Study: Canadian Auto Feebate Program a “First Step”, But Needs Improvement
23 November 2007
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.
Resources
While I generally support a carbon tax, any attempt to tax gas in Canada in any meaningful way would be met by a flood of traffic to the US to fill up. What are the chances of a carbon tax in the US? (a phrase about snowballs comes to mind)
Posted by: Neil | 23 November 2007 at 04:13 PM
It depends on why you want a tax - to change behavior or to raise money.
If you want to change behavior, then make the tax clear and large enough to bite.
If you want to reduce CO2, you either get people to buy more efficient cars, or to drive less.
It seems to be very difficult to get people to drive less, unless you provide good public transport and very congested roads (they have 1/2 of this in Ireland).
So the simplest thing to do seems to be to get people to buy more efficient cars.
They, how do you do it - you could use a tax where the rate is proportional to the CO2 / km rating of the car.
Perhaps, gms CO2/Km / 7 would give a useful tax rate.
We have a tax like this in Ireland called VRT where the rate is based on the engine size, but this could be changed to CO2 levels very easily.
The trick is to have no loopholes for biofuels or technology. just take the CO2 level, divide it by say 7 and that is the rate.
If this was done Europe wide, you would bring the CO2 rates down noticeably within 5 years and further in 10.
(Assuming a 10 year car life).
The only problem for Europe is that this would mean a lot of diesel cars, which would yield a lot of urban pollution - but maybe the latest diesels will be better.
[ Or you could add a few gms CO2 for diesel to ccover the extra local pollution ].
As long as it is introduced EU (or USA) wide, perhaps ramped in, perhaps just blasted in, it will have an effect.
It will also have the effect of reducing the exposure fo the economy to high oil prices, which will be a big benefit.
You can wait for oil to go to $200 or you can preempt the necessary change to survive it with purchase taxes up front.
Posted by: mahonj | 24 November 2007 at 09:36 AM
I don't agree that taking effect immediately was a bad thing. The rules are set, car companies can develop cars over the next few years to meet the criteria.
There are current cars that meet the rebate criteria and I bought one immediately so I could get the rebate. If the plan was simply announced and not implemented for 3 years, people would have an incentive to wait 3 years to buy a new fuel efficient vehicle, which would be counter to the goals of the program.
I agree, the government should lay out the longer term rules, to help the car companies development plans.
Posted by: Randy | 24 November 2007 at 04:30 PM
Meanwhile Canada still has not mandated the basic regulations adopted by California in the early 1980s e.g. requiring all gas pump nozzles to recirculate petro fumes released into the atmosphere during fueling.
And what is the reasoning behind pickup truck exemptions - commerce should not reduce emissions?
Posted by: gr | 24 November 2007 at 06:21 PM
I favor the feebate idea in the U.S. If people want to buy a large SUV, then they will pay an additional fee at purchase time and increased registration fees for the life of the vehicle. These fees will go towards the purchase of more fuel efficient vehicles and and to help us become less dependent on oil.
Posted by: sjc | 26 November 2007 at 08:36 AM
The real problem with the Canadian feebate system is that it hasn't actually been implemented. I hear a lot of complaining from people who purchased a Yaris or Prius and the requisite government paperwork is no where to be found.
Posted by: Robert McLeod | 26 November 2007 at 11:47 AM
Further extracts from the deals on wheels analysis:
"Recommendations in the Institute’s
publications are founded on quality research conducted by leading experts and subject to rigorous peer review."
(The document looks like a rough first draft and there are no links to peer review feedback).
The analysis expresses some opinions which are personal preferences rather than logical inferences drawn from the research quoted.
Surpringly, the title says the feebate needs improvement but the author is very short of practical suggestions for improving the feebate scheme.
However, the analysis does include some useful information which could form the starting point for discussion of possible improvements to the feebate scheme.
"The federal government’s 2007 budget introduced a feebate scheme known as the
'vehicle efficiency initiative'. It combines a rebate program for fuel-efficient vehicles with a tax on fuel-inefficient ones. The benchmark is fuel consumption in litres per 100 km driven. Although a direct focus on CO2 may be more effective in combating global warming, fuel consumption has the benefit of public familiarity."
"Some policy options in designing a feebate program are:
(i) The “pivot point,” where rebates switch to taxes;
(ii) The rate of the tax and subsidy;
(iii)Whether to use different schedules (pivot points and rates) for different
types of vehicles;
(iv) Whether to use a linear feebate or to include “dead-zones” where the
feebate doesn’t apply; and
(v) Whether to impose caps on taxes and rebate amounts."
"The federal government had been studying the possibility of using feebates for
some time, commissioning two major reports, the first in 1999 and another in 2005."
This contradicts the opinion in the analysis that the policy was implemented without proper consultation. The real danger is that governments have been consulting on policies for years and have been extremely slow to introduce legislation due to lobbying by industry.
"the same polls that show severe
opposition to increases in gasoline taxes also show significant support for gasguzzler
taxes and rebates for higher fuel-economy vehicles."
"Another attractive feature of feebates is that the choice of the pivot point can
be made in such a way that the policy is revenue neutral, i.e., the amount paid out
in subsidies exactly balances the amount received in taxes. Of course, the pivot
could also be set in order to generate revenues for the government, or to provide a
net subsidy to automobile consumers."
"Another key insight is that, in the models, the majority of the effects of a
feebate policy seem to come from manufacturers attempts to preserve their market shares through technological innovation and improvements to their vehicles. Implementing innovative technologies often makes more economic sense once the added financial incentives of the feebate are in place."
Good point - feebates reduce the price premium on Hybrids in the showroom.
"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."
Yes indeed, and the policy recommendations should have set out how to do this, based on suggestions from peer review. Any suggestions?
"Going forward, the government should take
steps to ensure that the program is improved in such a way that it is more
environmentally effective by providing a greater incentive to switch to lower emission vehicles."
Ditto.
"The current feebate uses a rate of $1,000 per L/100km, which is in line with the
rate recommended by the federal government’s studies, however the feebate
structure should apply to more vehicles to ensure that correct incentives are
present."
How? Any suggestions?
Personally, I believe that feebates are an essential part of curbing GHG emissions and achieving energy security (even if you do not believe GHG emissions are a problem).
Feebates help by influencing consumers at the time they are deciding which new car to buy. Other measures like fuel taxes, carbon tax and carbon trading are also needed. However fuel & carbon taxes affect low income families most and wealthy families least. Feebates add the highest fee to the most expensive luxury new gas guzzlers, which means the most extravagant citizens pay the most in fees.
Let's have some constructive suggestions on how to improve the feebate in Canada, which could be applied in California and then in federal USA, Europe, Japan, China & India.
Here is a challenge for you guys - what are the best ways of improving this car feebate?
Posted by: Polly | 28 November 2007 at 03:33 PM