The government should increase the tax on gas by a small amount to compinsate early adopters of alternative energy cars. This would include hybrid cars. The compinsation should be proportionate to the percentage of alternative energy used by the car in city driving with an inverse square relation to how long they've owned the car. I claim that such a program would be cost-neutral, highly effective and self-regulating.
Brief Analysis:
In 2007, according to Statistics Canada the net sales of gasoline for use by road motor vehicles was on the order of 40 billion liters. At a taxation rate of say $0.02/L, the Canadian government would collect $800 million. Given the volatility in gasoline prices in recent years, a tax increase of $0.02/L would barely be noticed at the pumps.
The cost of hybrid cars is on average $1,700 - $11,200 USD more than regular cars. Ignoring all tax incentives that are already in place, if the collected premium was devided amongst new car purchases evenly, at $11,000 that covers the premium for 72,700 cars. In 2008, a little over 1.6 million new cars were sold. Hence, 72,700 cars represents 4.5% of cars sold.
At first glance 4.5% may seem like an extremely small portion of the total car sales; however, that is sort of the point. Proponents of the free market system argue that government intervention is always a bad thing, and that the market will in time always figure out what is best - and I disagree. As I see it, the market is an amazing linear optimization tool, which eventually leads us to an optimal result, provide the incentives we provide the market with are good. Though, as they say 'garbage in.. garbage out'. We need to provide incentives for the market to be more environmentally friendly.
So why limit the tax to a small amount? Why not set the tax to $0.20 and have the incentive represent 45% of new cars sold? Because I still believe the free market is an amazing optimization tool. It is far too difficult for us to determine what the proper balance of hybrid vs non-hybrid car sales should be. If the government uses too much influence, incentives turn into manipulation. And as most economists know, historically whenever the government has tried to manipulate the market it has failed - worse, market manipulation eventually leads to a major correction, aka a collapse.
The second part of this proposal is to avoid provide incentives on a year-to-year basis, and instead providing the incentives to early adopters correlating with the inverse square of time. Additionally, so as to not punish early adopters who adopted before such an incentive is put in place, I'd recommend treating them as if they bought their car in the year the plan is put in action. So every year, the collected revenue would be split amongst hybrid car owners such that new car owners receive $x, owners from the previous year receive $x/4, owners from two years ago receive $x/9 etc.. Now, for the plan to remain cost-neutral, the sum of all payouts would need to equal the amount of revenue that was attained. It is easy to see that after purchasing a hybrid a car owner would receive increasingly smaller payments for being an early adopter. However, rather than receiving all the money in a single year, their payment is spread out over a number of years. In theory if the adoption rate remains at 4.5% exactly, each adopter would receive $11,000 spread out over time; however, in practice, the incentive should result in more than 4.5% of car sales being hybrid cars. At present hybrid sales make up under 2.5% of car sales, while projections have that number reaching 11% in 2013. I dont put much faith in projections, however, when surveyed many consumers agree to being willing to pay at least a $1000 premium for hybrid cars, since the gasoline savings would quickly repay the owners. Hence, the real cost becomes $10,000. Further, as demand for hybrid sales increases, production costs will decrease further increasing the benefit of the collected gas premiums. Since the effects of this incentive would compound over time, it is easy to see why it is highly effective.
So it is easy to see how this approach would be cost-neutral and highly effective, but what of that last claim? How is this a self-regulating change? and why is this relevant? This all comes back to the notion of the free market. Since the market is a great optimization system, and it would be foolish to believe that in the near future the entire economy will be able to instantly switch from gasoline to alternative energy, we need a self-regulating system that can work with the market to achieve a sustainable balance. The key to the self regulating nature of this proposal is the manner by which the tax is collected. If the government were to simply offer some amount of fixed deduction - as the Canadian and American governments do today - then at a later date, not only will it become difficult to repeal the tax deduction, but in the grand scheme of things, that money is being removed from necessary government programs, or being piled on as debt.
Further, as the demand for hybrid cars grows, the benefits each car owner receives from this program will deminish. Early adopters will get the most out of the plan, which is balanced out by the fact that they would not receive the benefits of cost-reduction attained through their contributions that late adopters would receive. Eventually an equilibrium will be reached where the make up of car purchases is a mixutre of hybrid and gasoline cars. At this point the government can place a similar tax on gasoline at a higher rate (since most car owners would be consuming less) and provide incentives for the economy to move over to more efficient hybrids or cars that run purely on alternative energy.
Side Note:
As a fringe benefit of adopting such a plan, there is a greater chance that consumers would opt to buy a car earlier than they had planned in order to become early adopters. As a result the struggling automotive industry would receive a nice boost that would help them re-outfit their plants to begin mass-production of hybrid cars.
Related Links:
- The Real Costs of Owning a Hybrid Car
- Car Sales in Canada
- Hybrid Sales projection for 2013
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