A Market-Based Policy to Encourage Fuel-Efficient Vehicles

RECOMMENDATION: Provide an incentive to make and buy fuel-efficient vehicles; a premium on gas guzzlers will discourage that choice and pay for the incentives. This is sometimes called a “feebate” program.

THE PROBLEM: Too Many Gas Guzzlers on Our Roadways

Today, more than two-thirds of the oil consumed in the United States is used for transportation, mostly for cars and light trucks. Most of that oil is imported, often from politically volatile regions of the world. Increasing fuel efficiency would lower pressure on oil prices, enhance our national security, help curb smog and acid rain, and reduce global warming. Yet America’s average fleet-wide gas mileage has actually decreased since 1987.

There are many cost-effective technologies available to reduce fuel use on our roads, but they are not being used. For example, while there are about a dozen hybrid electric vehicle models on the market in the United States, hybrid sales currently represent only one percent of the 17 million vehicles sold each year. More action is needed to encourage the production and purchase of efficient vehicles.

HOW WOULD A FEEBATE WORK

In one approach a fee or rebate would apply to the manufacturer of each new car and light truck. The size of the fee or rebate for each vehicle would be based on the gallons of gasoline estimated to be used over the lifetime of the vehicle. The fee or rebate would then be determined relative to a dividing line, the reference mpg. The box to the right shows how this could work.

The reference mpg could depend on the size of the vehicle, or other vehicle characteristics. This approach would, for better or worse, reduce the relative impacts on different automakers due to their fleet mixes, and neither reward nor penalize consumers for choosing big or small vehicles.

The reference mpg’s would be shifted each year such that the total fees would just pay for all the rebates, so there would be no net revenue or cost to the government. Consequently, about half the vehicles would receive a rebate, and about half the vehicles would be assessed a fee.

BENEFITS of a Feebate program:

• Revenue neutral: The program can be designed to cost the government NO money, and it would not be a tax increase.
• Market-driven policy: The financial incentives will help push the market to more efficient vehicles, to align consumer demand, manufacturer requirements, and national policy.
• Continual improvement: As fuel economies increase, the midpoint mpg is ratcheted up, encouraging continual improvement, but never out of line with the existing market.
• Not tied to CAFE standards: If the feebate is large enough, market forces will drive up fuel economies beyond the current fuel economy standard.
• Reduces oil consumption and greenhouse gas emissions.

SAVINGS AND COSTS: A feebate would improve fuel efficiency because it would encourage manufacturers to use more fuel-efficient technologies in their vehicles, and encourage consumers to purchase more efficient vehicles. One study finds that a feebate similar to that described above would save 2 million barrels a day of oil by 2020. Although improved technologies may increase the average price of cars and light trucks, the savings in gasoline should be greater than the added cost. For automakers, both total costs and total revenue would likely increase; some automakers (those with efficient vehicles) would benefit at the expense of others.

ALTERNATIVE FEEBATE STRUCTURES: There are many other ways to structure a feebate, including:

• use a single reference mpg for a class of vehicles,
• exempt pickup trucks or other kinds of vehicles,
• carve out a neutral mpg zone with no fee or rebate,
• apply to buyers rather than manufacturers, and
• apply as a direct fee and rebate or as a tax policy.

EXAMPLES OF FEEBATE PROGRAMS AND PROPOSALS

• District of Columbia: “The Department of Motor Vehicles Reform Amendment Act of 2004” (A15-704) requires owners of large SUVs to pay a higher excise tax and registration fee, while reducing the tax and fee for owners of hybrid electric and alternative fuel vehicles.
• Connecticut: Special Act No. 05-6, passed in June 2005, required a study of a graduated sales tax for vehicles, from 3 to 9 percent, based on greenhouse gas emissions.
• California: AB 2791 would have applied a discount or surcharge of up to $2000-2500 to the purchase of new cars and light trucks, based on emissions of greenhouse gases and air pollutants.
• United States: A bill by Sen. Richard Durbin (S. 795 in the 108th Congress) would have created an income tax credit of $770-7,700 for purchasers of cars and light trucks that get at least 5 mpg better than the CAFE standard, increased the existing gas guzzler excise tax to similar amounts, and expanded the gas guzzler tax to cover light trucks.