The gist:

Feebates–a novel combination of fees and rebates–would continuously tug the entire car and truck market toward increased fuel efficiency. Which Northwest region will be the leader in adopting them?

The details:

Still awaiting their Northwest debut, feebates, a novel combination of fees and rebates, are one of the smartest ideas around for creating a market for energy-saving products.

The basic idea is elegant in its simplicity: vehicles, for example, that are more efficient than average come to the showroom carrying a rebate for their buyers. Those rebates are proportional to the efficiency of the vehicle, so superefficient vehicles come with whopping big rebates.

As average efficiency increases, the feebates reset themselves around the new average, manufacturers raise their wares’ efficiency to compete, and consumers set their sights still higher. Efficiency snowballs.

Just as other tax shifts leave government revenue unchanged, a feebate’s fees pay for its rebates. And, like other tax shifts, feebates can be powerful: the cleaner the device, the bigger the rebate; the dirtier the device, the bigger the fee.

Feebates make prices tell the truth

Feebates counteract the market’s blindness to environmental costs and three other documented market failures.

  • Buyers—often choosing under pressure, as when the furnace goes out in midwinter—lack information about long-term costs.
  • A “payback” gap separates consumers from producers of electricity and other resources: appliance consumers typically demand a 2-year payback for investments in greater efficiency–such as fuel-efficient cars–while electricity producers build power plants expecting only a 20-year payback.
  • The motivation to minimize life-cycle costs is diluted by split incentives: landlords choose new water heaters, for example, but tenants pay the electric bills. These flaws cause massive, unnecessary investment in power plants, pipelines, and other facilities and amplify the ecological wake of daily life.

Feebates untangle these twisted incentives, with surprising results. If the United States enacted feebates on new cars of only $70 per rated mile per gallon, new-car fuel economy would rise on average about 1 percent a year.

Northwest debut?

Feebates could soon emerge from the shadows in the Northwest. The Canadian federal government gave feebates at least some consideration as part of its climate action plan. And the West Coast Governors’ Global Warming Initiative, a regional effort to combat climate change, presents the perfect political opportunity to introduce synchronized regionwide feebates on new vehicles, appliances, and other energy-using devices.

The Northwest also came close to feebates in the early 1990s when the California legislature passed a new-car feebate (which the governor eventually vetoed), structured to favor cars that were safer for local air and global climate.

Energy and water utilities in the Northwest have demonstrated the effectiveness of rebates for efficiency, but they’ve paid for these incentives from their own limited funds because they lack the authority to charge fees.

March 7, 2006