Senate Feebate Bill Aims to Improve on Cash for Clunkers

Aug 13, 2009

Due to popular demand, Congress just extended the cash for clunkers program with an additional $2 billion allocation, allowing consumers to continue trading in older cars with low fuel-efficiency for newer, slightly more fuel-efficient ones.

The program will stimulate the automotive industry as inventories clear and production increases for at least another month or two before the program runs out of funding again, but its environmental impact will be negligible. Even with the extension, the cash for clunkers program will have the effect of stopping the entire country's emissions for less than three hours per year.

A new Senate bill introduced last week, however, could have a longer-term environmental impact and improve the fuel-efficiency of all cars, not just clunkers.

Senator Jeff Bingaman (D-N.M.), along with Senators Olympia Snowe (Rep.-Me.), John Kerry (D-Mass.), and Richard Lugar (Rep.-Ind.), introduced the Efficient Vehicle Leadership Act, which proposes a "feebate" system, based in part on recommendations provided by the Rocky Mountain Institute.

Feebate programs, already adopted in France and Finland and being considered in California, will reward purchasers of more fuel-efficient cars with rebates while levying fees on those who buy less fuel-efficient cars.

Tied to the Corporate Average Fuel Economy (CAFE) standards -- federal regulations which require car manufacturers to meet an average mileage level across their entire fleet of cars -- the Senate feebate bill has two advantages over cash for clunkers: It will have a significant environmental impact and won't benefit one technology or class of car over another. Other legislation has provided incentives centered around specific technologies such as hybrid vehicles.

Although Senator Snowe's office says the bill will be cost neutral
until at least the 2016 model year -- without explaining how -- a
spokesperson for the Senate Energy Committee said that is still an
unresolved question that will be taken up by the Senate Finance
Committee.

The main plank of the program is to offer rebates to consumers who buy cars that are more fuel-efficient than the CAFÉ standard for their class, and to collect fees on cars that are less fuel-efficient than CAFÉ.

The fees and rebates would be tiered so that cars that are much more
efficient than that standard would receive higher rebates than those
that are only slightly more efficient, and likewise, the most
inefficient cars would have the highest fees.

For instance, purchasers of cars like the Honda Civic and Ford Focus would receive rebates of about $1,000, while buying the Ford Escape Hybrid would net $2,500. Rebates for the Toyota Prius and Chevy Volt would be, respectively, $4,000 and $8,000. But if a consumer can't resist buying a less fuel-efficient Hummer H3, it will come with a $2,500 fee.

The rebates would take effect in 2010 for cars in the 2011 model year, but the fees won't be assessed until 2012 for cars in the 2013 model year, to allow time for manufacturers to plan products in line with these incentives.

Bob Oliver, executive director at Pollution Probe, says that compared to CAFÉ standards, the feebate system will provide incentives to let technology drive efficiency:

"Regulations, by their definitions, are set at a level that is determined to be achievable based on conservative estimates. You don't regulate them to a level that you don't think they can achieve. Question is: What if you regulate it too low? What if they can actually do more than the regulation requires?"

Feebates, he says, free regulators from having to determine what is achievable but challenging. They will instead extract ingenuity out of the industry, rewarding manufacturers for improving efficiency and punishing them for not.

"As long as the reward is rich enough, automakers and consumers will chase the feebate as far and as fast as the technology will let them," says Oliver.

Because the feebates will be tied to CAFÉ standards, which are divided into classes of cars, the legislation will not reward people who can buy a compact car over those who need a large car.

"This will have the effect of not moving people from big cars to small cars, but it will ensure that all cars are maximizing technology to become more efficient, no matter what kind of car they are," says Oliver.

Feebate Bill Also Needs Some Improvements

Ken Johnson, an incentive policy analyst who has written about energy policy, says that the program will have more of an environmental impact than cash for clunkers because it is designed to be long-term. However, he says he sees several design flaws.

First, the program lacks a mechanism ensuring that the fees and the rebates will balance out.

"If the program turns out to have the same response as cash for clunkers has, you will have the same problem: Where does your funding come from?" says Johnson.

On the other hand, if the amount generated in fees equals the amount given out in rebates, "that would mean the feebate program isn't having any effect since it's just doing what CAFÉ would have done anyway," says Johnson.

To solve this, Johnson says, the government could calculate the benchmark annually based on what people bought the year before. If everyone buys cars that exceed CAFÉ, then the benchmark can be moved upwards the next year.

Another problem is that the rebates and fees do not lie on a continuous scale. For cars that are less than 50% efficient than the CAFÉ standard, the difference will be multiplied by $1,000. For cars that are 50% to 75% more or less efficient, the difference will be multiplied by $2,500, and for cars that are 75% more or less efficient, the fee or rebate will be a factor of $3,500.

"This three-tiered structure could create a situation in which two vehicles that are almost identical in their fuel economy can have a very, very different fee or different rebate, possibly in the hundreds or on the order thousands of dollars," says Johnson. "That could lead manufacturers to play games to go over that borderline from one category to another."

Johnson also sees potential for the program to have a ripple effect that would lessen its environmental impact. If the climate bill known as the American Clean Energy and Security Act is passed by Congress, it will institute a cap-and-trade system for carbon dioxide emissions. Polluters will have allowances to pollute, and if they don't use up their allowances, they can sell them to other entities who need to pollute more than they can with their allowance allotment.

If both ACES and the Efficient Vehicle Leadership Act pass, fuel refineries will sell less fuel and they will end up with surplus emission allowances. If these are then sold to coal-fired power plants or other dirty energy sources, then the lowered emissions in driving will be offset by higher emissions elsewhere.

A poorly designed feebate system could fail, as Canada learned after having to cancel its feebate program.

Johnson concludes,

"I like the idea of doing what they're trying to do, I just don't think they're getting good guidance from economists or policy people who have designed feebates. It's a step in the right direction, but it's poorly designed."

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