Hybrid-electric vehicles (HEVs) have been sold in the United States since the first Honda
Insight of 1999. Growth in hybrid sales has been relatively slow, with the current hybrid market
at about 2.5 percent of all new-car sales. Plug-in hybrid-electric vehicles (PHEVs) and battery
electric vehicles (BEVs) will soon be introduced to the market in the United States. The extent to
which these more fuel-efficient vehicles are able to penetrate the vehicle market and contribute
to the goals of reducing oil use and greenhouse gas (GHG) emissions will depend on technology
and market outcomes as well as policies pursued by government in coming years.

This part of the overall energy policy analysis focuses on the potential role of HEVs,
PHEVs, and BEVs in reducing oil use and GHG emissions in the U.S. Different technology
outcomes and policies targeting hybrid vehicles are considered, using NEMS-RFF1 to model
policy outcomes. Costs of each of the policies include full welfare costs and are determined
outside of the model.

Subsidies are among the major policy tools for increasing the share of hybrid vehicles in
the fleet. Here, we analyze a subsidy to consumers for the purchase of hybrid vehicles: the
greater the fuel efficiency of the hybrid over a conventional vehicle of similar size, the greater
the subsidy. We find that the interaction between a subsidy policy and other policies can be quite
important, and subsidies on hybrids should be evaluated in the context of other policies in place
or being considered.

A range of policies designed to reduce oil consumption and GHG emissions from the
transportation sector are addressed elsewhere in the RFF-NEPI study. These policies, which
include oil taxes, gasoline taxes, and feebates, have varying effects on both the rate and timing of
hybrid vehicle penetration. For example, the high gasoline tax that is modeled influences
consumer and producer decisions about the purchase of alternative fuel vehicles. Under this
policy, sales of all hybrids are projected to increase from 23 percent of new-car sales to 30
percent by 2030.

For a number of reasons, it may be efficient to develop policies that separately target
hybrid vehicles. These reasons include the effects of scale economies in the production of
hybrids, costs incurred by first adopters that are higher than those incurred by later adopters (on
both the consumer and the producer side), insufficient incentives for research and development,
and the effects of learning in such technology development areas as electric drive trains and
batteries.

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