Feebates: An effective regulatory instrument for cost-constrained environmental policy

A feebate can be described as an emissions tax combined with a refunded (i.e., negative) consumption tax, the balance of which can be either positive (a fee) or negative (a rebate) depending on how a taxed productʹs emissions performance compares to the industry average. A successful feebate-type policy is exemplified by Swedenʹs nitrogen oxide program, which has motivated power plant operators in Sweden to reduce NOx emissions far below levels achieved in the US and other industrial countries. A key to this success has been the fair and efficient manner by which the refund is distributed, and a similar approach could be applied to automotive vehicle feebates (for greenhouse gas reduction), making it possible to overcome limitations of political acceptability and greatly improve policy effectiveness. One such approach would distribute refunds in proportion to vehicle mass (rather than at a fixed rate per vehicle), so that the refund has at least an approximate correlation to vehicle utility and economic value. A second, alternative approach would apply separate feebates to multiple weight classes comprising limited, but overlapping, weight ranges, so that each feebate covers vehicles having similar transportation utility characteristics.