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Feebates – Introduction

DEVELOPMENT OF OPTIONS FOR A VEHICLE FEEBATE IN CANADA

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1. INTRODUCTION

A feebate is an economic instrument under which vehicles are subject to taxes or rebates in proportion to how much they exceed or fall below a specified reference factor. Typically this factor is the mean fuel consumption rating for the vehicle for a particular year. For example, in Canada, the average fuel consumption rating for light-duty vehicles is approximately 9.0 litres per 100 km. A single-class feebate of $500 per litre per 100 km would mean:

• A fuel-efficient vehicle that achieved 5.0 litres per 100 km would receive a rebate of $2000.
• A vehicle with poor fuel efficiency that achieved 13.0 litres per 100 km would pay a fee of $2000.

Feebates could offer some of the fuel-efficiency advantages of regulation without mandating a specific fleet average fuel consumption rating and thus allowing the market to determine the available choice of vehicles.

1.1 BACKGROUND

The concept of feebates was first proposed in the late 1980s but has not been fully implemented in any jurisdiction.

• The Ontario Tax for Fuel Conservation is technically a feebate but most vehicles fall in the category of a maximum tax of $75 or a maximum rebate of $100. These amounts not large enough to influence consumer behaviour. Revenues collected are much larger than the rebates.
• In June 2004, France announced the reform of their car registration tax into a feebate scheme. Under this scheme, cars that emit over 180 g per km of CO2 or diesels without a particulates filter will face a surcharge of 1,500 to 3,500, whereas cars that emit under 140 g per km of CO2 and diesels with particulate filters will receive a rebate of 200 to 700. Cars emitting between 140 and 180 g per km of CO2 will be liable to neither a surcharge nor rebate.
• Feebate variations also exist in Germany and Denmark (linked to annual registration), however the amounts are low and the incentives are minimal.
• In June 2005, the Governor of Connecticut signed a bill directing the Commissioner of Environmental Protection to develop a plan for the implementation of a feebate. The plan is to allow an increase or decrease of up to 3% in the state sales tax; based on GHG emissions. Preliminary indications are that the proposal may include a large "dead zone", or band in which the feebate is zero, so that many vehicles would be unaffected.

Feebates have also been studied extensively, but with conflicting results:

• The 1998 National Round Table on the Environment and the Economy (NRTEE) Backgrounder: Greenhouse Gas Emissions from Urban Transportation estimated a potential to improve fuel economy by 10 percent (Canada only) to 20 percent (Canada-US) with a feebate of $1400 per litre per 100 km. This report provided no information on costs.
• The 1999 NRCan study entitled Assessment of a Feebate Scheme for Canada found feebates to be costly approach to GHG reductions ($100+ per tonne). Our assessment is that this study overestimated the costs by double-counting the reduction in consumer surplus.
• A 2005 study by Greene et al. developed a detailed vehicle choice model for the US and found a significant potential to improve fuel economy at a net economic benefit (benefits exceed costs). The study also found a modest decline in sales (with the vast majority of improvement coming from technology rather than shifts in sales). A key factor in these results was the assumption that consumers significantly undervalue fuel savings in purchasing decisions and that there are economic gains to be made by capturing these unvalued savings through the application of a feebate.

In recognition of the growing interest in feebates, the 2005 Federal Budget signalled the Government of Canada's intention to explore the concept further, both in vehicles and potentially in broader applications. The Budget tasked the NRTEE to develop options for Budget 2006. These options were to:

• Be revenue neutral for the Government (striving, over time, to balance revenues from the fees with expenditures on rebates)
• Apply to all cars and light trucks, including all vans, sport utility vehicles (SUVs) and pickup trucks
• Be sufficiently flexible in structure to adapt to changing circumstances - for example to allow for adjustments in fees and rebates over time in response to changes in vehicle models and technology

The Budget also set out a basis for assessing feebates and other fiscal instruments in A Framework for Evaluation of Environmental Tax Proposals. At the same time, Transport Canada has initiated its own study of feebates by developing a Canadian variant of the Greene model for use in assessing options, and by commissioning the development of updated technology cost curves.

1.2 OBJECTIVES

To support the NRTEE in its development of feebate options for Budget 2006, this study was commissioned. The study assesses the implications of feebates by:

• Describing the nature of the motor vehicle market in Canada, the key factors that influence both manufacturers and consumers, and the key trends (including the implications of the recent voluntary agreement on GHG emissions)
• Identifying the key feebate options that meet the mandatory parameters identified by the Government (revenue neutrality, broad application and flexibility)
• Assessing the options against the criteria established in the Framework for Evaluation of Environmental Tax Proposals

Further, the Transport Canada variant of the Greene et al. vehicle purchase model was mandated for the analysis. « Previous — Contents — Next »