Monday, April 17, 2006

Bad Hybrid?

It’s always interesting to follow the path of perceptions concerning a new technology. Hybrid cars have enjoyed a classic halo effect since the first Toyota Prius was sold in the US in 1999. Now, though, we’re increasingly hearing about “good hybrids” and “bad hybrids.” This week’s Sunday New York Times included a lengthy op-ed on the subject. While it did a reasonable job of describing the pitfalls of hybrids, it somehow avoided the two most important aspects of this issue, consumer choice and outcome-driven policy.

Until gasoline prices hit $3.00/gallon last summer after Hurricane Katrina, fuel economy was a minor factor in most consumers’ car purchase decision. Even post-Katrina, only 20% of women car-buyers identified fuel economy as the primary factor influencing their choice, in a poll by Nor is that entirely irrational, considering the relative contribution of fuel costs in the overall cost of owning a car. At $3.00/gallon this accounts for about 12 cents/mile for a car averaging 25 mpg, compared to the 44.5 cents per mile deduction allowed by the IRS for business use of a car.

When carmakers offer hybrids such as the Lexus GS 450H, which emphasize performance over fuel economy, they are catering to customer demand, rather than misusing an efficiency technology. I can understand the frustration of those who would rather see hybridization used to turn 30 mpg cars into 60 mpg cars, but I doubt that the typical buyer of a Lexus GS sports sedan would be in the market for a Chevy Aveo (35 mpg) instead. At least the Lexus V-6 hybrid will get substantially better gas mileage than the 18 city/25 highway of the V-8 model it displaces.

If we accept that consumers know what they want and are unlikely to make fuel economy their top factor in picking a car at current gas prices, then the real question is how to structure the government incentives intended to elevate the priority of efficiency. We get into trouble when we reward a technology, rather than the outcomes that technology can produce. While I firmly believe that hybrid cars are tremendously important in reducing our future fuel demand, it’s silly to pay people to buy them.

If we’re serious about boosting fuel economy, then that’s what we should reward. Offering graduated tax incentives for buying cars that achieve better than the Corporate Average Fuel Economy actual results, currently 30.0 mpg for cars and 21.8 for light trucks/SUVs, makes more sense than indiscriminately giving out incentives to hybrids that get anywhere from 14 to 60 mpg. Until these incentives are reformed, however, we can’t blame consumers and manufacturers for using them.

We can take some consolation from the fact that every hybrid sold, whether economy- or performance-oriented, moves the technology down the experience curve, thereby reducing its cost and improving its reliability. Meanwhile, consumers wanting top fuel economy are getting a wider range of hybrid and non-hybrid choices, including the new Toyota Yaris, Honda Fit, and the Geely CK, which looks set to be the first Chinese car offered in America.

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