privateP UBLIC POLICY FORsector THE NOTE NUMBER 254

Leapfrogging Technology

Masami Kojima FEBRUARY 2003

Masami Kojima is a lead Cost-Effective Solution for Pollution in Developing Countries? energy and environment specialist at the World Leapfrogging technology makes sense where technological advances Bank focusing on joint are driven by market demand, as in telecommunications and energy, environment, and transport policy issues, information technology. But technological advances driven by the especially fuel quality, need to deal with such externalities as pollution are more vehicle emission control, fuel pricing policy, and the complicated, for they do not inherently increase profitability or health impact of pollution. efficiency. Using air pollution by vehicles as an illustration, this Note She has worked on these issues in Bank programs examines the issues that need to be considered in deciding whether in Latin America, South leapfrogging technology is a cost-effective solution. Asia, Central Asia, and the Caucasus. The pace of technological advance in the past ernment budget, removing one of the potential few decades has opened new possibilities. obstacles to implementation. Consider the technology for controlling emis- sions from cars, buses, and trucks. Government Danger of considering technology-based regulations have driven this technology as much regulations in isolation as the technology has driven regulations, result- The argument is appealing. If all else remained ing in vehicle emission standards in industrial the same, imposing stringent standards that

PRIVATE SECTOR AND INFRASTRUCTURE NETWORK countries that have become increasingly require the best available technology would stringent—far more so than those in developing indeed improve air quality, reduce illness, and countries. These standards are deemed neces- save lives. But the if is a big one—for standards sary to adequately protect the public, especially do not operate in isolation. from excess mortality and morbidity caused by Standards and policies, consumer behavior, air pollution. the structure of the auto and fuel markets, and But air pollution is much more serious in a host of other factors all interact strongly. many developing country cities. Doesn’t this These interactions in turn determine the cost- argue for imposing standards just as stringent, effectiveness of policy interventions. What since the technologies to achieve them are now appear to be straightforward technical available? Moreover, since the private sector questions—should new buses be required to bears the cost of adopting these technologies, run on natural gas? should sulfur levels in fuel

THE WORLD BANK GROUP there should be little direct impact on the gov- be lowered to meet the same ultra-low standards LEAPFROGGING TECHNOLOGY COST-EFFECTIVE SOLUTION FOR POLLUTION IN DEVELOPING COUNTRIES?

as those in industrial countries?—turn out to be Governments lack funds to set up an effective not only, or even primarily, about technology. monitoring and enforcement system, and oper- Instead, they require policymakers to address ators are reluctant to bear the private cost of wide-ranging issues—from reforming public compliance. As a result, the performance of new transport to reducing protective tariffs on fuels. technologies for environmental control can be Moreover, significant differences between seriously compromised. industrial and developing countries influence For example, vehicles need to be properly the effectiveness of leapfrogging technology and maintained to control emissions. But vehicle standards. One of these is the extent to which owners in developing countries rarely perform 2 policymakers have already “picked the low-hang- preventive maintenance, and when their vehi- ing fruit” in seeking to improve social welfare. cles break down they often use substandard (and thus cheaper) replacement parts. And Low-hanging fruit freight haulers routinely load their trucks far Government policy should ideally be designed to beyond the design limits. This practice may maximize social welfare at a given cost to society. increase private profits in the short run, but it And since many factors affect social welfare, harms social welfare by significantly increasing choices need to be made. That means asking emissions. which would increase social welfare more for a Even when there is monitoring, enforcement given amount spent: reducing emissions from often consists of little more than collecting fines vehicles or, say, expanding access to piped water, or, worse, bribes. All too often, there is little rela- basic sanitation, electricity, or primary education. tionship between emission levels (rarely even Industrial countries have already “picked the measured) and the amounts paid by vehicle low-hanging fruit”—that is, taken the measures owners. Moreover, fuel adulteration is rampant, with higher returns, such as providing water con- adding to the pollution problem (see Kojima nections, disease control, and public education and Bacon 2001). about hygiene behavior. Only after adopting So the cost-effectiveness of importing the these higher-return options have industrial most stringent standards is far from clear. Take countries taken the next step of considering mit- the example of the standards requiring ultra- igation measures that require the use of emerg- low-sulfur fuels and sulfur-intolerant emission ing (risky) and expensive technology. control devices, due to come into force in a few Developing countries are still at the first step. years in industrial countries. The widespread Leaving that first step incomplete and leapfrog- fuel adulteration in developing countries makes ging to much costlier measures would not make it unlikely that importing these standards would sense. Moreover, in evaluating policy alternatives, be effective. The most common adulterant for what is important is the cost to society, not who diesel is kerosene, which is often taxed little or pays. Policies whose costs are borne by the private even subsidized, in part because it is used by the sector should not be seen simply as free to the gov- rural poor for lighting. Kerosene is a nearly per- ernment. The government may assume much of fect substitute for diesel, so diverting low-priced the burden of implementing “low-hanging fruit” kerosene to the automotive diesel sector is a measures, while the private sector may bear most lucrative practice. But adulteration of ultra-low- of the initial costs of adopting advanced technol- sulfur diesel with much higher-sulfur kerosene ogy to control vehicular emissions. Ultimately, would defeat the purpose of investing hundreds however, it is society that pays, through consumer of millions of dollars in refineries for sulfur spending or taxes. So the principle of first select- reduction and rapidly impair sulfur-intolerant ing the measures with high benefit-to-cost ratios emission control devices. applies regardless of who bears the initial costs. Diesel engines are known for their durability, yet in developing countries they often break Cultural acceptance of costs of compliance down because they are not properly maintained. Environmental standards, however lenient, are If older, simpler technologies are not properly often not enforced in developing countries. maintained, it is even less likely that newer, more sophisticated technologies will be. That tion against competitively priced and cleaner calls into question the durability of advanced fuels on the international market. emission control devices under these circum- Even in countries with little refining capacity, stances. Because emission standards are rarely the government may set prices at every stage in enforced in developing countries, there is little the supply chain and decide who can import market demand for upgrading and expanding what and how much of it. That denies the coun- service and repair facilities. As a result, automo- try the benefit of market signals that can help tive repair garages tend to be underequipped allocate resources efficiently. Moreover, a com- and their mechanics in need of training. The petitive market provides a sound basis for 3 prevalent practice of repairing vehicles when attracting new investment without creating con- they break down rather than programming pre- tingent liabilities for the government. If the gov- ventive maintenance contributes to the lack of ernment controls prices or provides significant qualified technicians using good diagnostic and price subsidies to make fuels cheaply available to repair equipment. consumers, improving fuel quality—which That is not to say that all technology-based entails cost increases—becomes problematic. solutions fail without proper operation and Short of raising fuel prices, a highly politicized maintenance. A handful do not rely on opera- step, the government will have to further tors’ behavior. One example is the elimination increase subsidies. of lead in gasoline. Historically added to gaso- Reformulating fuel may not seem too expen- line as a cheap octane enhancer, lead has been sive when the costs are computed in terms of banned in a growing number of countries cents per liter. But raising the capital to revamp because of its serious health effects, especially its the refineries is a major hurdle, especially for effects on the intellectual development of small refineries that are uncompetitive and need gov- children. Lead is not naturally found in gaso- ernment protection. Moreover, because auto- line. So stopping its addition to gasoline, which motive diesel serves as an input for such can be done at a relatively low cost, instantly activities as freight and passenger service, rais- stops lead emissions from all gasoline-fueled ing the price of diesel has an economywide vehicles, regardless of their age or state of impact (see Gwilliam and others 2001). repair. Unfortunately, most technology-based Sector policy in passenger service also influ- solutions, especially those relying on emerging ences the effectiveness of higher emission stan- technologies, do not fall into this category. dards. Many public transport companies face fare controls and a poorly designed sector struc- Impact of sector policy ture. Thus when governments impose stringent In many developing countries the government is emission standards on, for example, traditional heavily involved in the petroleum and transport formal sector buses, they often make the serv- sectors, usually to the detriment of sector effi- ices too costly to operate at existing fares—and ciency. The downstream petroleum sector is too costly for many poor people to use at finan- often characterized by serious distortions, unsus- cially sustainable fares. The usual result is that tainable subsidies, gross inefficiencies, and a informal operators enter the market using severe shortage of investment—conditions that smaller vehicles, often old and polluting make achieving significant improvements in fuel (World Bank 2001). And with numerous oper- quality difficult if not impossible. This is espe- ators, each owning a few vehicles, enforcing cially true in countries with refineries. Domestic environmental and safety standards becomes refineries in many developing countries, often even more difficult. owned fully or in part by the government, are Without fundamental sector reform, it is dif- protected by import restrictions, quotas, or high ficult to introduce cleaner fuels and advanced tariffs. As fuel specifications tighten worldwide, emission controls. What do governments need small or inefficient refineries will find it increas- to do? End the protection of inefficiently oper- ingly difficult to produce fuels that meet the ated firms such as refineries and transport com- higher standards without even greater protec- panies, phase out untargeted subsidies and LEAPFROGGING TECHNOLOGY COST-EFFECTIVE SOLUTION FOR POLLUTION IN DEVELOPING COUNTRIES?

allow markets to set prices, create an open and The first step is to ask the right set of questions competitive downstream petroleum market, by placing the problem in a broader policy con- and allow regulated competition in public trans- text. It becomes apparent that technical solu- port with market entry criteria that include ser- tions cannot substitute for sound sector policies. vice and environmental performance standards. Moreover, sector reform will require liberaliza- view tion coupled with appropriate regulations. point Risks associated with novel technology There is little doubt that developing countries Commercializing new technology involves sev- will one day adopt the standards and technolo- is an open forum to eral technical and financial risks. First, the per- gies being developed in industrial countries encourage dissemination of formance of the technology is uncertain and today. The question is how to phase in appro- public policy innovations for can be assessed only after months or, more typ- priate standards cost-effectively. Adopting the private sector–led and ically, years of application on a large commer- latest standards from Europe and North America market-based solutions for cial scale. Unforeseen technical problems are with little time lag is unlikely to be a sensible solu- development. The views common, especially when the technology is tion in most developing countries. published are those of the deployed in countries with widely differing authors and should not be income levels. attributed to the World Second, the costs associated with novel tech- Bank or any other affiliated nology fall substantially with greater volume References organizations. Nor do any of and experience. For example, the refining Gwilliam, Ken, Robert Bacon, Masami Kojima, and the conclusions represent processes for producing ultra-low-sulfur fuels Kseniya Lvovsky. 2001. “Transport Fuel Taxes and Urban official policy of the World are continually developing and improving, so Air Quality.” Pollution Management in Focus Discussion Bank or of its Executive significant cost reductions are likely in the com- Note 11. World Bank, Environment Department, Directors or the countries ing decade. Washington, D.C. [http://lnweb18.worldbank.org/essd/ they represent. Third, rapid development of another tech- essd.nsf/GlobalView/In%20Focus%2011.pdf/$File/ nology may end up displacing the one adopted. In%20Focus%2011.pdf]. To order additional copies Consider the battery electric vehicle, once seen Kojima, Masami, and Robert Bacon. 2001. “Abuses in contact Suzanne Smith, as the technology of the future, capable of pro- Fuel Markets: How to Protect Consumers and Public managing editor, Room I9-009, ducing zero emissions. Today many industry Health.” Viewpoint 237. World Bank, Private Sector The World Bank, analysts no longer consider battery electric vehi- and Infrastructure Network, Washington, D.C. [http:// 1818 H Street, NW, cles a potentially viable technology. Adopting an www.worldbank.org/html/fpd/notes/237/ Washington, DC 20433. emerging technology prematurely can be very 237Kojim-831.pdf]. costly. World Bank. 2001. “Urban Air Pollution: How Can Telephone: These technical and financial risks are best Urban Bus Policy Reduce Air Pollution?” South Asia Urban 001 202 458 7281 left to industrial countries, which have the Air Quality Management Briefing Note 3. South Asia Fax: resources to manage them. For developing Environment and Social Unit, Washington, D.C. [http:// 001 202 522 3480 countries it makes sense to wait, allowing indus- www.worldbank.org/sarurbanair]. Email: trial countries to iron out problems with emerg- [email protected] ing technologies and reduce their costs.

Copyedited and produced by Conclusion Communications The ineffectiveness of most emission control Development Inc. programs in developing countries has led many policymakers and environmental groups to con- Printed on recycled paper clude that technical solutions are the best way to get around the culture of noncompliance. But the same problems that have led to heavy pollu- tion by conventional gasoline- and diesel-fueled vehicles would probably also condemn state-of- the-art control technology to failure. What should developing country governments do? This Note is available online: http://rru.worldbank.org/Viewpoint/index.asp