National Round Table on the Environment and the Economy
Study on Vehicle Feebates
Briefing Note
October 2005

Introduction

The National Round Table on the Environment and the Economy (NRTEE) believes that addressing greenhouse gas (GHG) emissions from the transportation sector is a critical component of Canada’s domestic response to climate change. The NRTEE applauds the Government of Canada’s interest in pursing the development of economic instruments to address this challenge, evidenced by its request that the NRTEE develop options for a vehicle feebate. This is consistent with previous recommendations the NRTEE has made to the Government through its program on Ecological Fiscal Reform (EFR).

Recommendations to the Minister of Finance

Responding to the Government’s request in Budget 2005 that it develop options for a vehicle feebate, consult with interested stakeholders, and make recommendations to the Government prior to the next federal budget, the NRTEE recommends that the Government of Canada:

1. Decide to not implement a vehicle feebate at this time.

2. Develop a comprehensive, integrated strategy aimed at reducing GHG emissions in the transportation sector. Within this strategy, a vehicle feebate could be given further consideration.

3. Release, with the Canadian Vehicle Manufacturers’ Association (CVMA) and the Association of International Automobile Manufacturers of Canada (AIAMC), a detailed plan for the implementation of the Memorandum of Understanding (MOU) committing the Canadian automotive industry to achieving a reduction of 5.3 megatonnes (Mt) of greenhouse gas emissions (CO2e) from cars and light trucks in 2010. This plan should be released to the public no later than November 1, 2006.

Rationale

Recommendation #1: The NRTEE does not believe a vehicle feebate would be the optimal instrument for shifting consumer purchasing to more fuel-efficient vehicles. There are significant unknown factors with the introduction of a vehicle feebate, including issues external to the modeling exercise, which could result in an increase in vehicle GHG emissions. (An example is the risk of vehicle arbitrage.) These issues would need to be addressed through a more integrated and comprehensive strategy.

Recommendation #2: All stakeholders with whom the NRTEE consulted agree that a feebate in isolation from other instruments, incentives and regulations is unlikely to deliver significant GHG reductions or shift consumers to more fuel-efficient vehicles. Motor vehicle fuel efficiency needs to be viewed within the government’s climate change targets and goals. Consistent with recommendations from the NRTEE’s EFR Program and the External Advisory Committee on Smart Regulation, a collection or “suite” of instruments is more effective in reducing significant GHG emissions than a single measure. Instead of using one economic instrument such as a feebate, the Government should develop an integrated and coherent Sustainable Transportation Strategy for Canada focused on all aspects of the transportation sector.

Recommendation #3: The NRTEE believes the MOU between vehicle manufacturers and the Government of Canada is worth pursuing. However, the manufacturers have not shared with the public how they plan on reaching their emission reduction targets. The release of such a plan will serve to engage Canadians and build confidence in the MOU.

Key Research Findings

To fulfil its task to develop options for Budget 2006, the NRTEE commissioned research assessing the implications of a vehicle feebate. This research satisfied the following objectives:

• Describe the nature of the motor vehicle market in Canada, key factors that influence both manufacturers and consumers, and key trends (including the implications of the MOU on GHG emissions).
  
• Identify the key feebate options that meet the mandatory parameters set out by the Government (revenue neutrality, broad application and flexibility).
  
• Assess these options against the criteria established in the Framework for Evaluation of Environmental Tax Proposals (Annex 4 of Budget 2005).
  

The following conclusions from the modeling results are subject to significant limitations and assumptions:

• Feebates can be designed to be environmentally effective and economically efficient. Other measures may be more effective and efficient, but feebates are a legitimate alternative should these other measures not be feasible.
  
• The imposition of feebates will 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.
  
• Feebates are administratively feasible and can be designed to be fiscally neutral.
  
• When identifying and assessing feebate options, there are significant uncertainties and risks that affect the magnitude of benefits and the market shifts involved.

Key risks that affect the assessment of feebate options are the:

• important limitations of modeling
  
• poor knowledge of Canadian elasticities
  
• poor knowledge of Canadian perceived value of fuel savings
  
• opportunity costs for consumers
  
• risk of vehicle arbitrage, and
  
• heavy adjustment costs for some manufacturers.

Because of these risks and limitations, NRTEE Members could not support a vehicle feebate in isolation from a broader, integrated strategy aimed at reducing GHG emissions in the transportation sector.

Stakeholder Views

On August 31, 2005, the NRTEE held an expert meeting on vehicle feebates to provide input on the preliminary findings of the draft consultants’ report. Participants represented industry associations, vehicle manufacturing companies, environmental organizations and labour groups. Positions of key stakeholders are as follows:

Industry Groups (including vehicle manufacturers) – Industry associations are critical of feebates in general. Their basic view is that a feebate is a regulation, so implementing a feebate would be counter to the spirit of the voluntary agreement on GHG reductions between the vehicle manufacturers and the federal government. There was also opposition from industry groups because of their view that a feebate will negatively impact vehicle sales. However, industry groups did feel the government needed to provide incentives to consumers to purchase more fuel-efficient vehicles.

Labour Groups – Labour groups are critical of feebates from the perspective of job losses. While the modeling shows that the introduction of a feebate would have overall economy-wide benefits, it would also result in a loss of vehicle sales for North American (Ford, GM and DCX) vehicle manufacturers.

Environmental NGOs – Environmental groups would prefer to see more aggressive action taken by the federal government on providing incentives for consumers to purchase fuel-efficient vehicles. While they support a feebate, they say a feebate alone is insufficient and should be considered within a larger suite of instruments and incentives.

Consumer Groups – Their position is that feebates would raise the cost of new vehicles, which would have a negative effect on consumers.

Government – Federal government officials support feebates because they result in a reduction of GHG emissions and are revenue neutral, so there is no cost to the government.

Observations

The following general observations from the NRTEE’s study on feebates may be of use for future analyses of economic instruments for environmental purposes:

• The Framework for Evaluation of Environmental Tax Proposals was very useful in evaluating feebates. This view is also held by the NRTEE’s expert consultants and stakeholders. The framework should continue to be used for the evaluation of environmental tax proposals.
  
• The assessment of a tax proposal is difficult and complex. In the case of feebates, it was not possible to arrive at a “clean and simple” solution. This should be kept in mind when evaluating future proposals.
  
• Lack of data was an issue in the effective modeling and analysis of feebates. For example, there is poor knowledge of Canadian elasticities. To effectively evaluate future economic instruments aimed at reducing GHGs in the transportation sector, the government should commit resources to the collection of data and the development of analytical tools for the transportation sector in Canada.

Conclusion

The NRTEE appreciated the opportunity to identify, develop and evaluate feebate options for the Government. It encourages the Government to continue examining the use of economic instruments in achieving its climate change goals.