Going Beyond CAFE Standards: Feebate Financing Incentives for Fuel Economy

Abstract

Vehicle efficiency or emission standards such as U.S. CAFE standards and California's Pavley standards have only been able to motivate a fraction of the technology investments in efficiency that would be cost-effective based on fuel savings alone. Vehicle feebates could create technology-development incentives that are not limited by any predetermined performance standard; but it may not be practicable or politically feasible to create feebate incentives approaching the limits of feasibility and cost effectiveness because of the "wealth transfer" that feebates create between low- and high-efficiency vehicles. This paper proposes a feebate-type vehicle financing program that combines loans for fuel-efficient vehicles with refundable fees on inefficient vehicles to create regulatory incentives far surpassing CAFE standards. The program would be revenue-neutral within the regulated sector and would not impose long-term revenue transfers between vehicle owners or manufacturers. In essence, it would operate to internalize the lifecycle benefits of fuel-efficient vehicle technologies, and the lifecycle costs of inefficient vehicles, in upfront vehicle prices, so that consumers fully consider long-term operating costs in their vehicle choice preferences.

Keywords: Fuel economy, CAFE standards, feebates

JEL Classification: K32, L50, O38