Vehicle Efficiency Incentive Program Design

1. Vehicle Efficiency Incentive ProgramDesign A Presentation to the Rhode Island Greenhouse Gas Working Group January 23, 2003

2. Elements of the VEI Program • Vehicles Covered by the Program The program will apply to all light-duty vehicles, i.e. passenger cars and light-duty trucks (including SUVs, minivans and station wagons). It will apply to conventional and alternative-fuel vehicles.

3. Elements (cont.) • Basis for the Program The program will be based on the federal vehicle miles-per-gallon (mpg) rating, with the maximum fee or rebate set at $3000. It will not be tied to the sales price of the vehicle.

4. Elements (cont.) • Within or Across Class (Number of Tiers) The program would be either: • A single-tier system with no class differentiation, or b) A two-tier system comprising a car class and a light truck class (which would include SUVs, minivans and medium station wagons)

5. Elements (cont.) • Treatment of Commercial Vehicles The program could either • Include all commercial vehicles, or • Require that individuals/businesses make special application for the exclusion of their commercial vehicles based on documentary evidence of their use for commercial purposes.

6. Elements (cont.) • Schedule of the Incentive Program Three possible schedules suggested are: a) A linear schedule around the zero point (the weighted average fuel economy of the fleet), reaching a plateau at $3000.

7. Elements… Schedule (Cont.) b) A non-linear feebate (or one with at least one change in slope) around the zero point (the weighted average fuel economy of the fleet). The rate of increase of the fee or rebate would change along the schedule – a shallow slope around the mean, then a steeper slope above and below it and finally a plateau at $3000.

8. Elements… Schedule (Cont.) c) A deadband around the zero point (the weighted average fuel economy of the fleet), with a linear design subsequently that reaches a plateau at $3000. The deadband would exclude vehicles near the mean from being charged a fee or from receiving a rebate. The size of the deadband would decide how many vehicles are excluded from the system.

9. Elements… Schedule (Cont.) The previous design can also be adopted under a two-tier program, with separate schedules for cars and light trucks.

10. Elements (cont.) • Administration of the Program The feebate will be administered at the point of registration of a vehicle. Fees will be collected by the Division of Motor Vehicles and will accrue in a program fund at the Division of Taxation at the Treasury Department. Rebates will be disbursed through this fund.

11. Elements (cont.) • Revenue-Neutrality The program will be designed to be revenue-neutral, except for a provision for administrative costs, public education/outreach and contingencies. The scheme decided upon would allocate roughly 80% of the revenues for rebates and 20% for the other costs. This 20% could be revise downwards once the system is deemed to stable and there is less uncertainty about the size of the contingency fund required.

12. Elements (cont.) • Legality of the Program • Labeling requirements may need to be either eliminated or be made more general. • An alternative formulation of the tax/rebate scheme that depends on, say, carbon dioxide emissions. • A schedule of fees and rebates for all vehicle models could be posted in a prominent place at each dealership.

13. Elements (cont.) • Annual Updates These updates can take the following forms: a) Increase the zero point and plateau points by 1mpg per year. b) If needed, adjust the slope of the feebate schedule and the maximum feebate levels every two years. The maximum increase in the feebate during each such revision would be no more than 10%, unless the program administrator deems it necessary.

14. Elements (cont.) • PublicOutreach Performed at two levels: • Before finalizing the legislation (educational workshops, training videos, pamphlets for legislators and stakeholders) b) During program implementation (mailings, ads, informational materials at dealerships and state govt. offices)

15. Distribution of 2001 new vehicle fleet

16. Linear Feebate w/o deadband • Zero point is at 22 mpg. • About 8% of new vehicle fleet are at zero-point. • Fees would amount to about $32 million and rebates would amount to $25 million, leaving about $7 million for contingency funds. • Approximately 1% of fleet on each side will either pay or receive the cap amount of $3000.

17. Linear Feebate w/flexpoints • Zero point is at 22 mpg. • About 8% of new vehicle fleet are at zero-point. • Fees would amount to about $25.3 million and rebates would amount to $21 million, leaving about $4.3 million for contingency funds. • Approximately 1% of fleet on each side will either pay or receive the cap amount of $3000. • About 45% of the fleet falls in the low-slope region

18. Linear Feebate w/deadband • Zero point is at 22 mpg. • Deadband covers about 30% of new vehicle fleet • Fees would amount to about $27 million and rebates would amount to about $20.7 million, leaving about $6.3 million for contingency funds. • Approximately 1% of fleet on each side will either pay or receive the cap amount of $3000.

19. Feebate design for cars/light trucks under a two-tier system Six possibilities were considered: • Linear for cars with no deadband and $3000 cap and 25mpg zero point • Linear for light trucks with no deadband and $3000 cap and 18 mpg zero point • Split-linear for cars with no deadband and $3000 cap and 25mpg zero point • Split-linear for light trucks with no deadband and $3000 cap and 18 mpg zero point • A deadband of +/- 1 mpg around the zero point of 25 mpg for cars, with a linear schedule that reaches a plateau at $3000 • A deadband of +/- 1 mpg around the zero point of 25 mpg for light trucks, with a linear schedule that reaches a plateau at $3000

20. Perverse Situations in Two-Tier System

21. Additional Option, nonlinear feebate • Zero point is at 22 mpg. • Fees would amount to about $39 million and rebates would amount to about $35 million, leaving about $4 million for contingency funds. • Approximately 0.01% of fleet on each side will either pay or receive the cap amount of $3000. • About 45% of the fleet lie between 20 and 24mpg and will contribute 9.2 million in fees or receive 8.2 million in rebates