Feebates: A Key to Breaking U.S. Oil Addiction

Guest authors Bennett Cohen and Cory Lowe are RMI alumni.

Oil addiction, in particular, is a habit RMI would like to help the U.S. kick. The scale of U.S. oil consumption (nearly 19 million barrels per day) combined with its virtual monopoly of transportation energy (97 percent oil-based), creates strategic weakness, economic insecurity, widespread health hazards, and environmental degradation.To kick the oil habit, the U.S. needs to shift toward radically efficient vehicles, which enable alternative fuels—electricity, advanced biofuels, or hydrogen—to compete robustly with oil.

Rocky Mountain Institute is apolitical and nonpartisan, but unabashedly endorses the feebate concept and thinks it should have strong transideological appeal. Co-invented by RMI Chief Scientist Amory Lovins, Richard Garwin, and Art Rosenfeld (who named it) in the 1970s and described in detail in RMI’s 2004 Winning the Oil Endgame, a feebate is an innovative policy that greatly speeds the development and deployment of efficient vehicles.

The California Legislature actually approved a similar “Drive+” law by an astonishing seven-to-one margin in 1980, but Governor George Deukmejian pocket-vetoed it after a mixed initial reaction from automakers, and it’s been bottled up ever since.

The basic idea of a feebate is simple. Buyers of inefficient vehicles are levied a surcharge (the “fee”), while buyers of efficient vehicles are awarded a rebate (the “bate”). By affecting the purchase cost up front, feebates speed the production and adoption of more efficient vehicles, saving oil, insecurity, cost, and carbon.

Though efficient vehicles’ reduced operating costs make them a good buy over the years, consumers’ implicit real discount rates, up to 60-plus percent per year (and nearly infinite for low-income car-buyers), make miles per gallon a relatively weak economic signal: long-term fuel savings are so heavily discounted that buyers, in effect, count just the first year or two—as minor an economic choice as whether to buy floor mats.

In contrast, feebates capture the life-cycle value of efficiency (or the cost of inefficiency) and reflect it in the sticker price. By increasing the price spread between less and more efficient vehicles, feebates bridge the gap between consumers’ and society’s perceptions of the time value of money. This corrects the biggest single obstacle to making and buying efficient vehicles.

Feebates can shift purchasing patterns in the short run and spur automakers’ innovation in the medium and long run. But to do both, a feebate program, like any well intentioned policy, must be properly designed and implemented. As RMI Principal Nathan Glasgow notes, “With feebates, the devil is really in the details.”

FEEBATE FORUM

In 2007, RMI organized and hosted the first Feebate Forum, pulling together 27 experts from the auto and insurance industries, NGOs, academia, and government to discuss feebate design and implementation schemes. Through open dialogue, the group developed a set of design recommendations, barriers, and next steps for feebates.

The participants agreed on the following design goals:

1. Metrics should be based on fuel efficiency or greenhouse gas emissions, and all types of transportation energy can be included—not just diverse fuels but also electricity.

2. The size of the fee or rebate shouldn’t depend on vehicle size. The feebate should reward buyers for choosing a more efficient model of the size they want, not for shifting size. A size-class-based feebate preserves the competitive position of each automaker regardless of its offerings, debunks the myth that consumers must choose between size and efficiency, and doesn’t restrict freedom of choice. Buyers can get the size they want; the efficiency of their choice within that size class determines whether they pay a fee or get a rebate, and how much.

3. Feebates should be implemented at the manufacturer level, so automakers, rather than a government agency, should pay the fees and collect the rebates. This lets manufacturers monitor results and adjust their vehicle mix accordingly, and it avoids any need for taxpayers to foot the bill for any costs. However, a good feebate program should be revenue-neutral, with “fees” paying for “bates” plus administrative costs—a potentially attractive feature. And since the “fees” are entirely avoidable by choice, they’re not a tax.

4. The “pivot point” between fees and rebates should be adjusted annually, so the program is trued up to stay revenue-neutral, and automakers have a predictable and continuous incentive to improve the efficiency of their offerings, spurring innovation.

5. Feebates should be designed for complete compatibility with efficiency or carbon-emissions standards, so automakers aren’t whipsawed between incompatible incentives or requirements. In practice, feebates may drive efficiency improvements much larger and faster than standards require, making the standards unimportant except to prevent recidivism.

FRANCE: A CASE STUDY

Around the same time RMI hosted the Feebate Forum in the U.S., France introduced the largest feebate program to date. It was dubbed bonus-malus after the French insurance terminology, where a bonus cuts your premium for a good driving record while a malus boosts your premium because you’re considered riskier. The French program is an excellent example of how the feebate concept can work in a large economy (France’s 2009 nominal GDP was the world’s fifth-largest, after the U.S., Japan, China, and Germany).

So far, it’s worked—beyond all expectations. Although designed differently than the ideal U.S. program outlined at the Feebate Forum, the French program has been enormously successful at reducing the carbon dioxide emissions rates of new light-duty vehicles bought in France.

Unlike the characteristics suggested by participants at RMI’s Feebate Forum, bonus-malus is administered by the government rather than vehicle manufacturers. With far more rebates (bonus) than fees (malus) collected, the government paid out 214 million in 2007 and 2008. This ultimately means that taxpayer money is funding the program rather than its remaining revenue-neutral, though the oil and carbon dioxide savings are well worth the cost.

Averaging 133 grams of carbon dioxide per kilometer for the 2009 new light-vehicle fleet, France’s vehicles now have the lowest carbon emissions in the European Union.

By comparison, the UK’s 2009 new vehicles emitted, and the EU average is, 146. Between 1995 and 2007 (when the French feebate was introduced at year-end), the emissions rate of new vehicles sold in France was falling at an average rate of 2.25 grams of carbon dioxide per kilometer per year.

During the first two years of the feebate program, the annual emissions decrease more than tripled to 8 grams per kilometer. Overall, the efficient bonus vehicles’ market share nearly doubled, from 30 to 56 percent, while the inefficient malus vehicles’ share fell threefold, from 24 to 8 percent.

France would love to keep this momentum going and has no plans to end the feebate program; there’s even talk of extending feebates to many other energy-using products.

While these are stunning results, the feebate’s impact is somewhat unclear because fuel prices soared as it was starting. When feebates began in early 2008, fuel prices were around $7 per gallon (already relatively high for France, though typical of most EU and other countries: U.S. gasoline and diesel-oil taxes, hence prices, are almost uniquely low). A few months into the program, fuel prices had soared to $9 per gallon. It’s unclear how this affected new vehicle purchases. By mid-2008, prices had collapsed to around $5.36 per gallon, and through 2009 they remained under $7, but vehicle emissions kept on plummeting. This suggests that the feebate was responsible for the decreased emissions during 2009. Perhaps the 2008 price spike caused buyer wariness that lingered through 2009, but the continued strengthening of the sales shift even as fuel prices fell suggests a strong policy effect.

CONCLUSION

So where did all this efficiency come from? The French program was not size-neutral as RMI recommends for the U.S., and the data show it shifted new-car buyers toward smaller vehicles. The market share of the smallest (economy) cars grew from 44 percent in 2007 to 57 percent in 2009, much as we’d expect for such a fleetwide feebate structure: smaller vehicles tend to have higher efficiency and lower carbon emissions, so unless unusually inefficient, they’ll earn a rebate that’s attractive to many buyers. For the U.S., RMI recommends a size-neutral feebate design to shift the entire market toward lighter, more aerodynamic, and advanced-powertrain vehicles, not just smaller ones.

California is currently considering the introduction of a statewide feebate bill. A state program would probably do more to shift the in-state vehicle sales mix than to spur innovative design, since even a market as big as California represents only a fraction of the U.S. auto market. Nonetheless, RMI is following this program closely.

In 2008, California’s aggressiveness on fuel efficiency spurred higher national CAFE standards, and a number of other states follow California’s lead on Clean Air Act and related policies. States and regions can make fine laboratories for refining policy innovations that later guide uniform national policies.

In August 2009, Senators John Kerry (D-MA), Jeff Bingaman (D-NM), and Olympia Snowe (R-ME) proposed a federal feebate program, based in part on RMI’s recommendations, as part of the Efficient Vehicle Leadership Act. The bill remains stuck in committee.

The oil spill in the Gulf has refocused attention on America’s oil problem, and D.C. insiders believe lawmakers must deliver an oil bill before November’s elections. RMI hopes its feebate proposals will be included as a way to confront oil dependence head-on by pulling radically efficient vehicles into the market while improving performance, safety, and comfort.