Various transportation specialists are worrying that persistently depressed fuel prices could threaten environmental components of the emerging bailout for Detroit, in which Congress appears to be demanding an aggressive push on fuel efficiency. What if consumers spurn all those fancy new fuel-sipping cars?

But some see a way out, particularly if the federal government and states add incentives — some of which have come and gone in the past — that encourage people to choose efficient vehicles. A new report co-authored by John D. Graham, a former senior regulatory official under the Bush administration who is now at Indiana University, lays out a menu of policies that could sustain the move to higher fuel efficiency:

From “Preventing Bankruptcy After Bailout: The Future of Green Vehicles,” (pdf)

by John D. Graham, dean of the Indiana University School of Public and Environmental Affairs, and Laura Cavagnaro, a graduate student in public administration there:



1. Re-Offer Income Tax Credits

In 2005 Congress authorized generous income tax credits ($1,000 to $3,500 per vehicle) for consumers who purchased new fuel-efficient vehicles with hybrid and clean-diesel engines. These credits are scheduled to expire soon. Congress should consider reoffering these credits. Congress has recently offered large tax credits (up to $7,500 per vehicle) for plug-in hybrids and electric cars, but these credits will have little practical effect until engineers accomplish breakthroughs in battery technology, and recharging stations are built throughout the country.



2. Enact “Feebates”*

A more promising approach would be a new “feebate” system that offers a rebate to consumers who purchase green vehicles and extracts a fee from consumers who purchase fuel-hungry vehicles. In order to protect the taxpayer, the formula for rebates and fees can be set to ensure revenue neutrality (i.e., no net increase in taxation). If policy makers make no adjustment for vehicle size or weight, the smallest, most fuel-efficient vehicles will be favored. But an adjustment for size and weight will better protect safety and align the tax credits with the federal government’s size-based system for regulating the mileage of new cars and SUVs. Some parents with large families and some small businesses need a large passenger vehicle. Tax policy should encourage them to purchase vehicles that achieve above-average fuel economy in their preferred size class….

3. Expand Non-Monetary Rewards

Consumers will respond to non-monetary as well as monetary signals, but some states and localities are actually removing non-monetary incentives to purchase green vehicles. In some regions of the country, vehicles with hybrid engines are permitted on HOV lanes in urban areas, even if the vehicle has only one occupant. This practice should be extended rather than curbed. If this policy creates too much congestion on HOV lanes (as has been suggested in Northern Virginia), the proper solution is not to eliminate the privilege but to focus it on a more limited class of vehicles that achieve the highest fuel economy within size or weight class.

Click for the summary:



Summary

A bailout of the Big Three will not work if companies must offer green vehicles at a time when fuel prices and household income levels do not support the sale of these more expensive vehicles. If market conditions are not favorable, companies will be forced to sell green vehicles with large discounts or cash-back offers, which will create the financial losses that heighten the risk of bankruptcy after a temporary bailout. Thus, since Congress has decided to pursue a bailout with stipulations – implicit and explicit – that force production of green vehicles, it would be wise for policy makers to accompany this policy with a series of monetary and non-monetary incentives that encourage consumers to purchase green vehicles, especially if fuel prices and income levels remain low in the foreseeable future.

Many libertarians insist that the market must rule and that cumbersome incentives and disincentives are bound to fail. In a world where the long-term trend is toward higher oil prices, how does a government and society avoid the “shock and trance” response to short-term wiggles in energy costs? Joe Romm of Climateprogress.org recently told me that he feels we’ve left an era of cheap oil punctuated by price spikes and entered a time of ever-rising petroleum prices with occasional dips. What’s your take on his thesis, the Indiana University prescription, and on policies that could lead to a more energy-efficient future?



(* I wrote about feebates in my 1992 book, “Global Warming: Understanding the Forecast.” Yet another idea that has come, gone, and now emerged again.)