What Market Distortion Does the Proposed COE Feebate System Intend to Correct?
This is a useful question to start with.
How the Original COE Classification Worked
When the COE system was first introduced, cars were classified according to engine capacity.
Category A was intended primarily for smaller, mass-market cars, while Category B covered larger and more powerful cars.
The First Convergence: Smaller Engines, Higher Power
Over time, however, manufacturers developed smaller engines with higher power outputs. This made it possible for some relatively powerful and expensive cars to qualify for Category A.
The price differentiation between Category A and B was gradually eroded, so to speak.
As Transport Minister Jeffrey Siow explained in Parliament, Category A and B premiums converged because of the increasing prevalence of smaller cars with turbocharged engines.
To restore the price differentiation, the Government introduced an additional criterion in 2014: engine power.
The measure worked for quite some time.
Electric Vehicles Have Created a New Challenge
Today, however, we are seeing a similar problem emerging again, this time because of electric vehicles (EVs).
As Minister Siow explained, manufacturers and workshops can adjust the power output of EVs using software, allowing the same car model to qualify for different COE categories.
Consequently, the existing criteria are becoming less effective at distinguishing between mass-market and higher-value cars.
Indeed, Category A premiums, which are traditionally intended for mass-market cars, have exceeded Category B premiums on several occasions this year.
This is the market distortion that the Government is seeking to address: the erosion of the price distinction between mass-market and higher-value cars.
Restoring Price Differentiation Through a Feebate Scheme
The mechanism proposed to achieve this is the feebate scheme first mooted by MP Edward Chia a few months ago.
The scheme aims to restore a permanent price distinction in COE premiums between mass-market and luxury cars.
Simply put, the scheme works this way: a lower-value car receives a COE rebate, while a higher-value car attracts a surcharge on its COE.
The proposed scheme has received majority support in a public consultation.
Three-Band or Five-Band System?
Two approaches are being considered: a three-band system and a five-band system, with most respondents favouring the five-band system.
Under the proposed three-band arrangement, a lower-value car would receive a rebate of $15,000 on its COE premium, while a higher-value car would attract a surcharge of $15,000.
This creates a potential $30,000 difference in COE cost between the lowest and highest-value bands.
The five-band arrangement introduces two additional intermediate bands, with adjustments of $7,500, thereby reducing the sharp differences between neighbouring bands.
Importantly, the scheme does not change the overall supply of COEs. Premiums will continue to be determined by market demand and supply, with the feebate providing additional price differentiation based on the value of the car.
LTA is still studying the public submissions. It expects to complete its review by the end of 2026 and publish its findings and recommendations in the first half of 2027.
