How does a feebate system work?

A feebate system operates by combining fees and rebates to create a financial incentive for promoting desirable behaviors while discouraging undesirable ones. This system involves levying fees on activities or choices that are considered environmentally harmful or undesirable. The funds collected from these fees are then rebated or redistributed to encourage behavior that is seen as beneficial.

For instance, if a feebate system is applied to energy consumption, individuals or businesses that utilize higher levels of energy may face higher fees. Conversely, those who implement energy-efficient practices or technologies would receive rebates, effectively reducing their overall costs. This structure motivates entities to shift towards more eco-friendly practices because they can receive direct financial benefits for doing so.

This contrast to other options highlights the distinct operational nature of a feebate system. Unlike strategies that simply tax or implement flat rates without differentiation—such as taxing all behaviors equally, encouraging only desirable behaviors through subsidies, or imposing a flat tax rate on all individuals—feebate uniquely balances penalties and rewards as a means to influence behavior effectively.