Compendium on Energy Conservation Legislation
in Countries of the Asia and Pacific Region

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Part Three: Sectoral Overviews and Discussion Papers on
Application of Energy Conservation Laws and Regulations

Alternative Legal Measures to Improve the
Fuel Efficiency of Motor Vehicles
by Adrian J. Bradbrook*

SECTIONS IN THIS CHAPTER

Introduction
Fuel economy standards
Alternative regulatory mechanisms
Fuel consumption labelling
Fuel consumption in advertising
Conclusion of suggested proposals
Fiscal incentives
Critical analysis of reform options
Selected References

1 Introduction

Legal measures which might be introduced at the national level to improve the fuel efficiency of motor vehicles consist of both regulations and fiscal incentives. The purpose of fiscal incentives is to vary the existing tax and other fiscal regimes to encourage purchasers and users of motor vehicles to take more account of the fuel consumption characteristics of their motor vehicles. Such legal changes might include the introduction of a modified system of sales tax so as to favour the purchase of small vehicles and to penalize the purchase of larger vehicles, the modification of motor vehicle registration charges by imposing higher charges on inefficient vehicles, an increase in petroleum excise tax, and the provision of income tax credits or rebates for the purchase of vehicles which meet specified fuel economy standards. The purpose of regulations is to ensure that minimum social changes required by a government are met by the general population.

The issue of fiscal incentives is discussed elsewhere. This paper will consider various possible regulatory instruments which might be adopted by governments in countries of the ESCAP region in order to improve the fuel efficiency of motor vehicles. Three major regulatory instruments have been identified: fuel economy standards, fuel consumption vehicle labelling requirements, and fuel consumption specifications in vehicle advertising. These three regulatory instruments will be considered in this paper. Various forms of road management laws which would also favourably affect fuel consumption, such as speed limits and restricted traffic zones in urban areas, will not be considered.

2 Fuel economy standards

2.1 Existing regulatory systems

The country with the greatest experience with mandatory fuel efficiency standards is the United States. The standards are contained in the Corporate Average Fuel Economy (CAFE) standards, enacted in 1975 pursuant to the Energy Policy and Conservation Act of that year. Similar federal legislation was also enacted in Canada pursuant to the Motor Vehicle Fuel Consumption Standards Act 1980, but was never promulgated in effect in light of the adoption of a new voluntary code of practice between government and industry. <return to top>

Elsewhere, Japan adopted new vehicle fuel efficiency targets in early 1993. These targets are not enshrined in legislation, but based on the close government-industry links in Japan they are regarded by motor vehicle manufacturers in that country as effectively mandatory.

The United States and Japanese systems of fuel efficiency regulations are fundamentally different in concept and design. It is important to analyze the essential features of each system in some depth in order to be able to assess their appropriateness for possible implementation in countries of the ESCAP region.

2.1.1 The United States' CAFE system

In outline, the CAFE system involves the establishment by the Government of a precise average fuel economy standard or standards that each vehicle manufacturer must attain each year in respect of all vehicles produced in that year. Two separate standards have been introduced: one for passenger vehicles and one for light trucks. In respect of passenger vehicles, the standard was initially set at 18.0 miles per gallon for model year 1989 and was progressively made more stringent. The standard is currently 27.5 miles per gallon. In respect of light trucks, the standard has been increased from 16.5 miles per gallon in 1979 to 20.5 miles per gallon in 1994. Each manufacturer's CAFE figure is stipulated in legislation.

The Administrator of the Environmental Protection Agency calculates the average fuel economy of a manufacturer by dividing: a) the number of passenger automobiles manufactured by the manufacturer in a model year by b) the sum of the fractions obtained by dividing the number of passenger vehicles of each model manufactured by the manufacturer in that model year by the fuel economy measured for that model.

The CAFE system is commonly referred to as one of harmonic averaging. The averaging is the reciprocal of the average of the fuel consumed by each vehicle in the fleet. The effect of this is that the system is more onerous to manufacturers than might appear at first glance. To put it simply, the CAFE figure for two vehicles, one rated at 20 miles per gallon and the other at 40 miles per gallon will not be 30 miles per gallon, as might be expected, but 26.7 miles per gallon. The use of this system provides the most accurate measure of the fuel consumption of the fleet. Thus, in the above illustration, if two cars were each driven 10,000 miles, they would jointly consume 750 gallons of petrol, thereby achieving an aggregate fuel consumption of 26.7 miles per gallon. <return to top>

Different CAFE standards are prescribed for cars as opposed to light trucks. In addition, the method of regulation is different. The CAFE regulation for cars is legislated by Congress and currently stands at 27.5 miles per gallon. The CAFE standard for light trucks (including 4-wheel-drive vehicles) is regulated by the Department of Transportation, and currently stands at 20.5 miles per gallon. An exemption from the normal CAFE requirements is provided for overseas manufacturers which produce fewer than 10,000 vehicles per year in worldwide sales.

A system of carry-forward credits enables manufacturers to comply with CAFE regulations at a level less than the prescribed fuel efficiency standard for any given year. This credit can then be applied against the standard for any of the following three years.

The CAFE system has not substantially changed under the administration of President Bill Clinton. There is considerable political pressure from environmentalists to increase the standard, although this is strongly resisted by car manufacturers. One earlier proposal, which has since lapsed, was to increase the CAFE standards by 40 per cent by 2001.

In the absence of further tightening in the CAFE regulations, some states (particularly California) have indicated their wish to introduce stronger controls on a statewide basis. At present, however, the introduction of any tougher state controls in this area would be impossible in light of the Federal pre-emption laws. Federal legislation specifically provides that the states may not make any law or regulation relating to fuel economy standards.

Representatives of the United States' automobile manufacturers have highlighted a number of problems associated with the actual operation of the CAFE regulations. The following points, inter alia, have been made:

a) CAFE works against market forces. Customers do not wish to consider energy efficiency when the cost of petrol is very low (as is currently the case on a worldwide basis). Thus, while most customers in the United States appear to want large cars, the CAFE regulations prevent the manufacturers from satisfying the demand.

b) CAFE distorts the price of vehicles. The major United States manufacturers now over-price their large cars in order to be able to sell small cars as cheaply as possible. <return to top>

c) The way that the CAFE regulation is fixed is unfair to domestic manufacturers. While United States manufacturers have been forced to spend large sums on technological research and development, many car importers (especially from Japan) have had no difficulty in reaching the standards set. At the time when CAFE was fixed at 27.5 miles per gallon, Japanese cars were already achieving much better fuel economy. Thus, CAFE is regarded as having helped the Japanese at the expense of the United States car manufacturers. In fact, because the Japanese importers have such a wide margin of comfort, the fuel economy of Japanese cars imported into the United States has worsened since the advent of the CAFE regulations.

d) The current civil penalty for breaching CAFE regulations is too light. Under the present regulations, the penalty equals US$5 multiplied by each 0.1 of a mile per gallon by which the applicable fuel economy standard under that section exceeds the average fuel economy: 1) calculated for automobiles to which the standard applies manufactured by the manufacturer during the model year; 2) multiplied by the number of those automobiles and 3) reduced by the credits available to the manufacturer under section 32903 of this title for the model year. This penalty is generally viewed as too light to be effective, as some overseas vehicle manufacturers trading in the United States have apparently been prepared to pay such a penalty as the cost of doing business.

e) Many safety standards militate against compliance with CAFE regulations. The standards for safety invariably involve increasing the weight of vehicles and are mandated by the Government without any apparent consideration of the adverse effect that such safety standards would have on fuel economy.

f) CAFE regulations increase the price of new cars. This has the effect of causing people to retain their old cars, which are usually very fuel inefficient, for longer periods.

g) The CAFE regulations only affect new cars and have no impact on existing vehicles.

h) CAFE does not affect driver behaviour. There is evidence in the United States that if motorists achieve greater fuel economy, they will simply do more discretionary driving. This results in the same level of fuel consumption overall.

i) CAFE distorts the market and leads to gaming by manufacturers. For example, when the CAFE regulations were introduced, stationwagons were effectively phased out by vehicle manufacturers and replaced by 4-wheel-drive vehicles. The reason for this is that the 4-wheel-drive vehicles class as light trucks and are treated much more favourably in relation to the CAFE fuel consumption standards. Retention of stationwagons, which class as cars, would have adversely affected compliance with the CAFE regulations for cars. <return to top>

2.1.2 The Japanese system

The Japanese system of fuel efficiency is based on a June 1992 report of the Study Group on Automobile Efficiency Improvement, established by the Ministry of Transport and the Ministry of Trade and Industry.

The Japanese system divides vehicles into three categories based on vehicle weight. Separate targets are established for fiscal year 2000 for each category, which have taken into consideration various factors affecting fuel efficiency, including the feasibility of technological development, safety measures and driving ease as well as comfort. The effect of improvements in vehicle weight reduction and constant technological development were also taken into consideration.

The targets have been set to achieve an 8.5 per cent improvement overall by fiscal year 2000. Table 3.2.1 shows the targets by vehicle type corresponding to the vehicle weight categories. In order to discourage manufacturers from increasing vehicle size, under the Japanese system the heavier the vehicle the higher is the required rate of increase in targeted fuel efficiency.

3 Alternative regulatory mechanisms

There are a number of different possible models for introducing fuel economy standards. Different problems exist in respect of each model regarding the reduction of standards into effective legislative form. The various options are mentioned below. <return to top>

3.1 A CAFE-style system

The major features of the United States CAFE system have been discussed above. Despite the many criticisms of this model, it should be noted that if the CAFE system were adopted in any of the ESCAP countries, many of these problems could easily be avoided by suitable legislative change. For example, the problems associated with the current low level of the fine imposed on manufacturers for breaching the CAFE regulations could be alleviated by substantially increasing the penalties in any new legislation.

Despite these possible solutions, however, it is strongly recommended that the United States' CAFE system in its present form should not be adopted in the majority of the countries in the ESCAP region. A possible exception exists in respect of Japan and the Republic of Korea. The major difficulty is that the United States' system was drafted on the assumption that it would apply to full-line vehicle manufacturers (i.e., companies which produce a full range of vehicles, from small compact 4-cylinder vehicles to larger 6- or 8-cylinder vehicles). It is implicitly understood that manufacturers will wish to produce some models of large cars which by themselves will exceed the relevant fuel efficiency standard, but this is perfectly acceptable provided that the company produces a sufficient number of smaller vehicles in the same model year to ensure that the average fuel consumption for all its vehicles meets the stipulated standard.

Except in Japan and the Republic of Korea, there are no full-line manufacturers of motor vehicles within the ESCAP region. Elsewhere, vehicle manufacturers produce only a limited range of models. The lack of a wide range of models means that the averaging process between the fuel consumption of larger vehicles and smaller vehicles cannot operate in these countries. In light of this structural difference between the motor vehicle industry in the United States and countries of the ESCAP region, the simple approach of adopting the United States' CAFE regulations, with minor modifications, should be abandoned.

3.2 Percentage improvement system

New legislation of this nature would not specify a particular fuel consumption standard for vehicles, but would require all manufacturers to improve the average fuel economy performance of their vehicle fleets by a designated percentage over a period of years. <return to top>

Legislation establishing a percentage improvement system would be relatively simple to draft and would be far less complex than the CAFE system. Such a system would establish the average fuel consumption achieved by the total fleet produced by each vehicle manufacturer during a specified reference year and would require the manufacturer to improve the fuel efficiency of its fleet by a fixed percentage the following year or within a specified period of years.

The establishment of the past consumption figures should not be difficult, as this information is regularly supplied by the manufacturers themselves. The real problem appears to be in the arbitrariness of the system and its failure to reward past efforts by certain companies to produce more energy efficient vehicles. The system requires each manufacturer to improve the fuel consumption figures of its vehicle fleet by the same percentage. Thus, it would be much easier for manufacturers which have never considered energy efficiency seriously to comply with the new laws of this nature than for more socially responsible manufacturers. The system would certainly penalize vehicle manufacturers in Japan and the Republic of Korea and they could be expected to lobby vigorously against its introduction.

3.3 Class-based system

A class-based system would involve the artificial division of all motor vehicles into a specified number of classes depending upon size, and the allocation of a different fuel efficiency standard to each class of vehicle. In this form, the legislation would ensure that each company produces more efficient vehicles in each class, but this would not necessarily save fuel overall as companies could decide to produce only very large vehicles and to abandon or refuse to enter the small car market. To overcome this problem, it would be possible to formulate the legislation so as to control the number or percentage of cars produced by each vehicle manufacturer in each class. Such legislation would give the appropriate government agency the discretionary power to impose annual quotas on each manufacturer so as to limit the maximum number of vehicles or percentage of vehicles produced in each class of motor vehicles.

The notion of dividing vehicles for legislative purposes into classes based on size has long been recognized as appropriate in the context of motor registration legislation. For example, the motor registration fee in some Australian states (private vehicle registrations in Queensland, Tasmania and South Australia) is based on the number of cylinders and in other states (commercial vehicle registrations in Queensland and both private and commercial vehicle registrations in New South Wales) is based on the vehicle mass. Both vehicle mass and the number of cylinders directly relate to fuel consumption. <return to top>

At first glance, a class-based system, coupled with adjustable quota controls, appears superficially attractive as it would be relatively simple in design and would be inexpensive to administer. However, on further consideration it appears unlikely that vehicle manufacturers in countries of the ESCAP region (except possibly Japan and the Republic of Korea), could operate profitably under such a system. The system of quota controls presupposes that the local manufacturers have an equal capacity to produce vehicles in each weight category. In reality, this is not the case. As explained above, in most countries of the ESCAP region there are no full-line manufacturers of motor vehicles, and it is only in respect of larger vehicles that local manufacturers can compete with imported vehicles.

3.4 A combined percentage and class-based system

The adoption of a system which incorporates the essential features of the percentage improvement system and the class-based system might, if structured appropriately, combine the best features of both these systems while eliminating their inherent defects.

The Japanese system illustrates this approach. Although the system has not been in effect long enough to determine if there are any unforeseen problems with its implementation, it appears to be flexible enough to avoid the arbitrariness associated with the simple percentage improvement system and removes the need to apply politically difficult quota controls under a simple class-based system. As has occurred in Japan, there appears to be no insuperable objection to the notion of applying greater fuel efficiency improvements to large vehicles than to small vehicles. The system is sufficiently flexible to allow for the introduction of any number of different categories of vehicles and for the imposition of varying levels of fuel efficiency standards for each category. The only prerequisites to the introduction of a system of this nature are the establishment of a mandatory overall percentage improvement for all vehicles produced by each manufacturer by a designated year and the establishment of heavier fuel efficiency requirements for larger than for smaller vehicles.

3.5 Volume average fuel economy standards

The establishment of a system of volume average fuel economy (VAFE) standards has been suggested in the United States in various industry and government reports as a way of retaining a workable system of compulsory fuel economy standards while avoiding the problems associated with the current CAFE standards. Under a VAFE system, the fuel economy standards could be made a function of the interior volume of vehicles on the market. Motor vehicles of differing volume would be given different fuel economy standards. <return to top>

In reality, although advanced in the United States as a completely novel system, the VAFE system appears to be merely a variant of the class-size system, explained above. Its suggested advantage is that it avoids the need to classify all motor vehicles into a small number of specified categories, as the system of classification would operate as a sliding-scale based on motor vehicle interior volume. The VAFE system would thus avoid distorting effects on the market caused by the manufacture of vehicles which just meet the requirement of certain classes. For these reasons the VAFE system is said to be more flexible than the class-based system and would allow for a more refined system of fuel economy standards to be introduced.

The adoption of such a system in countries of the ESCAP region is worthy of serious consideration, although it is not without problems. The method of calculating the volume of vehicles would need to be closely considered in order to avoid gaming by manufacturers. A simple measurement of interior volume might well lead to the creation of remarkable vehicle configurations designed solely to increase the interior volume so as to attract a less severe fuel economy standard. It has been suggested in the United States that only useable space inside a vehicle should be taken into account for the purpose of this type of fuel economy standards. This is obviously sensible, although it would be extremely difficult to define legislatively the concept of useable space. It has also been suggested that the volume could be assessed based on the calculation of the length of the shadow cast by the chassis of vehicles by a light located directly overhead. This might well prevent gaming by manufacturers, but again, it would be difficult to reduce it into effective and comprehensive law.

3.6 Australian Design Rules system

In Australia, the system of Australian Design Rules (ADR) for motor vehicles has been used by the Commonwealth Government since 1970. The ADR specify requirements relating to vehicle emissions and safety that manufacturers and importers must meet for motor vehicles manufactured in or imported into Australia. Conformity with ADR is indicated by a Vehicle Compliance Plate, the existence of which is used by the Australian States and Territories as an essential prerequisite to vehicle registration. Until 1989, implementation of ADR was left to the control of the states and territories, which introduced differing standards. <return to top>

In 1989, the Commonwealth Parliament enacted the Motor Vehicle Standards Act, with the aim of achieving uniformity in the various state and territory requirements and standardizing the implementation of the design rules. Section 7 of this Act provides that the design standards are to be declared by ministerial order. Pursuant to Section 41, the ADR standards, including those concerning vehicle emissions, are to be regarded as prescribed consumer product safety standards for the purpose of Section 65C of the Trade Practices Act 1974. This means that the provisions for the compulsory recall of products not complying with prescribed standards, contained in Section 65F of the Trade Practices Act, are applicable to motor vehicles not complying with the national emission standards.

It would be technically possible to expand the current design rules system to encompass fuel economy standards. In Australia, such a scheme would involve the amendment of the Motor Vehicle Standards Act 1989 by way of the addition of new provisions concerning fuel standards. In other countries of the ESCAP region, such a scheme would involve the enactment of legislation similar to Australia together with the proposed fuel economy modifications. It would not be necessary to create new design rules to determine fuel consumption as this can be accurately quantified based on each vehicle's carbon-dioxide emissions. In Australia, an appropriate design rule already exists in relation to vehicle emissions as part of the existing framework and operation of the legislation.

While the use of a design rules system in the context of fuel economy standards might seem superficially appealing, the proposal does not stand up to a more detailed analysis. Design rules legislation provides for a system of tests and requirements that all vehicles must individually meet, while a system of fuel economy standards (whichever system is adopted) does not require that each vehicle comply with a specified standard but rather that a whole range of vehicles collectively meet the standard. A further problem is that the sanction of non-importation and supply of non-conforming vehicles and, as a consequence, non-registration by the prescribed government road authorities, which is appropriate for vehicles which fail to meet prescribed emissions and safety standards, would probably be regarded as too draconian for vehicles which simply consume excessive amounts of fuel. The most appropriate remedy in this situation would appear to be to penalize manufacturers financially rather than to refuse to allow certain vehicles to be sold legally.

4 Fuel consumption labelling

Energy consumption labelling has been widely imposed in different countries by regulation in respect of many energy-consuming consumer products. In respect of the fuel consumption of motor vehicles, a compulsory system of labelling for fuel efficiency has been in effect for many years in Japan, the United Kingdom and the United States. A voluntary system of energy labelling exists in many other countries, including Australia and Canada. In Canada, legislation designed to make the system compulsory has been enacted and will be promulgated if vehicle manufacturers cease to comply with the present voluntary scheme. <return to top>

The proposal to introduce a mandatory system of fuel consumption labelling has proved to be unpopular amongst vehicle manufacturers in many countries. The major objection appears to be that the fuel consumption figures achieved under test conditions could never be achieved under road conditions and that this would lead to a rash of complaints against the manufacturers. While it is certainly true that road conditions significantly increase fuel consumption over test conditions, the figure or figures displayed on the label could be modified to take account of this fact. This occurs in the United States where, under rules produced by the Department of Transportation, two fuel consumption figures are displayed, one for fuel consumption in city conditions and one for fuel consumption in highway conditions. These figures are calculated by discounting the figure for city driving by 10 per cent from the figure obtained during test conditions, and by discounting the figure for highway driving by 22 per cent. Any overall fuel consumption figure displayed must be calculated using the discounted figures above and on the assumption that the vehicle will be driven 55 per cent under city conditions and 45 per cent under highway conditions.

From a legal perspective, there appears to be little, if any, difference between the proposals. Both proposals would require new legislation to make them mandatory, and the type of legislation required would be identical.

For a suitable regulatory system, it will be necessary to prescribe the exact form of the label by law, preferably in the regulations attached to the enabling statute. As the labelling system is designed as a consumer protection and information measure, it is essential that the label be carefully designed so as to disclose the relevant amount of information in a manner that is easy to understand. In this regard, it is suggested that a star system of classification, whereby the most economical vehicles would receive five or six stars while the most inefficient vehicles would receive zero or one star, as currently used in some countries, including Australia, should not be used. This appears to be too vague and more exact information is required.

Conversely, the label currently used for fuel consumption labelling for motor vehicles in the United States is considered too difficult to comprehend in that the same label also gives information on the price of the standard vehicle and all optional equipment, together with a mass of miscellaneous information including the vehicle identification number, the dealer number, the final assembly point, the method of transport and the vehicle description. It is quite likely that the fuel consumption figures would be overlooked by consumers in the overall mass of information. <return to top>

It is suggested that the desirable form of a label would consist simply of fuel consumption information and, like the United States label, would give separate figures for city and highway fuel consumption, appropriately discounted from the figures obtained from standard test conditions, and for comparative purposes would indicate the range of fuel consumption figures obtained by passenger vehicles and light trucks generally. It is further suggested that a global figure for the estimated annual fuel cost for the vehicle, which forms part of the United States' label, not be included in the newly designed label. The estimated fuel cost is considered by the writer to be too vague and misleading, from a consumer perspective, as the figure will depend greatly on the number of kilometres driven in a given year. This will be unknown in each case and will vary greatly between customers.

5 Fuel consumption in advertising

The proposal that all advertising in relation to the sale of model-specific new vehicles makes specific reference to the fuel consumption figures for the model originates from the Ecologically Sustainable Development Working Groups established by the Australian Government. This proposal can be justified in four ways: first, it would raise the public awareness of fuel consumption as a factor in the purchase decision; second, it would put fuel consumption information before the prospective buyer at an early stage in the purchasing process; third, sufficient fuel consumption data exists, so that the need for additional testing costs is avoided; and fourth, it ranks fuel efficiency alongside other attributes in the overall image of desirability of ownership delivered by the advertisement. An additional factor was the finding of the Australian Department of Primary Industries and Energy that only 10 per cent of model-specific motor vehicle advertisements contain statements about fuel consumption and that many of these statements are misleading.

The problem of false advertising in this area was regarded by the Australian Competition and Consumer Commission as sufficiently serious for it to publish in November 1992, a guideline on Fuel Consumption Claims in the Marketing of New Motor Vehicles, pursuant to its powers under Section 28 of the Trade Practices Act 1974. The Commission indicates in this guideline that it intends to give a high priority to monitoring fuel consumption marketing claims and will carefully evaluate all complaints received. The guideline recommends that all advertising in relation to fuel consumption for motor vehicles should use only Australian Standard AS 2877-1986 data. This standard specifies a method of laboratory testing of motor vehicles using a chassis dynamometer to measure the fuel consumption of motor vehicles under specific driving conditions. The test involves two driving cycles: a simulated city driving cycle and a simulated highway driving cycle, both conducted under strictly controlled test conditions. The guideline goes on to specifically mention that actual fuel consumption may be lower than the AS 2877 test figure depending on factors such as traffic conditions and the mode of driving, and it should ensure that nothing else is said or implied to indicate that AS 2877 test results are based on on-road testing. <return to top>

Such legislative controls on model-specific vehicle advertising can best be justified by analogies. Similar legislation exists in many countries of the ESCAP region requiring that advertising contain specific warnings or other prescribed content in relation to the classification of films, the sale of food and the sale of tobacco products. For example, in respect of tobacco advertising, the controls under the existing legislation extend either to an outright prohibition on corporations publishing in a print medium an advertisement for smoking or for the use of tobacco products, or alternatively to a prohibition on such advertisements subject to the inclusion in the advertisement of a health warning in prescribed terms. In respect of food advertising, it is an offence under legislation in many jurisdictions to publish, or to be a party to the publication of, an advertisement which falsely describes any food or which is likely to mislead as to the nature, substance or quality of any food.

Based on these analogies, particularly that of tobacco advertising, the following form of legislation could be adopted by the governments of the member countries of the ESCAP region to ensure that fuel consumption information is compulsorily included in all advertising for new model-specific motor vehicles:

A corporation shall not publish, or cause to be published, an advertisement for a new model-specific motor vehicle unless the advertisement incorporates, or appears in conjunction with, information relating to the fuel consumption of the vehicle. Such information must be published in the prescribed manner and form.

The legislation should go on to give the government the power to make regulations to exclude designated types or models of motor vehicles, or a class of advertisements, from its operation. The legislation should also give the government the power to make regulations prescribing the format and content of the information relating to the fuel consumption of motor vehicles to be included in all advertisements.

6 Conclusion of suggested proposals

The various proposals discussed throughout this paper for the introduction of legislation to improve the fuel efficiency of motor vehicles are offered for consideration to governments of all member countries of the ESCAP region. Each government is at liberty to choose those measures which are most appealing in light of the prevailing social demographics of the country, the state of the local motor vehicle manufacturing industry, if any, the nature of the Constitution, which may in some cases make the introduction of some of the proposals legally difficult or impossible, and other local factors. <return to top>

Technologically, there is no one solution to the problem of improving energy efficiency in society. The improvement of energy efficiency involves a variety of changes to be adopted in each sector of the economy. So it is with legislation and regulation in this field. Each country will need a variety of legal responses if energy efficiency is to be enhanced to its maximum. Ideally, it is submitted that the most effective legal response to the improvement of motor vehicle fuel efficiency would be to incorporate all of the provisions discussed in this paper. However, any of the proposals can be adopted singly or in combination, and the adoption of any would amount to a significant advance in the goal of improved energy efficiency.

7 Fiscal incentives

There are a number of financial strategies that governments of member countries of the ESCAP region may pursue to improve motor vehicle fuel economy. These are examined below.

7.1 Differential sales tax

Taxes could be imposed on the purchase of motor vehicles with a high rate of fuel consumption. Alternatively, a sales tax increase/rebate programme could be implemented where higher rates of tax for inefficient vehicles are combined with tax rebates for relatively efficient vehicles.

7.1.1 Skewed sales tax

The essential feature of a skewed sales tax system is that it imposes higher charges on vehicles with low levels of fuel efficiency. The tax may be imposed on the manufacturer or the consumer at the point of wholesale or retail sale. The penalty may take the form of a lump sum payment or a higher tax rate imposed on the value of the motor vehicle.

A new system of skewed sales tax could be modelled on the system currently in place in the United States, where a specified supplementary lump sum tax is imposed on manufacturers on the sale of new passenger motor vehicles that do not meet prescribed standards of energy efficiency. This system was devised in the United States and has been in operation since 1978. It is commonly referred to as the gas guzzler tax. The supplementary federal tax is imposed according to Table 3.2.2. <return to top>

Emergency vehicles such as ambulances and police cars are exempt from the tax. The legislation defines the terms "automobile", "fuel economy", "model type", "model year" and "manufacturer", and also explains how fuel economy is to be measured.

The imposition of such a system would raise additional tax revenue. The reform could be made revenue-neutral and give additional incentive for the purchase of fuel-efficient vehicles if the schedule were modified and expanded so as to give a lump-sum reduction for the sale of each vehicle that met or exceeded the specified fuel-consumption statistics. The introduction of a sliding scale would result in a significant price reduction for the most fuel-efficient vehicles.

Rather than imposing lump sum payments, the proposed legislation could impose differential sales tax rates based on motor vehicle fuel efficiency. Under this proposal the existing sales tax rates could be modified so as to increase the rate of tax payable in respect of fuel-inefficient vehicles and possibly reduce the rate of tax payable by fuel-efficient vehicles. This approach is more consistent with the current sales tax regime, which uniformly specifies rates rather than lump sums and was favoured in Australia by the report of the ESD Working Group on Transport.

7.1.2 A feebate system

A second option is to combine the imposition of higher sales tax for inefficient vehicles with tax rebates for relatively efficient vehicles. Such a system would specify a sliding scale of charges for vehicles of lower efficiency "gas guzzlers" and incorporate a sliding scale of rebates for vehicles of higher efficiency ("gas sippers"). The sales tax or rebate would be paid or received by the consumer at the point of retail sale. This tax or rebate would take the form of a lump sum payment. This option is commonly referred to in North America as feebates. The Ontario government in 1990 introduced a system of this nature, entitled the Tax for Fuel Conservation. The additional tax ranges between US$75 to US$7,000 for vehicles with fuel consumption ratings in excess of 9 litres/100 km. A US$100 tax rebate is given to purchasers of vehicles with fuel consumption ratings below 6 litres/100 km. <return to top>

Work has been undertaken in the United States by the American Council for an Energy-Efficient Economy on the development of a model formula for the calculation of feebate charges and rebates designed to best encourage energy efficiency. This study defines a feebate as the product of a feebate rate and the difference between a vehicle's energy factor and some reference level relative to which all vehicles are judged. Thus: Feebate = (feebate rate) x [(energy factor) - (reference level)]. The energy factor is a measure of the vehicle's energy efficiency. For a fuel-economy based feebate, the energy factor is the vehicle's fuel economy rating in kilometres per litre. The reference level is an average value of the energy factor. For example, for a fuel economy feebate, the reference level could be a fleet-based fuel economy. The feebate rate is the monetary value assigned to each unit difference in the energy factor above or below the reference level.

7.2 Skewing motor vehicle registration charges towards higher charges on inefficient vehicles

Another tax policy option is to require the owners of vehicles with a high rate of fuel consumption to pay increased vehicle registration charges. The majority of countries have legislation imposing differing registration fees. Currently, the registration charges are based on a number of factors, such as the type of vehicle to be registered, the weight of the vehicles to be registered, the number of cylinders of the motor vehicle and whether the vehicle is to be used for private or commercial purposes.

7.3 Increasing petroleum excise tax

Petroleum excise tax is levied directly on the consumers of petrol at the point of sale on a cents per litre basis. Such a tax already provides an incentive to consumers to reduce the use of petrol and to purchase fuel-efficient vehicles. In the United States, the Study on Potential to Improve Fuel Economy of Motor Passenger Vehicles suggested that motor vehicle fuel efficiency could be significantly improved by eliminating or reducing sales tax on motor vehicles and raising petroleum excise tax to compensate for the lost revenue.

7.4 Income tax incentives

The governments of the member countries of the ESCAP region could offer income tax rebates or credits on the purchase of motor vehicles that meet specified fuel economy standards. This concept is similar to the various incentive programmes in the United States that are designed to stimulate the purchase of alternative-fuel vehicles and the conversion of petrol-based vehicles to alternative fuels. <return to top>

For example, in 1990 California enacted legislation providing an income tax credit to individuals and businesses that either purchased new alternative fuel vehicles or retrofitted their standard vehicles using an alternative-fuel conversion kit certified by the state's Clean Air Regulatory Board. Under this low emission vehicle (LEV) credit, a taxpayer could receive as a tax credit 55 per cent of the incremental cost (the cost above the purchase price of an equivalent standard-fuel vehicle) associated with purchasing a new vehicle that meets specified emission standards or converting an existing vehicle to meet the same standards. The maximum credit was US$1,000 for vehicles under 5,750 pounds and US$3,500 for vehicles over 5,750 pounds.

A new scheme of income tax rebates or credits linked to the purchase or lease of fuel-efficient vehicles would require administrative oversight. In California, the California Energy Commission (CEC) was declared responsible for administering the state's programme. Parties interested in purchasing an alternative-fuel vehicle contacted the CEC for information on the availability of, and rules relating to, the tax credits. The taxpayer filled out the appropriate form, giving information as to the type of car purchased or converted. If the purchase or conversion was approved by the Clean Air Regulatory Board, the CEC would approve the application and send a certification letter to the taxpayer. This certification letter was kept for income tax audit purposes.

7.5 Grants, low-interest loans or loan guarantees to businesses or state or territory agencies for the lease or purchase of fuel-efficient vehicles

Another option to encourage the use of more fuel-efficient vehicles by businesses is by government subsidy of the purchase or lease of fuel-efficient vehicles by grants, low-interest loans or loan guarantees.

8 Critical analysis of reform options

The 1991 Study on Potential to Improve Fuel Economy of Passenger Motor Vehicles considered the effectiveness of various financial mechanisms to improve automotive fuel efficiency. The study ranked the proposed mechanisms in the following order: changes to the sales tax regime, fuel excise taxes, business franchise fees and motor vehicle registration charges. In making this ranking, the study considered not only fuel economy, but also concerns affecting energy management, the environment, socioeconomic factors, macroeconomic effects, and the risk of achieving unintended consequences. <return to top>

The study argues that both changes to motor registration charges should be discarded as a possible option. Registration charges are small relative to other costs of vehicle operation, and very large additional imposts or incentives (perhaps three times the existing charges) would be needed to have any impact on vehicle purchasing decisions.

A skewed registration system also raises equity issues. Because of the tendency for lower income groups to own proportionately more older, higher fuel consumption vehicles, those who can least afford higher charges may pay more in registration fees. This regressive effect could be solved or minimized by adopting a system of "grandfathering", whereby the skewed registration scheme would apply only to new cars purchased after a specified date and would exempt all existing vehicles. However, such a system would have two disadvantages: it would disadvantage owners of existing low fuel consumption vehicles vis-a-vis owners of new low fuel consumption vehicles and it would encourage consumers to keep older, less efficient vehicles on the road to avoid paying higher registration charges. This would delay the penetration of fuel efficiency improvements. If a system of grandfathering were not adopted, the improvement in fleet economy would be expedited, but at equity costs for low-income groups.

As for the remaining options, it is submitted that there is only scope to select one out of skewed sales tax, a feebate system, and income tax incentives. All three offer the same type of incentive. Each would require significant administrative oversight, and to choose a combination of two or more of these options would increase the bureaucracy and costs of administration without providing any additional incentive for the purchase of fuel-efficient vehicles. The preference of the writer is for a skewed sales tax system. The income tax option seems less satisfactory as the financial effect on the taxpayer is more indirect, in that any rebate or deduction would be only one of a number of factors affecting taxation liability in any given year. The other problem is that the financial effect is also delayed in that the taxpayer would not receive the benefit until the end of the taxation year. In contrast, a skewed sales tax or feebates system would offer immediate benefits in a more direct manner.

Between a skewed sales tax or feebates system, the former would seem preferable. Feebates offer the advantage that the persons ultimately responsible for fuel efficiency, the customers, are obliged to pay the tax directly, rather than indirectly in the case of sales tax. Feebates therefore offer greater educational value in terms of emphasizing to the public the importance of vehicle fuel economy. <return to top>

On the other hand, the proposed skewed sales tax regime could be implemented by the simple addition of one or more sections to the current sales tax legislation. A system of feebates, being novel to our present system and being based on actual monetary amounts rather than a percentage rate, would require comprehensive new legislation and a significant body of administrative support.

Therefore, it is recommended that modifications to the current sales tax regime represent the preferred option. The current regime should be amended as suggested above to provide for a preferential rate of sales tax in respect of higher fuel-efficient vehicles. The introduction of such a system would need to be deferred in each country until the government decides on an acceptable level of fuel-economy for the new legal regime or adopts fuel efficiency standards. Such new standards would have to be adopted into the changes to the sales tax legislation.

The proposed sales tax changes should exist concurrently with increases to the petroleum excise taxes and with a system of government grants, subsidies or loans to businesses for the purchase of highly fuel-efficient vehicles. Increasing petroleum excise taxes would compensate for the revenue shortfall that would be caused by the reduction of sales tax for a significant proportion of motor vehicles. Such increases can also be justified as being consistent with the user-pays system for maintenance of the highway system. In addition, being an up-front and highly visible charge, it is the most powerful possible incentive for fuel economy.

The combination of skewed sales tax and higher excise charges would amount to a carrot-and-stick system, whereby the consumer is simultaneously rewarded for taking the right approach to vehicle fuel economy (in this case, by reduced sales tax) and punished for taking the wrong approach (by higher petrol excise taxes). The two tax changes thus mutually reinforce each other.

Both these changes should be in addition to the provision of government grants, low interest loans or loan guarantees to businesses for the purchase of vehicles of a high fuel economy standard. Such financial advantages do not affect or interrelate in any way with changes to sales tax or petroleum excise taxes. Sales tax and petroleum excise tax changes are aimed primarily at influencing individuals in their choice and use of vehicles, while government grants or loans are aimed at large-scale purchasing decisions made by corporations. <return to top>

Selected References

49 United States Code ch 329, Automotive Fuel Economy, ss 32901ff, 32902 (a, b), 32903, 32912, 32919

Beca Carter Hollings and Ferner Ltd., Vehicle Fuel Economy Labelling and Other Fuel Economy Measures, Wellington, New Zealand, at 21, 1993.

Bradbrook, A.J., Motor Vehicle Registration Charges as a Means for Improving Fuel Efficiency, Environmental and Planning Law Journal, Issue 1, 1998.

Bradbrook, A.J. and Wawryk, A.S., Legislative Implementation of Financial Mechanisms to Improve Motor Vehicle Fuel Efficiency (1998, forthcoming)

Chandler and Nichols, Assessing Carbon Emission Control Strategies: a Carbon Tax or a Gasoline Tax?, American Council for an Energy Efficient Economy, Washington DC, 1990.

Crandall, R.W. and Graham, J.D., The Effect of Fuel Economy Standards on Automobile Safety Journal of Law and Economics 32, 97, 1989.

DeCicco, Geller and Morrill, Feebates for Fuel Economy: Market Incentives for Encouraging Production and Sales of Efficient Vehicles, American Council for an Energy-Efficient Economy, Washington D.C., 1992.

Department of Primary Industries and Energy (Australia), Vehicle Fuel Consumption Advertising, Energy Programmes Branch, (unpublished), Canberra, Australia, November 1992.

Ecologically Sustainable Development Working Groups, Final Report - Transport, AGPS, Canberra, recommendation 11(b), 1991.

Ledbetter, M.R., Automobile Safety and Fuel Economy: The Effect of Fuel Economy Standards on Automobile Safety, American Council for an Energy Efficient Economy, Washington D.C., 1989. <return to top>

Legislative Analyst's Office (Canada), An Analysis of the Low-emission Vehicle Tax Credit Programme, June 1996. http://www.lao.ca.gov/rp62196.html   

Loxton and Andrews Pty. Ltd., Study on Potential to Improve Fuel Economy of Passenger Motor Vehicles, Canberra, 1991.

McLean, Haltmaier and Shelby, Incentive-Based Approaches to Limit CO₂ Emissions, in Greene and Santini (eds), Transportation and Global Climate Change, American Council for an Energy-Efficient Economy, Washington D.C., 1993.

Ministry of Transport (Japan), M.O.T. News, No. 49, 2 July 1992.

Ministry of Transport (Japan), Announcement of Vehicle Fuel Efficiency Targets, 2M.O.T. News, No. 54, 3 March 1993.

Motor Vehicle Fuel Consumption Standards Act, Stats. Can. 1980-81-82-83, c. 113, ss 17-21. The Canadian system is discussed in Transport Canada, Voluntary Motor Vehicle Fuel Consumption Programme, Report TP 6890/E, 1993.

Office of Technology Assessment, Improving Automobile Fuel Economy: New Standards, New Approaches, United States Government Printing Office, Report OTA-E-504 at 74-75, 1991.

United Kingdom Passenger Car Fuel Consumption Order 1977 (later amended as SI 1983/1486), made pursuant to the Energy Act 1976.

*Professor of Law
Faculty of Law
University of Adelaide
Adelaide, Australia 5005
Phone: (61)(8) 8303-4020
Fax: (61)(8) 8303-4344
E-mail: adrian.bradbrook@adelaide.edu.au              <return to place in text>

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