How gas guzzlers could help pay for more efficient cars

Concern over energy security, rising oil prices, and global climate change has put automobile fuel efficiency on the agenda for many lawmakers in recent months. 

In December, President Bush signed into law an energy bill that will increase the Corporate Average Fuel Economy (CAFE) to 35 miles per gallon by 2020. That means U.S. automakers will have to increase the average fuel economy of the cars and light trucks they produce in the next 12 years.  

While the new CAFE standard is a landmark event -- U.S. fleet efficiency has been relatively flat since 1985 -- this command-and-control style of regulation oppresses market forces and requires automobile manufacturers to install fuel economy technology, regardless of the cost. 

Fortunately, there is an alternative to this expensive and ineffective approach to regulating fuel economy. It's called a feebate. 

What is a feebate?

A feebate is a policy that provides a one-time rebate on fuel-efficient vehicles and places a surcharge on vehicles that are inefficient. 

New light vehicles that exceed a defined fuel economy benchmark, called the "pivot point," qualify for a rebate. The logic is that people who choose to drive more efficient vehicles deserve a rebate, because they are working to reduce social costs such as pollution and oil dependence, congestion, health problems, and climate change. 

The amount of the rebate would depend on where the vehicle's fuel economy falls in relation to the pivot point for vehicles in the same class. A Honda Civic, for instance, would qualify for a rebate because it's more efficient and consumes less fuel than comparably sized vehicles.

Conversely, new vehicles that are less fuel efficient than others in the same class would be subject to a fee.

Why feebates work

A feebate is a better approach to regulating the automotive industry because it allows manufacturers to install as much fuel economy technology as is cost-effective, as opposed to requiring manufacturers to install technology regardless of the cost.

Feebates also help consumers to consider the long-term impacts of a vehicle's fuel economy when they purchase the car.

Better yet, a well-designed feebate can be self-financing. Fees could pay not only for the rebates, but also the administrative costs of running the program.  

Feebates in action

There are a number of factors that affect both how the feebate works, as well as the success of the policy. These include where the pivot point is set, the number of vehicle classes, and the size of rebates and fees. RMI recently analyzed these factors in a white paper. 

In principle, though, feebates are gaining acceptance. Canada has had a feebate law in effect since 2007. Last month, several European countries adopted feebates: Finland and Ireland changed their automobile tax structure to vary based on greenhouse gas emissions, and France just implemented what's being called the "bonus-malus" law last month. 

California's State Assembly recently considered a feebate bill to reduce vehicle greenhouse gas emissions after the EPA denied the state a waiver to regulate tailpipe emissions. 

Feebates and you

So how would a feebate affect the average American? 

For starters, it would create an incentive program for manufacturers to produce more efficient vehicles, offering more fuel-efficient vehicle choices to consumers. 

By setting a pivot point for each size class, it would allow consumers to choose the type of automobile that fit their needs-be it a compact car, sedan, SUV, or light truck. There would be a financial incentive, however, to choose the more efficient cars within each class. 

Best of all, people who opt for an efficient vehicle would know that their choice will contribute to a better environment for future generations.