What is the economic impact of hybrid cars?

The hybrid logo shines off the front fender of an unsold 2008 Yukon hybrid sports-utility vehicle priced at more than $56,000 on the lot of a GMC Truck dealership in the south Denver suburb of Littleton, Colo., on Feb. 17, 2008.
Image Gallery: Hybrid Cars The hybrid logo shines off the front fender of an unsold 2008 Yukon hybrid sports-utility vehicle priced at more than $56,000 on the lot of a GMC Truck dealership in the south Denver suburb of Littleton, Colo., on Feb. 17, 2008. See more pictures of hybrid cars.
AP Photo/David Zalubowski

The world's first mass-produced gasoline-electric hybrid car, the Toyota Prius, launched in December 1997 against a backdrop of growing concern over human-induced climate change and a clamor for greener technologies. People have debated the economic impact of the vehicles, which utilize a dual-mode drive train to combine the low-emission energy efficiency of an electric motor with the superior high-speed performance and power-to-weight ratio of a gasoline engine, ever since.

The discussion continues. Some dispute the relative economic advantage of buying more expensive hybrid models instead of cheaper, but still fuel-efficient, internal combustion cars. They wonder if their fuel savings will offset the difference in sticker price, especially if the hybrid models they shop for come standard with a more expensive repair bill. Good warrantees, loads of options and state and federal economic incentives can tip the scales in the hybrids' favor, but the introduction of less efficient hybrid versions of gas-guzzling full-sized trucks and SUVs has further blurred the picture.


Critics have also pointed out that the economic and environmental impacts of hybrids depend not only on their fuel efficiency, but also upon the costs -- and the political, national security and economic ripple effects -- of the materials and technologies that go into building them. On the other hand, as the market continues to grow, hybrid prices will continue to fall and manufacturers could shift to more secure, economical and environmentally friendly alternative technologies.

Clearly, hybrids present a moving target, and detecting their economic impact remains about as easy as hearing a hybrid's electric motor idling at a stop sign. Still, logic suggests a few obvious and important areas in which to look, and we'll examine three of them in this article: the auto industry, the oil industry and the population. So, put on your thinking caps, fasten your seatbelts and let's get underway.


Hybrid Cars' Effect on the Auto Industry

One of the new FedEx electric-hybrid trucks is shown at a distribution center in Charlotte, N.C., on July 21, 2009.
One of the new FedEx electric-hybrid trucks is shown at a distribution center in Charlotte, N.C., on July 21, 2009.
AP Photo/Chuck Burton

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.


Hybrid Cars' Effect on Oil Companies

Mine operator Dallen McFarland, right, inspects the teeth of a continuous mining machine at the Horizon Coal Mine outside Helper, Utah.
Mine operator Dallen McFarland, right, inspects the teeth of a continuous mining machine at the Horizon Coal Mine outside Helper, Utah.
AP Photo/George Frey

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.


Hybrid Cars' Economic Effect on the Population

Fisker Automotive's Fisker Karma, a sports luxury plug-in hybrid car, is shown at the 2010 Los Angeles Auto Show, in Los Angeles.
Fisker Automotive's Fisker Karma, a sports luxury plug-in hybrid car, is shown at the 2010 Los Angeles Auto Show, in Los Angeles.
AP Photo/Damian Dovarganes

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.


Lots More Information

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  • Belson, Ken. "The Greening of the Yellow Fleet." The New York Times. April 27, 2008. (Dec. 10, 2010) http://www.nytimes.com/2008/04/27/automobiles/27TAXI.html
  • Bradsher, Keith. "China Vies to Be World's Leader in Electric Cars." April 1, 2009. (Dec. 10, 2010) http://www.nytimes.com/2009/04/02/business/global/02electric.html
  • Bunkley, Nick. "Fisker to Make Plug-In Hybrids at Former G.M. Plant." The New York Times. Oct. 26, 2009. (Dec. 8, 2010) http://www.nytimes.com/2009/10/27/business/27auto.html
  • Carnegie Mellon University. "Low-Carbon Electricity is Needed to Power Plug-in Hybrids." April 28, 2008. (Dec. 10, 2010)http://www.sciencedaily.com­ /releases/2008/04/080425163711.htm
  • Conn, Lain. "Energy and Climate Policy After Copenhagen -- a Pragmatic Response." BP Refining & Marketing. Jan. 22, 2010. (Dec. 10, 2010) http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/ downloads/I/Iain_Conn_Speech_in_Brussels.pdf
  • De Haan, Peter, et al. "Comparison of Buyers of Hybrid and Conventional Internal Combustion Engine Automobiles." Transportation Research Record: Journal of the Transportation Research Board, No. 1983. Transportation Research Board of the National Academies. Washington, D.C., 2006, pp. 106-113.
  • De Haan, Peter, et al. "Reducing Energy Consumption in Road Transport through Hybrid Vehicles: Investigation of Rebound Effects, and Possible Effects of Tax Rebates." Journal of Cleaner Production. 2007. pp. 1076-1084.
  • Herbert, Bob. "Signs of Hope." The New York Times. Nov. 23, 2009. (Dec. 10, 2010) http://www.nytimes.com/2009/11/24/opinion/24herbert.html
  • Kintner-Meyer, Michael, et al. "Impacts Assessment of Plug-In Hybrid Vehicles on Electric Utilities and Regional U.S. Power Grids Part 1: Technical Analysis." November 2007. (Dec. 10, 2010) http://citeseerx.ist.psu.edu/viewdoc/download?doi=
  • National Academies Board on Energy and Environmental Systems. "Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards (2002)." (Dec. 9, 2010) http://books.nap.edu/openbook.php?record_id=10172
  • U.S. House of Representatives Ways and Means Committee. "Domestic Manufacturing and Energy Jobs Act of 2010." July 26, 2010. (Dec. 10, 2010) http://waysandmeans.house.gov/media/pdf/111/Discussion_Draft_Summary.pdf
  • Wald, Matthew L. "$2 Billion in Grants to Bolster U.S. Manufacturing of Parts for Electric Cars." The New York Times. Aug. 5, 2009. (Dec. 10, 2010) http://www.nytimes.com/2009/08/06/business/06battery.html
  • Wald, Matthew L. "After Initial Promise, Hybrid Trucks Stall." The New York Times. April 27, 2008. (Dec. 10, 2010) http://www.nytimes.com/2008/04/27/automobiles/27TRUCK.html