractors and non-road mobile machinery into 98/70/EC. There are currently no specific requirements controlling the fuel quality used by this class of vehicle and this directive limits the sulphur in fuels for these vehicles to 2000 mg/kg reducing to 1000 mg/kg in 2008. This is already achieved in practice by Directive 99/102/EC, the "Sulphur in Liquid Fuels Directive", which applies identical requirements to gasoil used in such appliances as boilers. Since gasoil is the only appropriate fuel available in the UK for non-road vehicles and tractors, the controls on the fuel used in these vehicles would not have production or implementation cost impact. The costs of this element of the directive proposal are not, therefore, considered further here.

f. Finally, while not amending the fuel parameters as such, footnotes 4 and 5 to Annexes I and III of the new directive do provide added flexibility for Member States to apply national petrol volatility requirements where severe weather or arctic conditions is experienced. The options afforded by this are considered in a Supplementary RIA.

2 (v) Regulatory instruments

Amendments to "The Motor Fuel (Composition and Content) Regulations 1999" made under "The Clean Air Act 1993" and section 2 (2) of "The European Communities Act 1972".

3. Options

3 (i) Identifying the options

This directive sets mandatory standards that the UK is required to implement under EU law.

In response to the directive's requirement to make sulphur-free fuels available from 1 January 2005, the Chancellor announced in his Budget on 9 April 2003 that an incentive of ½ p per litre would be available to oil producers from September 2004 to cover the additional cost of producing this fuel. The Department has consulted with oil companies and others on the likely effect of this measure and has concluded that this should be sufficient to ensure sulphur-free fuels are generally available from 1 January 2005 without any additional enforcement measures. Nevertheless, the Department will undertake an assessment in 2005 of the actual availability of sulphur-free fuel and will reconsider the need for additional measures should this prove necessary.

3(ii) Issues of Equity or Fairness

The requirements will apply equally to all EU refiners as well as to non-EU refiners who wish to market their products in the UK.

4. Benefits

4 (i) Identifying the Benefits

Scientific evidence is mounting that man-made greenhouse gas emissions are having a noticeable effect on the earth's climate. Carbon dioxide is the main greenhouse gas and emissions from road transport account for around 21% of all UK CO2 emissions. Concern about the serious impacts that climate change could have is driving the UK's response. This measure is primarily aimed at reducing the CO2 impact from road transport, but has the additional potential for reducing NOx and particulates. Cost reductions to drivers of new petrol cars through improvements in fuel efficiency might also be expected.

4 (ii) Quantifying the Benefits

There are a number of scientific and economic uncertainties surrounding any attempt to put a value on the social cost of carbon. A Government Economic Service Working paper recommends the use of a figure of £70 per tonne of carbon as an illustrative estimate for the social cost of carbon with a sensitivity range of between £35 to £140 per tonne of carbon. This equates to approximately £20 per tonne of CO2 with a range of between £10 and £40 per tonne of CO2. This value includes such factors as agricultural and ecosystem impacts and increased mortality due to climate change effects.

4 (iii) Scale of Reductions Necessary

Delivery of the voluntary agreement is one of the most significant elements of the Government's Climate Change Programme, and is projected to reduce emissions from transport by 4 million tonnes of carbon in 2010. At a European level, the Commission is assuming that the introduction of sulphur-free fuels will result in reductions beyond the 140g/km target of the voluntary agreements, however, this assumption is not necessarily valid for the UK. Whilst reasonable/good progress has been made in the UK - around a 7% reduction in emissions since 1995 - the latest figures from European Association of Car Manufacturers (ACEA) show that within the EU, the UK still has the second highest CO₂ emissions per new car. This largely reflects the fact that the technologies that industry has introduced to date have focused on improvements to diesel engines and these represent a smaller percentage of the UK fleet than is the case in most other European countries. Figures from the ACEA for 2000 suggest that a further CO₂ reduction of 22% is needed for the UK to reach the European target of 140g/km. The additional efficiency from sulphur-free fuels could therefore be critical in terms of meeting the 140g/km target in the UK.

Reduced emissions of particulates and NO_x are necessary to help the UK meet its legally binding obligations under the First EU Daughter Directive for Air Quality and the EU Emissions Ceilings Directive for acidification and eutrophication. The directive will also contribute to meeting Air Quality Strategy objectives and the joint Defra/DfT air quality PSA target.

4 (iv) Emissions Reductions Predicted

CO2

The additional CO₂ savings in 2010 from assuming availability of sulphur-free fuels from 2005 are estimated to be in the range from 0.49 to 1.049Mt CO₂ ¹ . The range reflects the assumption that the rate of penetration of petrol direct injection (pdi) technology into the vehicle fleet is predicted to vary depending on the level of early availability of sulphur free fuel. The additional fuel economy benefit on pdi vehicles enabled by sulphur free fuel is estimated to be typically 3%.

However, production of sulphur-free fuels is more energy intensive so these efficiency gains need to be set against an increase in refinery CO₂ emissions. Based on median figures from oil companies the increase in UK emissions is predicted to be 0.525 Mt CO₂ per annum, assuming all petrol and diesel supplied is sulphur-free. Net CO2 savings for the year 2010 therefore range from -0.035 to +0.524 Mt CO₂. In monetary terms, the value of this saving is shown in the table below:

	CO2 Low cost (£10/t)	CO2 Mean cost (£20/t)	CO2 High cost (£40/t)
Worst Case CO2 Saving	-£350,000	-£700,000	-£1,400,000
Best Case CO2 Saving	£5,240,000	£10,480,000	£20,960,000

In the longer term the CO₂ benefits of sulphur free fuels will increase as the penetration of petrol-direct-injection (pdi) vehicles into the fleet increases. CO₂ emitted from producing sulphur free fuels is also projected to fall in the future, as improved refinery technology becomes available.

Regulated Pollutants (CO, HC, NOx, PM) - General

Improvements to fuel quality will bring both direct and indirect benefits. Cleaner fuels will improve emissions of regulated pollutants throughout the whole vehicle fleet, but more importantly will facilitate longer-term vehicle technology improvements. In particular, lower sulphur fuels will help to maintain the performance of emissions control systems on vehicles and allow the use of new after-treatment technologies. This will deliver air quality benefits. This directive is therefore closely linked to the other Auto-Oil directives that set emission standards for passenger cars, light vans and heavy-duty vehicles.

NO2

Estimates of the effects of sulphur-free petrol on catalyst performance suggest that the introduction of this fuel could lead to a 4.3ktonne saving in UK year 2010 NO_x emissions compared with a baseline of not using sulphur-free petrol.

The Air Quality Strategy for England, Scotland, Wales and Northern Ireland, published in January 2000, indicates that whilst existing NOx control measures are expected to lead to a reduction in NO₂ concentrations, background levels in inner London, may still exceed the EU annual mean limit. The estimated NOx emission reduction would make a small, but useful, reduction in NO₂ concentrations at sites predicted to exceed the EU limit value for 2010.

Quantifiable health benefits for NO₂ reductions are small and the evidence for the associations less strong than for PM₁₀. The life years saved for NO₂ cannot presently be calculated although there may be small reductions in the number of hospital admissions. There will also be benefits to ecosystems from reduced acidification and eutrophication; and indirect reductions in ground-level ozone concentrations - with consequent health benefits.

PM10

Modelling work has suggested that the introduction of sulphur-free diesel will reduce PM₁₀ emissions by around 0.3ktonnes/year by 2010. This translates into a reduction in population weighted mean PM₁₀ concentrations of around 0.03µg/m3 - a small but helpful contribution. The benefits of this reduction in PM10 concentrations are predicted to vary from 3,000 to 7,000 life-years gained. Other benefits in terms of reductions in respiratory hospital admissions, potential reduction in cardiovascular admissions and reductions in building soiling damage might also be expected.

5. Compliance Costs for Business

5(i) Business Sectors Affected

The regulations will impact on 9 fuels refineries in the UK and 6-12 importers. Techniques necessary to comply with the sulphur requirements of the directive would include FCC naphtha hydrotreating/reforming (petrol) and for diesel, high-pressure hydrodesulphurisation and dearomatisation, hydro cracking, VGO hydrodesulphurisation and FCC throughput reduction. All the refineries are large multinational integrated businesses.

5 (ii) Compliance Costs for a Typical Business

Policy Costs

It would not be meaningful to produce compliance cost estimates for a "typical" UK refinery. The UK's refineries differ from each other significantly in terms of levels of throughput and configuration and investment levels will differ accordingly. The costs will also vary according to the way in which companies have invested in new or re-vamped equipment to manufacture ultra low sulphur diesel and petrol. Refineries that produce a higher proportion of diesel will face a higher cost per litre than those that primarily produce petrol.

Implementation Costs

The Department of Trade and Industry routinely monitors fuel quality to ensure compliance with the directive requirements. Increased monitoring costs will be incurred in the event that the Commission imposes the standardised system referred to in the directive. Section 8 contains additional detail.

5 (iii) Total Compliance Costs

UKPIA has summed member companies' estimates of the extra capital expenditure and operating cost of supplying sulphur-free fuels, suggesting an aggregate investment in net present value (@ 8%) for UK refineries at £1.0bn (March 2003 estimate). This translates into a total cost to UK refiners of approximately £117million per annum, based on a 15-year investment recovery period.

In terms of cost per litre of fuel, this is equivalent to c.0.15p/litre for petrol and c.0.42p/litre for diesel, which is in line with the Commission's estimates. This fuel would be sold through the existing supply chain and dispensed through existing pumps and should result in no additional cost for retail outlets.

It should be noted that no costing allowance has been made for the impact of the longer term switch from low sulphur North Sea crude oil to high sulphur Middle East crude oil as North Sea reserves become depleted or any impact of increased demand for low sulphur crude oil.

6. Competition Assessment

A negative effect on competition is not anticipated. While three of the largest firms account for about 50% of market share, the costs of the regulations are not expected to affect some firms substantially more than others and no effect is anticipated on the market structure.

Although the costs are very substantial they are considerably less than were the costs of implementing the existing directive, 98/70/EC. The refining industry is a capital-intensive industry and an increase in capital value of the order indicated, spread between 10 firms, is relatively small in terms of refinery value. Additionally, there is no indication from the industry that this measure will result in the closure of a refinery.

New and potential firms will not have to meet higher set up or on-going costs compared with existing firms. The market is not characterised by rapid technological change and the regulations will not affect the ability of firms to choose the price, quality, range or location of their products.

7. Impact on Small Businesses (including the General Motorist)

There are no small businesses engaged in refining, Small companies in the supply chain only purchase fuel and then resell, without capital expenditure being required.

The measure is not expected to impact unduly on other types of small businesses or motorists in general, but in the longer term, post 2010, positive benefits may be expected. For businesses and users of new vehicles that are expected to be introduced onto the market from 2003 that have been optimised to take advantage of sulphur-free fuels, a fuel economy improvement of 3% for petrol vehicles is projected. Using sulphur-free fuels in these vehicles is estimated to produce an overall net saving in annual fuel bills in the region of £35 for a typical petrol car. In addition, for diesel vehicles fitted with particulate traps a fuel economy improvement of 2% is expected, although within the next decade it is unlikely that this technology will be widespread on heavy duty vehicles. For a 38 tonne truck fitted with a particulate trap the net saving in annual fuel bills is estimated to be £900. New technology vehicles will also be able to operate without detrimental effect on existing fuels.

In terms of operability of current vehicles and machinery, the new fuels will be completely interchangeable with current fuels without any detrimental effects. However, sulphur-free fuels are expected to improve the reliability and durability of both new and existing exhaust emission control systems, resulting in lower maintenance costs, although no data is currently available to permit this benefit to be quantified.

The price of sulphur-free fuels is a matter for the oil industry. However the Chancellor's announced duty incentive of 0.5p/l should cover the additional production costs and, hence, should result in no additional cost to the motorist. In addition, until current fuels are phased out of the market, the motorist will have a choice of using existing fuels or switching to sulphur-free fuels.

8. Other Costs

Monitoring/Enforcement Costs

The monitoring requirements imposed on Member States by the previous directive have been implemented in the UK using independently audited data that is routinely collected by the oil companies. The first report under this system was sent to the Commission in June 2002. The reporting costs to the industry and HM Government imposed by this system are administrative only and are minimal.

The Commission is currently considering whether Member States current reporting systems are acceptable. As a result of this review, should they then demand a system based on rigid application of the European norms (PrEN 14274) the costs will increase significantly.

PreN 14274 requires Member States with a fuel supply of the size of the UK's to take at least 100 samples of each grade having 10% or more of market share in each of the summer and winter fuel periods. Pro rata samples are also required for grades with less than 10% market share. On this basis it is estimated that the total number of samples required to be collected and analysed by the UK would be 576p.a. for road fuels and 140p.a. for gasoil used in non-road mobile machinery and agricultural tractors.

UKPIA have indicated that costs would be of the order of £500 per sample for a full analysis of all the parameters set by the directive. For gasoil where only the sulphur level would be controlled, a cost of £200 per sample has been assumed based on charges currently incurred by the Environment Agency in monitoring a limited number of fuel samples for sulphur via an external contract. On this basis, total annual costs of sampling would amount to some £316K, made up of £288K for petrol and road diesel and £28K for gasoil. For an interim period, where all currently available road fuel grades are marketed alongside sulphur-free road fuels, and should the latter exceed 10% of market share, the number of samples would rise to 896 for road fuel plus 140 for gasoil, a total of 1036 samples. The costs of sampling would rise proportionately to c. £448k p.a. or £476k with gasoil included. In addition to these sampling costs, administration costs would be of the order of £15K p.a.

Fuel quality is enforced by trading standards officers. An extension of their task, as envisaged in the European norm, would have an impact on their resources, would need to be funded from Central Government funds, and would not be recoverable.

Effects on International Competitiveness

No effect on international competitiveness is expected since the regulations introduce a mandatory directive that will apply throughout the EU.

9. Results of Consultations

The motor industry is fully supportive of the directive, as it will assist the introduction of advanced technologies offering low CO₂ emission. The UK Petroleum Industry Association (UKPIA) have indicated that their priority has been to have the directive enacted as soon as possible in order to aid investment planning, which could not start until new fuel quality parameters were agreed.

10. Summary and Recommendation

The substantial reductions in greenhouse gases and pollutants forecast to result from this measure make it a key element in the Government's strategy for reducing these emissions. It is therefore recommended that the directive's requirements for sulphur free fuel for road vehicles from 2009 and for lower sulphur fuel for non-road vehicles from 2008 be incorporated into UK regulation at the earliest opportunity.

It is considered that the duty incentive announced by the Chancellor for sulphur-free fuels will be sufficient to ensure the availability of these products by January 2005 and that regulation of this aspect of the directive is not therefore necessary.

11. Contact Point:

Tony Baker, Department for Transport,
4/15 Great Minster House, 76, Marsham Street, London SW1P 4DR.
Tel: 020 7944 2063, Fax: 020 7944 2605,
E-mail: TonyT.Baker@dft.gsi.gov.uk

Declaration

I have read the Regulatory Impact Assessment and I am satisfied that the benefits justify the costs.
Date: 27 November 2003.
Signed by the Parliamentary Under Secretary of State
Tony Mcnulty Department for Transport

¹ CO₂ savings estimates are based on DTI's predicted UK fuel demand.