Euro 5 in Perspective

The last time Pakistani companies invested in introducing fuel exhaust emission standards was eight years ago. The implementation was Euro 2 compliance with regard to petrol/diesel and engines in local production vehicles. At the time, not too many people noticed that Pakistan had finally taken this leap of faith nine years after the world had done so, and at a time when most of the developed world was moving into implementing Euro 6 emission standards. At least, there was now a palpable emission standards regime in the country!

Most Pakistanis believed (some still do) that Euro standards had something to do with engine power – quite a far-fetched idea. In reality, Euro standards are globally recognised legal requirements that seek to limit air pollutants released into the atmosphere. They set quantitative limits on the permissible amount of specific air pollutants that are allowed to be released from specific sources over specific timeframes. The objective is to achieve higher air quality standards and preserve human, animal and plant life.

European emission standards are the definitive standards that define such minimum limits imposed on exhaust emissions of new vehicles sold in the EU and EEA member states. Defined in a series of EU directives, they delineate the various phases in the introduction of progressively stricter emission standards. The ultimate standard is deemed Euro 7, which will be followed by the obsolescence of fossil fuel vehicles.

Even now, from a Pakistani perspective, Euro 2 standards do not sound all that bad. The technology reduced more carbon monoxide emissions over earlier Euro 1 limits, with reduced amounts of unburnt hydrocarbon and a restriction on nitrogen oxide emissions. Cleaner air to breathe is always critical for any country. According to the WHO, polluted air accounted for nine percent of deaths in Pakistan in 2017 and Pakistani megacities such as Lahore and Karachi regularly feature in the top five most polluted cities of the world.

It was in this perspective that the Government of Pakistan ordered an emissions upgrade. In June 2020, it ordained the switchover from Euro 2 straight to Euro 5 – the ultra-low sulphur fuel containing a maximum of 50 parts per million (98% lower Sulphur) and 80% lower Benzene levels – by August 2020 and January 2021 for petrol and diesel respectively.

The decision, which many still believe to have been abrupt and reflexive, will impact the domestic automobile and crude oil refining industries in the immediate term, but over the long haul, significantly improve urban air quality and bring the local industry closer to international standards. A variety of challenges stare the automobile and petroleum industries in the eye.

Production Upgrades

The introduction of Euro 5 will require the installation of expensive specialised Euro 5 compliant parts such as particulate filters and accessory equipment to meet the new emission standards. This will increase costs and raise retail prices for vehicles already priced dearly in the market. Experts believe it will be easier for new entrants in the industry to bring in Euro 5 compliant cars. It was no surprise then that Master Motors Changan’s Alsvin was introduced as the first ever Euro 5 compliant sedan in Pakistan.

Rerouting CKD Imports

Sooner rather than later, emission standards will require that Pakistani assemblers move their traditional imports away from countries such Indonesia and Thailand (estimated at 40% of total CKD imports into Pakistan), as these countries are still following Euro 4 compliance. This indicates that imports will be directed to complaint (and expensive) countries like Japan, further raising costs and end prices of vehicles.

Refining Petroleum

This industry is expected to face the most challenges, both in terms of technology and finances. According to a State Bank of Pakistan Report, the local petroleum industry is “largely outdated” and will need to massively upgrade to bring it up to steam. The Report estimates, with some consternation, that building in refining upgrades to comply with Euro 5 standards is likely to cost upwards of one billion rupees and take up to three years. Thus far, PSO and NRL have proceeded with their Euro 5 upgrades, with Shell and Total pitching in with imports and sales at selected pumps. Local refineries supply some 60% of the diesel demand and as of yet, two petroleum oil refineries out of the total five in Pakistan have upgraded to Euro 5 technology. In August 2020, the government threatened to impose penalties on refineries failing to meet the Euro 5 standards, triggering a tussle with the industry that challenged the legality of such penalties. Still, with the pressure up, industry insiders confide that Pakistan imported the first Euro 5 cargo in late December and the second in early January.

Storage Conundrum

Independent storage vessels or tanks will have to be built at fuel stations around the country to ensure separate Euro 5 provisions, a daunting task when only PSO has some 3,500 pumps across Pakistan. Analysts believe this may lead to mixing of the EURO 5 and 2 variants in the interim and consumers may end up paying a premium for Euro 5 alone. Similar storage problems will be expected at ports where the fuel is unloaded from arriving ships.

Analysts mulling over the government directive for Euro 5 wonder if it is viable for a developing country reeling with a negative growth rate this year, coupled with heavy public and foreign debt and resource paucity, to aggressively implement emission standards. They note that Pakistan still had a large number of non-compliant cars, commercial vehicles, rickshaws and motorcycles on the road and there will therefore be no immediate reduction of CO2 emissions. On the flip side, Pakistan was over two decades behind most of the world in adopting emission standards and it is critical it does so, given the air degradation. But will this be seen as reason enough by all stakeholders to implement the standards?

Clearly, industry support is required and incentive mechanisms need to be worked out for both the automobile and petroleum industries to garner their support for a smooth transition. These include tax benefits or even breaks and subsidies to help the industry and offset price hikes. Properly managed, such incentive structures could jumpstart further investment and create employment. Pakistan could even seek input from countries like China and India that successfully made the transition.

In a nutshell, the move to Euro 5, well intended as it may be, is rife with pitfalls and is unlikely to garner immediate and distinct climate advantages for Pakistan. Furthermore, the cost of bridging the emission standards gap may be too high in the short to medium term for a country still some years away from coming to terms with its economic quagmire.

Mazhar M. Chinoy has led the marketing services function for a leading multinational automobile company and is currently a director at LUMS. mazharmchinoy@yahoo.com