The Tax for Fuel Conservation in Ontario

The Policy in Brief

Economic Instrument: Consumption tax and tax rebate.

Problem: The high environmental impact of the automobile, specifically as fuel consumption contributes to air pollution.

Goal: Environmental protection, energy conservation and increased revenues.

Description: 'Feebate' scheme to reward or penalize fuel conservation behaviour when purchasing new cars.

Administering Institution: Ontario Ministry of Finance.

Key Stakeholders: Car purchasers and manufacturers, and the provincial government.

An Overview

Ontario`s Tax for Fuel Conservation (TFC) evolved through a number of stages. In 1989 the Ontario government (Liberal) introduced an earlier tax on car purchases - the Tax on Fuel-Inefficient Vehicles (TFV). The tax varied in proportion to highway fuel consumption ratings above a base level of 9.5 litres per 100 kilometers. In 1991 the newly elected government (New Democratic Party) amended the TFV by doubling its rates, extending coverage to 250 car models representing about 12% of passenger cars, lowering the threshold at which the tax is applied, and including sports cars for the first time.

Opposition resulted in modifications to the tax as follows: tax rates for cars in the 8.5 to 9.5 litres per 100 km range were lowered; tax rates for sports cars were reduced by around two-thirds, and a $100 rebate was introduced for the most fuel-efficient cars (defined as those below 6 litres per 100 km). This last element made Ontario's tax the first automobile feebate scheme in North America. The new tax was renamed the Tax for Fuel Conservation (TFC).

Experience with the TFC suggests a number of possible improvements:

• The tax brackets should be further differentiated. Currently the tax is a flat $75 over almost 90% of car purchases. It does not, therefore, influence the bulk of the market. The tax should be advertised more. Currently most car buyers only learn of the tax after they have made the decision to purchase a car.
• Both the refund and tax rate should be larger if they are to provide sufficient financial incentive to change purchasing behaviour. Currently they represent only a small fraction of a new car's purchase price - less than 1% in the case of the rebate, for example.
• Rates should also be broadened to include light trucks and vans.

Some Further Reading

Davis, William B., Levine, Mark D. and Train, Kenneth in association with K.G. Duleep (1993). Feebates: Estimated Impacts on Vehicle Fuel Economy, Fuel Consumption, CO2 Emissions, and Consumer Surplus, Draft Report, Lawrence Berkeley Laboratory, Berkeley, California.

DeCicco, John M., Geller, Howard S. and Morrill, John H. (May, 1993). Feebates for Fuel Economy: Market Incentives for Encouraging Production and Sales of Efficient Vehicles. American Council for an Energy Efficient Economy, Washington, D.C.

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