What is the economic impact of hybrid cars?

Although continuing to grow as a sector, hybrid cars still constitute a very small percentage of the automobiles manufactured and sold worldwide. Ideas can be potent, however, especially when backed by legislation and international agreements.

Once such set of regulations, the Corporate Average Fuel Economy (CAFE) standards, levies economic penalties against auto manufactures failing to meet mandated fuel economy targets. Although many manufacturers would rather pay the penalties than meet the requirements, it nevertheless appears that CAFE standards have had a positive impact on fuel economy trends.

CAFE standards and other requirements have a positive effect on hybrids as well. The U.S. Energy Information Administration projects that more stringent CAFE standards and higher fuel prices will propel unconventional vehicles (vehicles that use alternative fuels, electric motors and advanced electricity storage, advanced engine controls, or other new technologies) to a parity market position by 2035, when they will account for nearly 50 percent of passenger car and light truck sales. By then, they say, consumers will have four varieties of hybrid to choose from: standard gasoline-electric or diesel-electric hybrids, plug-in hybrids with an all-electric range of 10 miles (16.1 kilometers), plug-in hybrids with an all-electric range of 40 miles (64.4 kilometers), and micro hybrids, in which the gasoline engine shuts off only while the car idles.

Hybrid power trains entering the market today cost the purchaser 10 to 30 percent more than an equivalent gasoline vehicle, but some experts anticipate that the gap will shrink to a mere 5 to 15 percent by 2035. Hybrid drivers commonly find that their fuel savings offset 60 to 90 percent of this price difference, and this should only get better as hybrid sticker prices trend downward.

Fleet purchasing, as for rental car and taxi companies, has already begun undergoing a large-scale shift due to new emission standards and fuel economy concerns. Taxi services must wrestle with the relative value of the inherent tradeoffs: Hybrids usually get better gas mileage, but cost more to repair and tend to have less room for drivers and passengers -- unless the taxi companies use SUVs, in which case fuel economy plummets. Economic incentives sporadically crop up to encourage hybrid hacks, particularly in cities with clean air problems. New York's Taxi and Limousine Commission, for example, has offered discounted medallions for hybrids to encourage taxi drivers to give them a go.

Commercial fleets, such as those used by delivery companies, ought to be a great match for hybrids, which excel in stop-and-go traffic, yet the vehicles have as yet failed to penetrate as deeply into this sector as predicted. This is partly because manufacturers do not currently produce commercial hybrid vehicles in a sufficient volume to allow economies of scale to reduce their prices. Commercial shipping companies like FedEx must consider the bottom line, and the estimated payback period for replacing a 10,000-pound (4,536-kilogram) walk-in delivery truck with a hybrid, given gasoline at $3 per gallon, clocks in at around 20 years [source: Wald].

Although it remains too soon to make any definitive predictions, hybrids may be a difficult win for American auto companies now that China, which has historically lagged behind the United States and Japan in gasoline-powered vehicles, has thrown its full weight behind cornering the hybrid and electric market.

The financial upshot of hybrid cars on oil companies essentially parallels the effects of clean air regulations, fuel economy standards and policies like the Kyoto Protocol, Copenhagen Accord and CAFE standards. These and other issues confronting the petroleum industry have compelled companies like BP to shift their focus toward alternative energies and superior efficiencies as a hedge against probable disruptions in the petroleum markets.

Although hybrid vehicles boast lower emissions at the tailpipe than fully gasoline-powered cars, they remind us to bear in mind the emissions produced by electricity generation, thereby exerting subtle pressure on power companies to switch to cleaner alternatives. This holds particularly true for plug-in hybrids, which recharge by plugging into the national grid (gas-electric hybrids recharge use their own gasoline engine and regenerative braking to top off their batteries).

In terms of carbon footprint, electricity produced by coal coughs up more airborne gunk than oil, which churns out more than natural gas, which produces more than low-carbon electricity, such as wind power, solar power, geothermal power, nuclear power, and technologies such as carbon capture and storage, which prevent carbon dioxide emission into the atmosphere. The electrical production process has a significant impact: According to one study, lifetime greenhouse gas emissions from plug-in hybrids come out to about one-third less than those put out by traditional gasoline-powered cars, but using coal-fired electricity, they have a worse carbon footprint than traditional gas-electric hybrids, although they still beat out traditional cars. Experts project that coal plants will constitute the major source of electricity through 2035.

In other words, even if hydrogen fuel cells or electric cars are the wave of the future, we must develop a decarbonized electric grid to power them. Industry insiders view this as a long-term solution; in the short term, the sector will likely turn to more efficient hybrids and toward using biofuels or cleaned-up gasoline. Some companies have already initiated this shift: Even now, BP invests heavily in sugarcane and advanced biofuels. Oil companies that do not make such investments might find themselves left behind in the long term, if or when hydrogen-fuel-cell hybrids or non-petroleum-hydrocarbon-burning hybrids become feasible. Hydrogen hybrids offer the advantage of significantly higher propulsion system efficiency than internal combustion engines, but with zero tailpipe greenhouse gas emissions.

Supply and demand, price fixing and spikes, the need for increased energy security, concern over greenhouse gas emissions from fossil fuels and other large-scale factors ultimately drive shifts in the petroleum economic landscape; the growing hybrid market flows from these forces as well, and feeds back into the economic system totality, but they do not drive major shifts in the petroleum market. Only time will reveal their ultimate impact.

The financial consequences of hybrid cars stem from the auto and petroleum market forces already discussed, combined with consumer behavior and the rhythms of the technology adoption cycle. In other words, it amounts to a question of who buys hybrids, why they buy them and whether they buy them in sufficient numbers to have an effect.

The number of hybrids being bought, and why, is difficult to pin down because purchasing patterns are driven by several factors. Consider the effects of gas prices, for example: Since the advent of the Prius, and at various times in the history of hybrids in general, people have bought more hybrid vehicles as gas prices have climbed, but they've also bought muscle cars and SUVs despite rising gas prices. Although economic rebound effects, which undercut the fiscal rewards of a technology by introducing countervailing behaviors, are not yet evident, they could potentially attend the more extensive embracing of hybrids; for example, a household could rationalize buying a muscle car if they own a hybrid, telling themselves that the two purchases offset each other -- a kind of household-level cap-and-trade.

The issue of who purchases hybrids presents an easier target. Hybrid car buyers have statistically higher household incomes and education levels, and value fuel consumption and technology higher than other criteria, including brand preferences and design. They tend to be early adopters as well. Of course, as available brands and options expand, as fuel prices increase and as consumers grow accustomed to the technology, that may change.

Other population economic effects of hybrids range from environmental impacts to the creation of new jobs. In light of the current economic downturn, economists, columnists and even the president have begun looking toward the creation of new, greener energy technologies and industries as the key to a stronger economy and future economic prosperity. Thus far, American policy support from Congress for such initiatives has been weak. Additionally, these plans, currently in their early stages and painted in broad strokes, face challenges from large global economies such as China, which holds a home field advantage: the rare earth metals necessary to make hybrid batteries. In other words, hybrid cars could mean more jobs, but they also might not.

Nevertheless, economic impacts continue to trickle in. California-based Fisker Automotive, for example, recently purchased a shuttered GM plant in Delaware to manufacture plug-in hybrids. Fisker estimates the plant will employ 2,000 American assembly workers, and industry experts expect an associated surge in employment for domestic parts suppliers and service providers.

Along similar lines, the $787 billion stimulus package approved by Congress in 2009 incorporated more than $2 billion in grants to support American education and manufacturing related to hybrid and electric vehicles. The proposed Domestic Manufacturing and Energy Jobs Act of 2010 provides tax incentives to consumers that purchase heavy (more than 8,500 pounds or 3,856 kilograms) natural gas vehicles and heavy hybrid vehicles. Moreover, electric and hybrid batteries exemplify the kinds of jobs that American companies are less likely to export, because labor only accounts for about 10 to15 percent of their overall cost [source: Wald].

For more information about hybrid cars and other related topics, follow the links on the next page.