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Feebates – Options

DEVELOPMENT OF OPTIONS FOR A VEHICLE FEEBATE IN CANADA

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3. FEEBATE OPTIONS

There are a wide range of options to link feebates with other programs such as social marketing or R&D incentives. However, this study is focused exclusively on the use of the purchase price mechanism to influence the behaviour of consumers and manufacturers. In this context there are still an infinite number of design options, based on nine main variables:

• Rate Basis. This refers to the choice of indicator or metric for the calculation of the feebate. The options include:
• Targeting fuel consumption (litres per 100 km) – this ensures that each litre saved has the same value
• Targeting fuel economy (kilometres per litre or miles per gallon) – this would mean that there would be progressively fewer fuel savings per dollar of feebate as fuel efficiency improves; consequently, this choice would not lead to least-cost reductions
• Targeting GHG emissions directly – this would be a more precise way of targeting their reduction (by including gases other than CO2) and would provide a basis for dealing with alternative fuels, but it would be less intuitive for the public
• Targeting specific technologies, such as advanced diesel or hybrid vehicles, as proposed by the Sierra Club

Form of the Feebate Function. The function that applies the rate can be linear or non-linear (for example, plateaus, or deadbands where the feebate is not applied; changes in slope, meaning differential rates; and, caps where fees are limited or capped at an upper level). In theory, all of these are possible: caps provide ways of avoiding excessive fees or rebates that contribute little to the effectiveness of the measure; deadbands provide a way of avoiding large numbers of small transfers close to the pivot point (mean fuel consumption level). However, they create discontinuities in the incentive to reduce fuel consumption, affecting behaviour and reducing effectiveness. Rate. Assuming a linear function, this refers to the slope of the line. Steeper slopes (higher rates) are more effective in promoting fuel-efficient technology investments but may be more disruptive as they would lead to greater shifts in purchasing, and greater costs. Number of Vehicle Classes. The options are:

• Single system (one pivot point for all vehicles) – the most efficient system
• Two-tier system (cars and trucks, for example) – less efficient but better at mitigating the impact due to market shifts
• Multiple classes (by weight, or interior volume) – least efficient, however multiple classes could reduce the burden on manufacturers more heavily reliant on larger vehicles (GM, Ford, DCX). That is, the pivot point would be differentiated by class, thereby limiting the impact of the feebate between classes.

Application and Exemptions. In principle, feebates are meant to apply to all classes. However, a variety of small exceptions could be made for legal or administrative reasons without affecting the overall effectiveness of the measure. A more significant option would be to exempt commercial vehicles or vehicles built exclusively for cargo (though such an exemption would probably encourage various forms of gaming to manipulate the definition of “commercial” or “cargo”). Manufacturer Feebate or Consumer Feebate. Assuming that manufacturers pass on the fees or rebates fully, there should be no difference in the effect. In either case, the tax or rebate amount can be posted with fuel economy ratings, since consumers may value that information. Both options would also be comparable in terms of administrative complexity and, in any case, manufacturers would likely want the feebate to be transparent in the price. Revenue Neutrality. In principle, the pivot point would be determined by the requirement for revenue neutrality and would change annually as vehicles became more efficient. However, the value would not be known with certainty until after the fact. Therefore, it would be necessary to operate with a proxy value so that vehicle transactions could take place with price certainty. One approach to achieve revenue neutrality is to model the expected changes in purchasing and set the pivot point ahead of time, then calculate the surplus or deficit at the end of the year and recalibrate in the following year(s) to distribute the excess or recover the deficit. This could involve large adjustments and possibly a risk of overcompensating. In addition, manufacturers with large market share may strategically respond by gaming in order to influence future pivot points. Another approach would be to continually recalibrate the modeling approach to improve the estimate of the pivot point but without seeking to explicitly compensate for any previous surplus or deficit. Over time, it might be hoped that surpluses and deficits would cancel each other out. In this option, the pivot point could be set several years in advance (for example, 3–5 years), improving planning, ensuring price certainty and minimizing the potential for gaming. Phase-In Period. A phase-in period could help alleviate some concerns about fairness and market disruptions, but would also delay the benefits. If implemented, a phase-in should take into account the projected vehicle redesign schedule. Paid at Purchase or Annually. An annual feebate would act as a continual incentive to replace less fuel-efficient vehicles but would incur additional administrative costs relative to a paid at purchase system. (Administration of an annual system would probably need to be through provincial vehicle registration.) In principle, this would apply equally to used cars, and therefore might be appealing as a way of mitigating the impact on manufacturers. This approach is more administratively complex. « Previous — Contents — Next »