The Vehicle Efficiency Incentive

I’ve posted below an interesting commentary from Dennis DesRosier in favour of gas tax increases as an alternative to the proposed incentive increases. His chart shows a near perfect correlation between monthly gas prices and % monthly auto sales going to entry level ( fuel efficient) vehicles. It strikes me that – to reduce the emissions intensity of motor vehicles – the way to go is to raise gas prices and then use the proceeds to subsidise the most efficient vehicle choices and development of new technologies, bio fuels etc. Our domestic auto industry will be hit by an incentive to purchase overwhelmingly non Big 3 vehicles, and could and should have been cushioned through support for the development of new greener vehicles. I note that the incentives are not to fuel efficiency per se, but to relative fuel efficiency within vehicle classes.

The entire premise of the Vehicle Efficiency Incentive (VEI) is wrong. VEI’s cannot take Canada to the next level of fuel efficiency because it pushes OEMs to build vehicles that many Canadians do not want. The only approach is a gas tax like the one that has been so successful in Europe and other overseas markets. These same domestic OEMs that everyone blasts for gas guzzlers sell high mileage fleets in Europe because CUSTOMERS want to buy efficient vehicles because they pay high gas taxes that pushes gas over $1.50/litre.

At the hint of a gas tax, buyers will scramble for fuel efficient vehicles. This is exactly what is already happening in Canada. Remember that over 50 percent of Canadians last year bought a small fuel efficient entry level vehicle. Look at the attached chart, month in and month out, when gas prices went up over the last four years, entry level vehicle sales followed. When gas prices went down, e! ntry level vehicle sales went down. If you Increase gas prices then, driven by demand (not policy), OEMs will bring in more of the fuel efficient engines from Europe and Asia that were previously undesirable in Canada and the U.S.. E.g., GM could add the gas miser engines they leave in Europe to the new Saturn Astra and have a big, profitable success. There are dozens of diesel engines in Europe that could be successful in Canada!

Longer term, this demand will drive investment and innovation that fuels the economy and provides a context where OEMs can compete for return on investment. Higher gas prices will encourage the drivers of the other 19 million plus vehicles on the road on Canada to drive less and better maintain their existing vehicle rather than the VEI which encourages maybe 20 to 50,000 Canadians to be more responsible with their new vehicle purchase. 19 million driving less will do a lot more for the environment than! getting a few thousand new vehicle intenders to be more responsible.

Why is increasing gas prices never brought up? Political fear is the only reason. Read that as Alberta. Don’t you find it interesting that the one vehicle exempt from the VEI tax are pick ups. And guess what vehicles Albertans purchase? Yes they purchase pickups. Lawmakers see the discussion over higher gas taxes as political suicide — they fear they will not get re-elected if they support a tax. Pure and simple.

The inertia behind policies like a feebate unfortunately is unstoppable. For instance, the National Roundtable on the Environment submitted a report to the Federal Government pointing out the flaws in a feebate system. This didn’t stop the Government. The failure of the Ontario fuel efficiency tax and the BC luxury vehicle tax did not stop the Government. OEMs have to understand that they cannot make this just go away. Their only play is to replace it with a stronger alternative that drives demand that they can plan their business around — a progressive gas tax. The devil is in the detail around 3 primary questions — how much, how fast and what do you do with the tax revenue. There are plenty of places to use the money — energy R&D is an obvious one. They can be implemented gradually to lesson the political fall out and who knows how high? It likely would take at least a nickel per litre! and maybe even ten cents per litre but that could be figured out by some smart economists. But these issues could be figured out.

Fuel Efficiency taxes and pointing the national energy policy gun at OEMs heads, is a stupid, senseless, cowardly political debate. The identical debate is going on in the US right now over increasing CAFE standards. Our politicians are cowards. Lawmakers and citizens need to summon just a tiny fraction of their courage and step up to self responsibility and accountability and protect our environment through a progressive gas tax. And speaking of cowardly politicians, why are they hiding behind a name. It is a Feebate my friends not a VEI. The primary intent of this policy is to TAX vehicles and I struggle with the inefficiency of this concept when there are better tools available to the politicians.

At the same time I support the rebate side of the equation if it is restricted to advanced technology vehicles like Hybrids, clean diesel and certain E85 vehicles. The resistance to these vehicles is price. They cost more to buy because of the technology. Many believe they are worth the extra cost not because of the fuel you save but because they offer much better overall performance AND fuel efficiency. But most consumers can’t get by the price issue. So nudge them over the price barrier. This makes some sense at least for a limited time period.

I also support any program that gets the old smokers off the road. The Car Heaven program is excellent and needs to be enhanced. But higher prices on new vehicles encourage consumers to keep older vehicles on the road and is in direct conflict with initiatives to get older vehicles off the road. This may seem a stretch but if there is a group of consumers who are bound bend and determined to drive a large SUV then shouldn’t they be encourage to buy one of the newer more fuel efficient ones rather than keep their old one. Yes, a new large SUV is less fuel efficient that a mid sized vehicle. But a new large SUV is a lot more fuel efficient than any bought 5 or 10 years ago. So if you must be in a large SUV, as odd as it may appear, wouldn’t you want consumers driving the newer ones rather than the older ones?

And I’m already being criticized for coming out against the feebate. But understand that I’m against it because it is bad policy not because I don’t care about the environment. In my note yesterday I laid out a number of the unintended consequences of such a program so I will not repeat them again. But I support programs which lead to more environmentally friendly vehicles being purchased. I just don’t support politically motivated programs that I believe will not work. Go after gas prices. Go after the old smokers not just through a carrot approach but implement a rigorous inspection program to get them off the road. Encourage the best technology to be developed. Help consumers reach the higher prices of these technologies. But don’t put a tax in place that won’t work and may have the exact opposite effect.