• Targeting  
• ConsumerResponse 
• ManufacturerResponse 
• EnvironmentalBenefits and Side Effects. 

• Shiftsin purchases. The incentive to switch  depends primarily on the feebate rate. Although partiallyoffset by technology improvements, there will likely be a significant shift from trucks to cars, from larger vehicles to smaller vehicles, and from less fuel-efficient vehicles to more fuel-efficient vehicles within a given class. In a single-class feebate, the increase in car share ranges from 1-6 percent, with a 3-percent shift for $500 per litre per 100 km feebate. With separate classes for cars and trucks, the shift is reduced to less than 0.1 percent.
• Modalshift from transit to small cars. Lower  prices for fuel-efficient cars might tempt some peoplewho would not otherwise have done so to purchase a car. This effect increases as the rate rises and is included in the overall estimate of demand for smaller vehicles.
• Scrappage.Higher new car prices for larger vehicles means longerretention of existing cars in these classes. In the worst case scenario, approximately 6000 fewer vehicles would be sold, out of total market of 3.8 million (approximately 0.1 percent). Assuming that vehicle ownership remains the same, this would mean that an equivalent number of older vehicles would stay on the road longer.
• UsedVehicles. If feebates are high enough,  purchasers seeking less fuel-efficient vehicles couldlook to the used car market for supply. Similarly, purchasers of more fuel-efficient vehicles will be more likely to buy new vehicles. Eventually, Canadian used car prices will reflect the value of the feebates that applied to them when they were originally sold, however this could take several years. To some extent this effect is included in the overall calculation of vehicle sales and is reflected in the figure of 6000 fewer vehicles sold. However, what is not included is the possibility that feebates will lead to increased imports of larger (relatively new) used vehicles from the US or increased exports of smaller (relatively new) used vehicles to the US. If significant, either or both effects (vehicle arbitrage) would undermine revenue neutrality and could significantly reduce the effectiveness of the measure.

• Investmentin Technology. Feebates would induce  significant investment in technology. In fact, themodel suggests that most improvements in fuel efficiency will likely flow from technology improvements as opposed to shifts in purchasing. However, because manufacturers respond to overall North American demand for fuel economy, technology investment is smaller with unilateral Canadian policies (approximately 80 percent for Canada-only versus 85 percent for an integrated North American feebate of $500 per litre per km). It is important to note that, although not included in the model, the availability of hybrid and diesel technologies will enhance the technology contribution and that excluding hybrids and diesels tends to underestimate effectiveness of feebates and overestimate costs.
• Availability.Constraints on the availability of diesels and hybridsare expected to be overcome in the medium term. The availability of models incorporating conventional technologies is governed by the assumed design modification thresholds - lower production run models may not be available.
  • Incontrast with fuel consumption standards, feebatesshould not directly restrict the availability of less efficient models.
  • High-volumemanufacturers have the ability to continue tooffer a wide choice of product offerings, but some less fuel-efficient models will probably be dropped.

• FuelSavings and GHG Emissions. The combination  of technology improvements and shifts in purchasingis expected to yield fuel consumption improvements of 0.2 litres per 100 km to 0.8 litres per 100 km, with an improvement of 0.4 litres per 100 km for a $500 per litre per 100 km feebate (equal to 1.2 billion litres per year). Corresponding GHG reductions are expected to range from 1.5 Mt per year to 6.2 Mt per year, with 3.0 Mt per year for a $500 per litre per 100 km feebate. Adopting two or more separate classes would slightly reduce the fuel economy improvement and would significantly reduce the GHG reductions (because these are cumulative).
• CriteriaAir Contaminant (CAC) Emissions. Some  fuel-economy technologies will increase CAC emissions,but overall, the reduction in fuel consumed should result in significant decreases. To some extent, manufacturers may take advantage of this to reduce their investment in emission controls to meet the
  On-Road Vehicle
  and Engine Emission Regulations, but generally emissions per kilometre should be substantially lower. However, because of the rebound effect, distance travelled may increase and total CAC emissions could rise accordingly. Emissions may also increase due to reduced vehicle scrappage, but, as noted earlier, the number of vehicles affected would be relatively small. Overall emissions of CACs should be lower.
• Congestionand Noise. Both congestion and noise  may increase slightly due to the rebound effect. Noisecould also increase because of the use of diesel technology which is slightly noisier, but the use of hybrids would decrease noise.
• Safety.There will be an increase in exposure due to the largerdistances traveled (rebound effect). As far as risk is concerned, larger and heavier vehicles are safer for their occupants but less safe for others. Overall, there no consensus on the impact of a smaller fleet on safety risks.

FISCAL IMPACT

• Sizeof the Transfer 
• PublicPerception and Trust 
• AdministrationCosts 
• Effecton Other Revenues 
• AnnualSurplus or Deficit. 
• Sizeof the Transfer. Although all options  are revenue neutral, they vary in terms of the amountof fees collected and rebates paid. The total transfer varies from approximately $300 million per year (for a $250 feebate, or a $500 feebate with 11 classes) to over $1.1 billion per year for a $1000 feebate.
• PublicPerception and Trust. Because there  is little experience in Canada with revenue-neutralgovernment programs, many people are sceptical of the Government's short-term and long-term intentions and will need significant ongoing reassurance that this is not primarily a tax increase.
• AdministrationCosts. The cost of administration of  the program is discussed in Subsection 5.5. What isrelevant here is that this cost has not been considered in the calculation of revenue neutrality. In principle, the pivot point could be adjusted to raise additional revenues in order to account for these costs, but again, this could be perceived as a tax increase.
• Effecton Other Revenues. Because fewer cars  will be sold and those cars that are sold will besmaller and cheaper, there will be an overall reduction in revenues for retailers and manufacturers. Reduced revenues for vehicle purchases also means less GST collected. However, it is expected that the loss of these GST revenues will be compensated for by additional GST revenues elsewhere in the economy. Overall no net effect on GST revenues is forecast. However, the same is not true for fuel taxes. Because of the greater fuel economy of vehicles, less fuel will be sold and governments will collect fewer fuel taxes. The loss is expected to range from $200 million per year (for a $250 feebate) to $900 million per year for a $1000 feebate (including both federal and provincial taxes). Again, the pivot point could be adjusted to raise additional revenues to account for these lost revenues, but this could be perceived as a tax increase.
• AnnualSurplus or Deficit. As discussed in  Section 3, it should be possible to achieve revenueneutrality over time, but it will not be possible to do so with certainty in any given year while providing the price certainty necessary for transactions to proceed. Thus, it will be necessary to consider the practicality of different options regarding adjustments for compensation, as well as different options regarding bias. For example, in the early years, it may be important to demonstrate that Government is not retaining excess revenue, and therefore, a pivot point could be selected to provide a degree of certainty that fees will not exceed rebates. All of the options will involve trade-offs between the certainty of revenue neutrality and the need for price certainty for market effectiveness.

ECONOMIC EFFICIENCY

• InternalEfficiency 
• Competitiveness  
• AdjustmentCosts 
• InternalEfficiency. In assessing internal efficiency,  we are concerned with the extent to which feebateshelp compensate for market failures and their cost-effectiveness in doing so. Specifically, we are concerned with two types of market failure:
  • Undervaluationof Fuel Savings. To the extent that  consumers fail to value fuel savings correctly- this is supported by the market research in Canada, though the extent is unknown - feebates provide a means of correcting this tendency. The optimal feebate for this market failure is the difference between the social valuation of the fuel savings and the consumer valuation. As discussed in Section 4, on this basis, a feebate of approximately $1000 would be appropriate. This calculation is particularly sensitive to the choice of discount rate, and so using a rate of 10 percent means that the undervaluation is conservatively estimated.
  • Externalities.Feebates also provide an indirect means of givingvalue to GHG reductions. They can help internalize the costs of GHG emissions in decisions to purchase new vehicles, but not in decisions to drive and consume fuel directly. Thus, they help improve economic efficiency when GHG emissions are otherwise underpriced in the cost of fuel. As discussed above in the section on targeting, other options could address externalities more directly, including, for example, fuel taxes, a GHG charge and congestion pricing.
  • Cost-Effectiveness.A calculation of cost-effectiveness needs to considerthe change in consumer surplus, overall societal costs and any changes in opportunity costs. Assuming GHG reductions are the key objective, cost-effectiveness is the ratio of costs per tonne of emissions reduced.
  • Changein Consumer Surplus. Feebates impose  costs which rise as the rate increases 
    • $7million per year for $250 
    • $60million per year for $500 
    • $300million per year for $1000. 
  • OverallSocietal Costs. The reduction in  consumer surplus is more than compensated forby unvalued fuel savings that are realized. The benefits are positive for all rates up to $1000 but marginal costs begin to outweigh benefits between $500 and $1000. Adopting two or more classes reduces the benefits significantly while creating a relative subsidy for larger vehicles.
  • Costsper Tonne GHG Reductions. Because  of the unvalued fuel savings, feebates produceeconomic benefits as opposed to costs. These range from $40 per tonne for a $250 per litre per 100 km feebate, to $10 per tonne for a $1000 per litre per 100 km feebate. If it is assumed that consumers already fully value fuel savings, then there are no unvalued fuel savings and the costs are in the range of $10 per tonne.
  • OpportunityCosts. By selectively targeting  fuel economy, feebates impose opportunity costs.Consumers who might otherwise have chosen other features such as power, weight or options will have their choices reduced. This effect is not modeled and there is no way to estimate how significant these costs may be in this context.
• Competitiveness.The key considerations are effects on exports andeffects on investment:
  • Exports.Feebates will only affect vehicle sales in Canada,so there should be no impact on exports.
  • Investment.In theory, feebates should have no impact on theenvironment for manufacturing. However, as noted previously, an environment interpreted as hostile to the product could affect investment decisions.
• AdjustmentCosts. The key consideration will be  the effect on vehicle sales and revenues, and howthis will affect employment in the sector.
  • VehicleSales. Overall vehicle sales are  expected to decline slightly (at most 6000 orapproximately 0.5 percent of annual sales for a $1000 feebate). Of greater importance is the shift to less expensive models, which overall would reduce revenues by approximately $1.5 billion per year. (Note: these results are very sensitive to elasticity assumptions.)
  • Employment.There are a number of factors that will affectemployment.
    • Althoughnet sales may only decrease slightly, theemployment impacts could be greater if imports are substantially increased.
    • Onthe other hand, a large proportion of theNorth American adjustment may occur in the US.
    • Somelosses will be offset by new employment associatedwith technology investments.
    • Forillustrative purposes, using 15 jobs per 100vehicles would imply a worst-case net loss of approximately 1000 jobs worldwide; this result may mask greater or lesser adjustments in Canada.
    • Giventhe overall economic benefit, the loss ofjobs in this industry should be more than offset by job gains elsewhere in the economy.
  • FuelSales. In addition to a reduction  in vehicle sales, there will also be a reductionin fuel sales that will affect refiners and their retail networks. The reduction in revenues would range from $300 million per year (for a $250 feebate) to $1.4 billion per year for a $1000 feebate (not including fuel taxes) and would involve associated employment changes. Once again, these losses should be more than offset by gains elsewhere in the economy.

FAIRNESS

• AutomotiveSector. In terms of market share, the  main impact is further loss in market share for GM/Ford/DCX.The shift increases as the rate increases, reaching 4 percent for a $1000 per litre per 100 km feebate. This shift can be significantly mitigated by segmenting the market into two classes. (Having 11 classes makes little additional difference.) As far as profitability is concerned, the assumption is that all costs and savings are passed on, and so profits are unchanged. However, since there will be a shift to smaller vehicles, and historically these vehicles have had lower profit margins, it is reasonable to conclude that profits will be adversely affected. As far as parts suppliers and retailers are concerned, they will be affected in proportion to their exposure to GM/Ford/DCX.
• Individuals.For individuals, the key issue is price. The priceof each individual vehicle will rise in order to pay for new technology. However, consumers are expected to shift to lower-priced models within classes and to lower priced classes overall, so average prices will decline. Certain consumers who are unable or unwilling to shift will bear a greater burden. For example, the estimated 50 percent of consumers who use trucks for commercial purposes may not be able to avoid the higher fees. Similarly, larger families may be restricted in shifting to smaller vehicles. Regions and areas that have a greater preference for larger vehicles (western Canada and rural areas, for example) will find that their traditional choices are more costly. Conversely, consumers who would have purchased fuel-efficient vehicles anyway will gain a windfall. Because lower income households tend to purchase smaller vehicles, the measure is progressive overall. (Feebates will eventually influence prices in the used car market as well as new cars.)

SIMPLICITY

• Volumeof Transactions 
• OverallComplexity 
• AdministrativeCost and Practicality. 
• Volumeof Transactions. As noted earlier, the  size of the transfers will range from approximately$300 million per year to $1.1 billion per year, whereas the number of transactions will be equal to the number of new vehicle sales (1.5 million per year). The number of transactions could be reduced by adopting a deadband but the level of effort probably would not be substantially reduced, since there would still be an administrative procedure required to assert that the vehicle was not subject to a feebate.
• OverallComplexity. Overall complexity is a  function of the number of classes and the number ofrules. A single class would clearly be the simplest approach, whereas 11 classes could be cumbersome to manage. Because definitions are unclear, anything more than one class creates the potential for gaming (artificially changing features to move vehicles into a different class). Similarly, the use of a cap, plateau or deadband would introduce added complexity and induce responses that would reduce the effectiveness of the measure.
• AdministrativeCost and Practicality. In terms of administrative  practicality and costs, the measure could be similarto the GST in that retailers would need to collect the fees, pay the rebate, and submit the appropriate paperwork on a regular basis. Overall, given the experience of the GST, it would be anticipated that costs would be significant at first but would fall substantially after the initial implementation. Some of the considerations are as follows:
  • Becauseof year-round model introduction, feebates wouldprobably need to be administered on a calendar-year basis.
  • Itwould be necessary to publish the rate and pivotpoint ahead of time and calculate the fees and rebates accordingly. This could be done through NRCan's Fuel Consumption Guide. (The timing of industry submissions and publication might need to be adjusted.)
  • Cash-flowimpacts on retailers would need to be assessedand mitigated so there is no incentive to sell more inefficient vehicles in order to collect more fees.
  • Theapplication of feebates leasing requires additionalstudy, but should not present major impediments as the fee or rebate can be passed on by the leasing agent.
  • Theannual feebate option could be implemented throughvehicle licensing but would require the participation of provinces and would be much more complex to administer.
  • Theapplication of feebates to alternative-fuel vehiclesrequires additional study but could be implemented via a GHG conversion factor.