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Economic analysis of feebates to reduce greenhouse gas emissions from light vehicles for California

McManus, Walter (2007): Economic analysis of feebates to reduce greenhouse gas emissions from light vehicles for California.

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Abstract

A growing majority of climate scientists are convinced that unless emissions are reduced, global warming would cause a number of adverse effects throughout the United States. In California, rising temperatures would reduce the snow pack in the Sierra-the state's primary source of water-and lead to less water for irrigating farms in the Central Valley. Global warming would increase the number of extreme heat days and greatly increase the risk of poor air quality across the state. California's 1,100 miles of coastline and coastal communities are vulnerable to rising sea levels. Concerted action could curb global warming, but all sectors would need to take immediate steps to reduce heattrapping pollution.

In California, the transportation sector consumes well over half the oil used statewide, and passenger cars and trucks emit 20 to 30 percent of the state's global warming pollution. Vehicles therefore are a central focus of the immediate action required to reduce global warming.

The state of California's regulatory approach involves phasing in limits to average global warming emissions from passenger cars and trucks beginning in 2009 and culminating in 2016. This regulation is often called "Pavley," after its author, Assemblywoman Fran Pavley.

The federal government's approach provides tax incentives to buyers of hybrid vehicles, which emit significantly lower amounts of global warming pollution than most conventional vehicles. However, the hybrid incentive affects only a small portion of the vehicle market.

A third approach that could be used to enhance or replace existing regulations would be a feebates program. A feebates program creates a schedule of both fees and rebates that reflects the amount of global warming pollution that different vehicles emit. Purchasers of new vehicles that emit larger amounts of heat-trapping emissions pay a one-time surcharge at the point of purchase. These surcharges are then used to provide rebates to buyers of new vehicles that emit less pollution. A feebates program has several advantages over other approaches: Market-oriented: A feebates program recognizes the power of price signals to change consumer behavior. That is, incentives spur consumers to purchase and manufactures to produce cleaner vehicles. Self-financing: A feebates program can be designed so that the surcharges collected equal the rebates paid.

Affects entire market: A feebates program applies to all new vehicles-clean and dirty-spurring a transformation of the entire market. Consumer choice: A feebates program can be designed so that consumers have the option to buy vehicles that carry no surcharge in each vehicle class, such as cars, trucks, sport utility vehicles (SUVs), and minivans.

This study explores the economic impacts on consumers and manufacturers of the existing Pavley regulation and a feebates program by analyzing four alternative scenarios, using information from 2002 as the base year.

Our findings show that a feebates program is an effective strategy to reduce global warming pollution by up to 25% more than Pavley alone. Also, under a feebates program consumers will save thousands of dollars and retailers will see their revenue rise by as much as 6%.

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