Commentary: Hybrid Cars: Less Fuel but More Costs

By Paul Raeburn

Many economists and free-market conservatives have long argued for using rigorous cost-benefit analysis to judge environmental proposals. That would mean picking the policy that offers the biggest bang for the buck.

It's ironic, then, that the latest environmental decision by the Bush Administration involves choosing the least cost-effective of two options. The question is how best to increase the fuel efficiency of vehicles over the next 10 years. Environmentalists have pushed for mandating higher gas mileage for cars and light trucks--the corporate automotive fuel efficiency (CAFE) standards. By contrast, President Bush threw his support behind gas-electric hybrid cars, a newer technology.

Unfortunately, while hybrids offer more gas mileage, they do so at a far higher cost per gallon of gasoline saved. Thus, a reduction in pollution and oil consumption will cost more than twice as much using hybrids, compared to raising CAFE standards. On cost-benefit grounds, higher CAFE standards are far preferable to hybrids, at least over the next decade.

The cost comparison comes from a study done last year by the American Council for an Energy-Efficient Economy (ACEEE), a nonprofit research group in Washington. The study found that in midsize cars, such as the Ford Taurus, boosting mileage from 26 mpg to about 41 mpg using conventional technology, such as better engines and transmissions, would add $1,000 to the price of the car. Those efficiency improvements work out to a cost of 57 cents for each gallon of gas saved, assuming the car has a 12-year lifetime.

Hybrid vehicles, which also include an electric motor to aid propulsion, get better mileage--but that extra boost comes at a big cost. For example, the ACEEE study calculates that a hybrid Taurus could get almost 53 mpg. However, the electric system would add $3,500 to the price of the car--or $1.38 per gallon of gas saved. That's more than double the cost of the per-gallon savings using conventional technology. The figures vary for other cars and trucks, but generally the added cost of hybrids is 1.5 to 3 times the added cost of conventional improvements.

Another way to compare numbers is to see how long the gas savings would take to cover the extra purchase costs. For conventional cars, that happens in 3 1/2 to 6 years, depending on the model. For hybrids, the payback period is 7 to 10 1/2 years.

Moreover, the shift to hybrids, if widespread, would impose a substantial cost on car buyers. In the extreme case, requiring that all new U.S. cars and light trucks have a hybrid system would cost $56 billion a year, if the average additional cost per vehicle is $3,500. By comparison, tougher fuel standards with conventional technology--at an average cost of $1,000 per vehicle--would impose a yearly cost of only $16 billion.

The ACEEE analysis suggests that the right economic choice for Bush over the short term is tougher CAFE standards, not hybrid cars. In March, however, Congress refused to act. Instead, it asked the Transportation Dept. for a two-year study of tougher standards. Bush supports the development of hydrogen-powered fuel-cell vehicles over the long term, but such autos are still at least a decade away.

Hybrid cars do have virtues that aren't apparent in simple cost calculations. "The industry is investing in them because they think they will need them for higher efficiency in the future," says John DeCicco, the lead author of the ACEEE report, who is now at Environmental Defense, an advocacy group in Washington, D.C. Still, the only way that manufacturers can sell hybrid cars today is by heavily subsidizing them--something that doesn't make sense on a large scale.

The Administration may not be moved by environmentalists, but it should take a closer look at the numbers. Raising CAFE standards is not only more affordable, it's also likely to be more palatable to consumers. This is one case in which what is good for the environment is good for the economy, too. Raeburn covers the environment.

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