Examine the new federal clean-car incentives and you have to conclude Finance Minister Jim Flaherty assigned the file to well-meaning but second-tier bureaucrats about 15 minutes before the budget deadline and barked "Gimme something quick." The result -- a gas guzzler tax that will finance purchase credits for gas sippers -- looks like a winner on paper, all the more so because it comes with whack-the-rich appeal. In practice, the effort already seems doomed. The pity is that the feds could have launched a far more effective clean-car program at little cost.
The scheme will slap a fee as high as $4,000 on road pigs like the Jeep Grand Cherokee SRT8 and deliver a $2,000 credit to buyers of fuel misers like the Toyota Prius and Ford Escape gas-electric hybrids. The plan presents two big problems. The first is that it's lousy industrial policy. Since most of the fuel sippers are made outside of Canada, consumers now have a tax-driven incentive to buy fewer Canadian-produced vehicles.
The second is air quality, or lack thereof. New cars are far cleaner than old cars, end of story. A car built before 1988 will produce 37 times the amount of smog-related pollutants of a new car, according to the Canadian Vehicle Manufacturers Association. Get all the old clunkers off the road and the quality of the air we breathe in cities would rise considerably.
It's hard to tell whether the feds get this simple concept. The budget did set aside $36-million over two years to scrap pre-1995 vehicles. At the same time, the $4,000 gas guzzler tax can only slow the national fleet turnover rate as new large vehicles become suddenly less affordable.
Europe has a similar predicament. There, taxes on new vehicles have slowed fleet turnover rates. As a result, European per capita emissions from transportation have climbed faster than Canadian rates even though European cars are generally more fuel efficient that North American cars.
The great flaw in Mr. Flaherty's clean-car program is that it does next to nothing to encourage the development and production of clean cars or cleaner fuels, such as ultralow-sulphur diesel, in Canada. Granted, most development work by General Motors, Ford and DaimlerChrysler is done in the United States, but some is done north of the border. For example, GM's Oshawa, Ont., site is working on fuel cells and other technologies. Why not pull together a tax package that would make Canada a leader in green-car development?
The Finance Minister obviously understands the bang-for-your-buck potential of accelerated writeoffs on machinery and equipment. The budget gave manufacturers the right to write off 50 per cent of those costs each year between now and the end of 2008. Historically, measures like this have created investment booms in Canada and the United States. The oil sands projects qualify for similar tax goodies. Since 1996, they have been allowed to write off all of their capital costs before they start to pay income tax (this is being slowly phased out).
The feds could do the same for auto companies. An aggressive tax package might qualify any equipment used in the production of clean vehicles for a 100-per-cent, one-year writeoff. Investment spending would surely accelerate. The Big Three auto makers would probably shift more clean-car development work to Canada. Financial support from the federal and Ontario governments has worked wonders to preserve Canada's vast car economy in the face of intense global competition. Accelerated writeoffs could keep the momentum going and create high-quality jobs and R&D careers.
The budget's clean-car incentives aren't even a week old and already they need a rethink. As it stands, a few more hybrid cars, none produced in Canada, will move out of the showroom (even when the $2,000 credit is applied, hybrids are relatively expensive). Fewer gas guzzlers, many produced in Canada, will get sold. The fleet turnover rate will not improve. Air quality and average fuel economy will not improve appreciably. But compact car drivers now have the satisfaction of knowing that rich guys will fork out an extra $4,000 for monster SUVs.
Mr. Flaherty has done a lot of things right in his 14 months on the job, from cracking down on the income trust market to boosting the writeoff rates for new investment in manufacturing equipment. The gas guzzler tax is not one of them.
The Tories could have been far more imaginative in devising a clean-car program without busting the bank to implement it. It's time to let the government heavyweights loose on this file.
Eric Reguly