Fees and rebates on new vehicles: Impacts on fuel efficiency, carbon dioxide emissions, and consumer surplus

Several incentive systems are examined that provide rebates on vehicles with higher-than-average fuel efficiency and levy fees on vehicles with less efficiency. The rebates and fees are applied to new vehicles at the time of purchase, and the rates are set such that the total outlay for rebates equals the revenues from fees. We find that moderately-sized rebates and fees result in a substantial increase in average fuel efficiency. Most of the effect is due to manufacturers incorporating more fuel-efficiency technologies into the vehicles that they offer, since the rebates and fees effectively lower the price to manufacturers of these technologies. Consumer surplus is found to rise, and the profits of domestic manufacturers are estimated to drop only slightly under most systems and actually to rise under one system.