Home / Development of Options for a Vehicle Feebate in Canada / Feebates – Conclusions

Feebates – Conclusions

DEVELOPMENT OF OPTIONS FOR A VEHICLE FEEBATE IN CANADA

Previous - Contents - Next

6. CONCLUSIONS

As discussed in Section 4, the modeling results are subject to limitations and assumptions but some robust policy conclusions are possible.

• Feebates can be designed to be environmentally effective and economically efficient. Although other measures such as fuel taxes may be better targeted, feebates are a legitimate alternative should other measures not be feasible.
• The imposition of feebates may involve difficult adjustments for automobile manufacturers at a time when the industry is faced with the challenge of oversupply. GM, Ford and DCX will bear most of the burden.
• The measure is administratively feasible and can be designed to be fiscally neutral.
• There are significant uncertainties and risks that affect the magnitude of the benefits as well as the market shifts involved.

Assessment of the Options

• Environmental Effectiveness. The higher the feebate rate, the greater the GHG reductions. However, it would be necessary to compare cost per tonne with other measures. Assuming $15 per tonne (and extrapolating from our highest scenario of $1000) a feebate of $1500-$2000 per litre per 100 km would be appropriate.
• Economic Efficiency. The best choice would be the feebate option that produces the greatest marginal economic benefit to society. Based on current assumptions concerning valuation and elasticities, this would involve a rate of approximately $1000 per litre per 100 km.
• Fairness. The best choice would be the feebate option that produces the least amount of shift between manufacturers and between classes. A feebate with separate classes for cars and trucks would mitigate most of the fairness concerns, but at the expense of economic efficiency, environmental effectiveness and simplicity.
• Fiscal Neutrality and Simplicity. Apart from the two-class option, there are no significant differences between the options.

Overall, a feebate of $1000 per litre per 100 km would appear to be most promising since it delivers the greatest economic benefit, and avoids the large shifts in market share associated with higher rates. This option would produce GHG reductions of 3 Mt per year in 2010 rising to 6 Mt per year by 2018. (By comparison, the MOU target is 5.3 Mt per year in 2010.) However, starting with a rate of $500 per litre per 100 km would be helpful in three ways:

• It would give greater weight to the fairness criterion, while still being reasonably environmentally effective and economically efficient.
• It would give firms time to adjust.
• It would contribute to a risk management strategy by providing the opportunity to: gather better information on factors such as elasticities and valuation; assess issues regarding the import of used cars, etc.; and, assess other implementation problems.
• Depending on the results, the rate could eventually be increased to the optimal level justified by the information gained.

Risks The key risks that affect the assessment are as follows. Modeling has Important Limitations. These limitations do not affect the main conclusions, which are based on broader evidence, but they do affect the magnitude of changes and the choice of the most promising option. In order to mitigate their effect, the study has used conservative assumptions and has involved sensitivity analysis. The key concerns are: Poor Knowledge of Canadian Elasticities. Elasticities have a very significant impact on the calculation of environmental benefits, economic benefits and adjustment costs. To the extent that they are underestimated, it means that the actual environmental and economic benefits would even greater, but so would the adjustment costs and impacts on manufacturers. Poor Knowledge of Canadian Perceived Value of Fuel Savings. The extent of unvalued fuel savings determines the economic benefit and affects the choice of optimal rate. While there is ample evidence of some level of undervaluation, there is very little information on the magnitude of it. Opportunity Costs for Consumers. As discussed in Section 5, these costs have not been assessed (although they have been described in general terms). Imports of Used Vehicles from the U.S. As discussed in Section 5, there is little information on the extent of the potential problem, yet it has the potential to undermine the entire initiative. If consumers were to import US vehicles in large numbers, this would significantly reduce the environmental effectiveness of feebates and make it very difficult to achieve revenue neutrality. Adjustments for Manufacturers. The reduction in net vehicle sales would probably be minimal but the reduction in overall revenues could be substantial (in the range of 4 percent). Most of the response should come in the form of economically justified investments in conventional fuel economy, hybrids and diesels, but there will be significant shifts in market share (2-4 percent). Given the fragile state of some manufacturers, this could be difficult. As suggested above, a lower rate to begin (phase-in period) would help hedge against these risks and would provide an opportunity to gather real information on costs and benefits. Interaction with the MOU on GHG Emissions If the MOU and feebates were implemented simultaneously, many or most of the benefits of the feebate would be included in the reference case. In theory this could mean that the effects would be additive. However, the reaction of manufacturers is unknown and there is a risk that they would respond to a feebate by withdrawing from the MOU. This suggests that feebates might best be considered as an alternative policy to the voluntary MOU, or as a subsequent policy following the expiration of the MOU. « Previous — Contents — Next »