The Canadian government’s current feebate program (earlier post) is a first step in introducing market instruments to help address concerns about fuel use, but it has several defects, according to a new study by the C.D. Howe Institute.
In the study, “Deals on Wheels: An Analysis of the New Federal Auto Feebate,” policy analyst Robin Banerjee supports the use of feebates since they provide a financial incentive for consumers and manufacturers to shift towards more fuel-efficient vehicles by subsidizing fuel efficiency and taxing fuel inefficiency.
The feebate structure consists of two programs. The ecoAuto rebate program offers rebates from C$1,000 to C$2,000 to people who buy or enter a long-term lease (12 months or more) for a fuel-efficient vehicle. The government is also levying a tax on fuel-inefficient vehicles from C$1,000 to C$4,000 in its Green Levy program.
The ecoAuto rebates apply to cars that get combined fuel economy of 6.5 L/100km (36 mpg US) or better and new light trucks getting 8.3 L/100km (28 mpg US) or better. Additionally, the initiative has a rebate for flex-fuel vehicles with E85 consumption ratings of at least 13 L/100km.
The Green Levy imposes a tax that starts at C$1,000 for vehicles which use between 13 L/100km and 14 L/100km and proceeds in $1,000 steps for every liter increase in consumption up to 16 L/100km. At that point, the tax is capped: all vehicles that use 16 L/100km or more are subject to the same maximum $4,000 tax.
While supportive of the concept, Banerjee flags several deficiencies with the current Canadian scheme:
Ottawa implemented the program without adequate consultation with the industry.
The program took effect immediately without mandating a timetable, or at least a phase-in period. Analysis of feebate schemes suggests that a large part of the gains from such an approach come from attempts by manufacturers to preserve market share by introducing new fuel-saving technologies or by redesigning their vehicles to make them more fuel efficient. “It follows, therefore, that pre-announcing the policy and giving manufacturers more time to adjust their models would have reduced their costs.”
The current feebate structure is not a linear curve, but rather contains a “deadzone” in which most vehicles fall. Only 10 car models and nine truck models are eligible for rebates for the 2006 and 2007 model years. Four models of flex-fuel vehicles meet the cut-off. This limited applicability reduces the effectiveness of the policy and reduces the impetus for manufacturers to make continuous improvements.
The non-linear nature of the feebate might make the revenue neutrality of the program difficult to achieve, since the plan is not expected to result in a large net inflow of tax dollars.
The plan exempts pickup trucks, which are regarded as primarily commercial vehicles.
The major motivation for the feebate was to reduce greenhouse gas emissions. In a recent C.D. Howe Institute study, Jaccard et al. (2007) estimate that the feebate will reduce Canadian emissions by at most 1 Megatonne of CO2 equivalent by 2010. Clearly, the plan alone will make only a small contribution to achieving ambitious emissions reduction targets. If the government wishes to induce greater reductions as a result of this policy, then the rate will have to be adjusted to provide greater incentives.—“Deals on Wheels”
Banerjee makes a number of policy recommendations to improve the feebate policy in such a way that it is more environmentally effective by providing a greater incentive to switch to lower emission vehicles, but balancing any changes with an attempt to minimize adverse consequences on the auto manufacturing sector. These include:
Lessening the adverse effect of the feebate on domestic auto manufacturers by pre-announcing the path of the feebate over time so that the auto manufacturers have sufficient time to adjust their plans. A time frame of several years to introduce major changes is reasonable, Banerjee says, given the long lead times required in auto manufacturing. Any increase in regulated emissions reductions would overlap with the feebate and may provide a basis for a reduction in the feebate rate, although the feebate would continue to have positive effects.
The feebate structure should apply to more vehicles to ensure that correct incentives are present.
Take the recommendation of the National Round Table on the Environment and the Economy (NRTEE) and ensure that feebate policies are actually part of a “comprehensive, integrated strategy” for the transport sector.
Provide incentives for the reduction of travel.
It is essential to maintain an incentive for people to travel less. This involves maintaining, or possibly increasing the cost of using fuel. Examples of policies to target travel are: the basic fuel tax, (which although perhaps not ideal for influencing fuel efficiency in new cars, will still affect how far those cars are driven); a carbon tax; or mileage-based charges, (which also target emissions from driving, but less directly, and thus less efficiently than a fuel or carbon tax.)
Such taxes would also provide an added incentive for drivers to switch to more fuel-efficient cars. As well, they could alter other lifestyle choices such as the distance from home to work and the amount of public transit usage.
Emissions from light vehicles currently accounted for about 12% of Canada’s total greenhouse gas emissions in 2005, while the transportation sector as a whole accounts for more than a quarter of all greenhouse gas emissions. The popularity of SUVs has caused a 109% increase in Light Duty Truck emissions between 1990–2005 according to Canada’s greenhouse gas inventory for 2005.