Thursday, July 21, 2005

Curious Incentives In The Hybrid Car Market

by Tom Bozzo

I'm not first to note this N.Y. Times article on the phenomenon of performance-oriented hybrid cars, which is itself belated if you've been following the topic automotive press. As resident car guy, I'll just add a couple things.

Drek's impressive post on "impression management" and the adoption of green — or pseudo-green — technologies is right on, even if I'm more accepting of the performance-enhancement application of hybrid technologies. That point goes to the instant title: eligibility for the "clean fuels" tax deduction is not based on fuel cleanliness per se, but rather on the cost of the extra hardware in the hybrid car. So it shouldn't be a total surprise, given that there is a horsepower war on, that the deduction has ended up subsidizing performance as well as fuel economy. As Matthew Yglesias correctly notes, if saving fuel were the true aim, raising fuel taxes would be the obvious policy solution.

That said, as boondoggles masquerading as greenery go, allowing the tax deduction for performance-oriented hybrids could be worse. If you figure most hybrid buyers to occupy mainstream upper-middle income tax brackets, then the average subsidy for eligible hybrids is currently close to $500, though it'll be more for cars just coming to market like the hybrid Lexi.

Not unironically given the Times's emphasis on the modest fuel savings of the performance hybrids, it's actually worth more in terms of avoided fuel consumption to subsidize a performance rather than an economy hybrid. The old saying about bank robbery applies: high-performance cars and other gas guzzlers are where the fuel consumption is. Plus, as should be abundantly clear from the performance hybrid marketing (as well as the Times's anecdotes), by and large the performance hybrid buyers would be expected to be coming out of performance non-hybrids. Likewise, a few environmentally conscious celebrities aside, economy hybrids probably substitute mostly for other economy cars.

The bottom line is that a hybrid drive system tuned for a 10% fuel economy improvement, holding performance constant, would have twice the annual fuel savings applied to an 18 MPG performance car versus a 35 MPG economy car at 12,000 miles per year. (*) Variations in marginal income tax rates between performance and economy hybrid buyers might be expected to level the subsidy per unit of fuel savings to some extent, but probably not completely. A quick calculation based on a 10-year vehicle life suggests that the subsidy costs $1-2 per avoided gallon of gas consumption — a bargain compared to ethanol.

A better question is whether hybrids are actually the lowest-hanging fruit for passenger car fuel savings. Signs point to no. High-performance diesels, in particular, appear to offer better fuel-economy improvements than current hybrids for a given level of performance, can themselves be hybridized, and solutions to their tailpipe emissions problems don't appear to be intractable.

But fuel economy theater is the order of the day, at least until fuel prices press matters further.


(*) A table accompanying the Times article shows Consumer Reports test data indicating more than a 20% fuel economy improvement for the Honda Civic hybrid over the base non-hybrid Civic, though the hybrid is markedly lower-performing. The second-generation Civic hybrid promises improvements in both departments.
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