Accelerating the Transition to Zero- Emission Vehicles (ZEVs) through a Feebate System

In June 2021, Canada revised its ZEV sales target to require that all new passenger vehicles be ZEVs by 2035. Currently, ZEVs account for just 3.5% of new vehicle sales in Canada. The country also has the world’s dirtiest vehicles, largely due to the popularity of SUVs and other light-duty trucks, which represented 80% of new passenger vehicle sales in 2020. Achieving the new target and reducing carbon emissions from the transportation sector will require a combination of measures to rapidly boost both demand and supply.

On the demand side, the Green Budget Coalition welcomed investments in Budget 2019 and the 2020 Fall Economic Statement to establish and replenish the iZEV program. As of May 31, 2021, this program has supported the purchase of more than 92,000 ZEVs and likely contributed to the uptick in ZEV sales during this period. However, even taking the $5,000 iZEV rebate into account, a price differential remains between most ZEVs and gas vehicles in the same class, and this influences consumer choices.

To both increase the effectiveness and reduce the costs of the federal government’s existing iZEV and Green Levy programs, the Green Budget Coalition recommends introducing an environmental fee, negatively correlated with a vehicle’s fuel efficiency, on sales of all internal combustion engine (ICE) vehicles, phased in over time. Revenues would then be recycled to offset federal spending on ZEVs.

The proposed fee would modernize and expand or replace the Green Levy program, which applies primarily to large SUVs and luxury vehicles, and the new luxury vehicle tax announced in the 2021 federal budget for vehicles over $100,000. These existing initiatives cover only a small portion of the passenger vehicle market, involve weak disincentives, and are inefficient in driving emissions reductions. An expanded environmental fee on sales of ICE vehicles must be more than symbolic and designed to complement the iZEV program.

Analysis suggests that an emissions-based fee structure with a maximum fee of $4,000 could finance ZEV purchase incentives of up to $15,000. These fees and rebates should be incrementally adjusted over time as the market adapts. Equity considerations should be taken into account in the design of the program. (A more detailed analysis is available.)

The Green Budget Coalition recommends that the federal government consider consolidating administration of the environmental fee and iZEV programs. A consolidated “feebate” system would ensure alignment of policy objectives and allow the government to review and adjust both measures in parallel against a shared set of indicators. In addition to influencing demand, we expect that a well-designed feebate system would support other supply-side measures and send a strong market signal to accelerate the decarbonization of light-duty vehicles, while also encouraging investment in domestic ZEV manufacturing.

The United Kingdom, the Netherlands, and France all set 2035 as the year by which ICE vehicles will be banned, while also having a bonus-malus scheme. Partly because of its feebate system, introduced in 2008, France exceeded its targets ahead of schedule, achieving a reduction in average emissions from its light-duty vehicle fleet of 126 g CO2/ km in 2017, and an increase in the market share of new ZEVs to about 10% in 2019.

Sweden, which set 2030 as the year by which it will have phased out ICE vehicles, also has a feebate system and has seen ZEV uptake increase from just above 5% at the end of 2017 to over 25% by the end of 2019.

Recommendation:

Modernize and expand or replace the Green Levy program with a comprehensive, emission-based fee on the purchase of gas passenger vehicles, aligned with Canada’s climate policy. Coordinate the fee structure with the iZEV purchase incentive for a revenue-neutral feebate system. [NRCan, FIN, TC]

Contacts

Marc-André Viau – maviau@equiterre.org
Lisa Gue – lgue@davidsuzuki.org