Wednesday, March 21, 2007

Canada Introduces 'Fee-bates' and Other Measures to Encourage Fuel-Efficient Vehicle Purchases

[From Green Car Congress:]

The Canadian government is introducing several new measures designed to encourage consumers to purchase or lease fuel-efficient vehicles and get older vehicles off the road.

The measures in Budget 2007 include up to C$2,000 in rebates for the purchase or long-term lease of a fuel-efficient vehicle; up to C$4,000 in a gas-guzzler tax; C$6 million over two years for a seven-fold increase for vehicle scrappage programs; and C$30 million over two years to remove older vehicles from Canadian roads.

In addition to the initiatives above, the government will also invest C$33 billion in transportation infrastructure, including public transit, and C$2 billion over the next seven years for the production of renewable fuels.

Rebates. Transport Canada establishes and manages the list of vehicles available for rebates. The list currently includes new cars getting 6.5 l/100km (36 mpg US) or better and new light trucks getting 8.3 l/100km (28.3 mpg US) or better. In addition, new flexible-fuel vehicles with combined fuel consumption E85 ratings of 13.0 l/100km (18 mpg US) or better will be eligible.

Green Levy—the gas-guzzler tax. Manufacturers or importers will have to pay a Green Levy on new passenger vehicles (excluding trucks) with fuel consumption of 13.0 l/100 km combined (18 mpg US) or more. The tax will start at C$1,000 for passenger vehicles with combined fuel consumption ratings of at least 13.0 l/100 km but less than 14.0 l/100 km. The rate will increase in $1,000 increments for each full liter per 100 km increase in the combined fuel-efficiency rating above the 13.0 l/100 km floor, to a maximum of C$4,000. With the introduction of the new levy, the existing excise tax on heavy vehicles will be eliminated effective 20 March 2007.

Fuels. The Canadian government recently announced a minimum 5% average renewable content requirement in Canadian gasoline by 2010. The government also intends to develop a regulation for diesel fuel and heating oil to contain 2% average renewable content by 2012.

More than 2 billion liters of renewable fuels will be needed to meet those targets. Budget 2007 invests up to C$2 billion in support of renewable fuel production in Canada to help meet these requirements, including up to C$1.5 billion for an operating incentive and $500 million for next-generation renewable fuels.

Up to C$1.5 billion over seven years will be allocated towards an operating incentive to producers of renewable alternatives to gasoline, such as ethanol, and renewable alternatives to diesel, such as biodiesel, under conditions where industry requires support to remain profitable.

Incentive rates will be up to $0.10/liter for renewable alternatives to gasoline and up to $0.20/liter for renewable alternatives to diesel for the first three years, then decline thereafter.

The government will not provide support when a company’s rate of return exceeds 20% annually. Support to individual companies will be capped to ensure that benefits are provided to a wide range of participants in the sector, not just the largest oil-producing companies.

Budget 2007 also makes C$500 million over seven years available to Sustainable Development Technology Canada to invest with the private sector in establishing large-scale facilities for the production of next-generation renewable fuels such as cellulosic ethanol.

Other measures in Budget 2007 include a focus on reducing federal fleet greenhouse gas emissions, and a phasing out of tax breaks for oil sands production.

Federal fleet greenhouse gas reductions. The government is also targeting a 15% reduction in greenhouse gas emissions per vehicle-kilometer in its 26,000-vehicle fleet from 2002-03 levels.

Federal departments now have about 1,400 alternative fuel and hybrid vehicles in use, and vehicles purchased for the federal fleet must be capable of operating on alternative fuels, where cost-effective and operationally feasible. In addition, where it is available, all gasoline purchased for federal road vehicles must be ethanol-blended.

Oil sands tax break. The government intends to phase out a tax break for oil sands producers that allows them to write off investment costs, setting a final deadline of 2015 for the changes.

Accelerated capital cost allowance (ACCA) is sometimes used to promote investment in certain emerging industries and in clean energy technologies that have broad social benefits in terms of reduced environmental impacts. By accelerating the timing of capital cost deductions, ACCA defers taxation and improves the financial return from investments in particular assets.

Canada provided ACCA for investments in the oil sands at a time when it was an emerging sector and special support was appropriate to help offset some of the risk associated with early investments. Given the current health of the oil sands sector, the government decided that ACCA is no longer required. Budget 2007 phases out the existing ACCA for assets in this sector, leaving in place the regular 25% CCA rate for these assets.

The existing ACCA that encourages industries to invest in equipment that generates energy more efficiently or by using renewable energy sources will be extended to equipment acquired before 2020. It will also be expanded to cover wave and tidal energy, and additional solar energy and waste-to-energy technologies.

This looks like a smart package of policies. It's good to see the Harper government getting serious about climate change, renewable energy and energy efficiency. Things didn't look good when Harper took power last year (see previous post), but he seems to have taken a new look at energy and climate change policies.

The 'fee-bates' system on vehicles is a very smart policy. If designed correctly, a fee-bate policy can be largely revenue neutral and can effectively incentivize the purchase of more efficient vehicles. As fleet fuel economy improves, the list of vehicles qualifying for rebates or fees can be updated so to continually incent the improvement of fleet fuel economy.

This would be a very smart policy to enact in the United States, and in conjunction with improved and reformed CAFE standards designed to ensure manufacturers offer the fuel efficient vehicles in the first place, could help push forward the efficiency of the United States light vehicle fleet for the first time in nearly 30 years.

Unfortunately, the fee part of the fee-bates policy looks too much like a tax to some American lawmakers and hasn't had much traction in the U.S. It would probably take some delicate spin to get a fee-bate system passed in the United States.

At least Canada is providing a good example for us here (China has a similar gas-guzzler fee and incentives for efficient vehicles, I believe, and I'm sure other countries do as well).

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