The Feebate

Now, for part two of encouraging the introduction of the (plug-in) hybrid:

The best way I know of to encourage more efficient automobile buying habits is called a feebate. A feebate is a zero-sum tax-slash-rebate on motor vehicle fuel economy. Car buyers with fuel economy above the mean get a cash rebate, while gas guzzlers must pay an additional tax. The government simply acts as the creditor in the exchange -- it gains no net tax revenue. E.g. it is a very socialist concept. The nature of the feebate helps offset the higher capital investment of a hybrid vehicle. Increased mileage is, of course, a built-in reduction in operating costs.

There have been a number of academic papers on the feebate concept. The most recent one, which I will regurgitate here, is

DL Greene et al., Feebates, rebates and gas-guzzler taxes: a study of incentives for increased fuel economy, Energy Policy 33 (2005), pp. 767-775.

The authors examined a number of feebate programs, at a $500 and $1000 per 0.01 bushels per rod rate (or that might be gallons per mile). The impact of the program on average mileage is heavily determined by how far-sighted the consumer is. Since the consumer is myopic with a 4.67x diopter, most of the analysis is based off a 3-year amortization period, rather than the assumed 14-year lifespan of the vehicle. The last key point, is that they aren't using an absolute zero-sum feebate -- there is a very small ding to government finances.

The results?

1. $500 per 0.01 GPM: a 12.5 % gain in car mileage and a 25.1 % gain in light truck mileage.
2. $1000 per 0.01 GPM: a 24.6 % gain in car mileage and a 40.7 % gain in light truck mileage.
   

They also looked at a pure gas-guzzler tax or a pure rebate. Neither is nearly effective as the combination. The results appear quite significant, especially in terms of the impact on the evil soccer mom's SUV.

One of the conclusions is that buying patterns aren't significantly altered by a feebate. Instead, it mostly acts to facilitate the purchase of more technologically advanced models. Overall unit sales are slightly decreased, but the overall monetary value of car sales increases with the higher capital costs. Of course, this favours Japanese automakers over the comparatively mentally retarded domestic manufacturers.

Of course, any results from a study that tries to mathematically model consumer buying habits should be taken with a grain of salt. Treat these numbers as approximate only. I think a key of any feebate program is a truth in advertising provision. If advertisers are forced to include the feebate in their listed prices I think the impact on vehicle choice would be more pronounced. The study cannot effectively model the state of mind of the consumer. As we saw during the Middle-east Oil Crisis, if North Americans think oil is expensive, they will buy more fuel efficient cars. The actual price of oil is not so important.

As usual, I do not support specific subsidies for hybrids themselves. Otherwise we may see the absurdity of the Hummer Hybrid. Energy Outlook has a good discussion of this general issue here:

http://energyoutlook.blogspot.com/2005/08/specifying-path-vs.html