Transitioning Away from Oil: What Role for Electrics and Plug-Ins?

Hybrid and electric vehicles offer the hope of reducing greenhouse gas emissions and oil dependence at the same time. What are the prospects for the penetration of these vehicles into future vehicle fleets and what is the appropriate role for government?

The buzz over electric vehicles has been growing louder. Congress is considering adding further subsidies for plug-in electric vehicles (PEVs) to subsidies granted last year. The first PEVs, the Chevy Volt and the Nissan Leaf, will be sold in a number of cities this fall and public battery-charging stations are also being planned.

PEVs will be added to hybrid electric vehicles (HEVs) already on the road. The HEVs have also received significant government subsidies in the past, but are still only 2.5 percent of new car sales. Why the push toward electric vehicles?  What are their prospects?  And what is the appropriate role for government?

Why Electrics?

The heightened interest in electric vehicles is the result of two major challenges. First, over half of our oil comes from foreign countries that are often politically unstable and hostile to U.S. interests. Reducing foreign oil dependence will require major changes to a transportation sector that is almost entirely dependent on oil as energy source. Second, the need to reduce carbon dioxide and greenhouse gas (GHGs) emissions will require sharp reductions in the use of carbon-based fuels, including oil and gasoline. Electric vehicles currently have the promise of reducing oil use at a lower cost than alternative fuels.

Forecasting how well electrics will meet these goals is difficult, however, both because there are many possible types of hybrid and electric vehicles, and their technologies are still emerging. The major categories are the HEVs, which combine an electric engine with an internal combustion engine (ICE) but do not plug in; hybrid gasoline and electric plug-in vehicles; and the full electric vehicles that have no ICE (the latter two are PEVs and get some or all of their energy from electricity). And within each category, there is a wide array of possible drive trains, battery technologies, and vehicle configurations. The technologies, even for the HEVs which have been produced since 1999, are still evolving.

In the coming years, there are likely to be significant gains in fuel savings from improvements to ICE technologies and to HEVs, with further savings from the emerging PEVs, but the amount of that additional savings is uncertain. Much will depend on the performance and cost of these vehicles and consumers’ willingness to buy them. Also, it becomes increasingly difficult to reduce fuel consumption as the fleet becomes more efficient overall: improving average fuel efficiency of the fleet from 30 miles per gallon (mpg) to 50 mpg saves much more fuel than improving fuel economy from 50 to 70 mpg. The costs per gallon saved are likely to rise steeply as the fleet becomes cleaner.

GHG emissions also vary among HEV and PEV vehicles. If the electricity to power PEVs is generated from carbon-based fuels, then there is not a great deal of difference between emissions from HEVs and emissions from PEVs, and PEVs can even have higher emissions. If the electricity used for PEVs is powered from renewable sources, such as nuclear, solar or wind, then the difference in GHG emissions will be close to the difference in fuel use.

Prospects for Electrics

Battery cost and storage is still a major problem for most PEVs, with the size and cost of the pack determined by the vehicle size, weight, and driving range. And the lithium ion battery packs being developed for PEVs are still in the experimental stages, even for those vehicles coming on the market this year. The cost of most PEVS is high relative to ICEs.

The size of the battery packs needed for HEVs are much lower than those for PEVs, because of the need for battery power for shorter periods of time. While overall production costs for HEVs appear to have declined since they were first introduced over 10 years ago, most full HEVs remain somewhat more expensive than equivalent standard vehicles, even after accounting for the fuel-savings improvements.

There are likely to be different populations and regions where the ICEs, HEVs, or PEVs will have an advantage with consumers. HEVs may do better than ICEs in urban areas, where there is more stop and go traffic, while ICEs get good gasoline mileage in rural areas with more free-flowing traffic. PEVs may have more appeal as a second or third car in locations where there are opportunities to easily plug in, but may have less appeal as an only vehicle or in locations without garages or other infrastructure for plugging in.

The Federal Government’s Role

Virginia D. McConnell

There are a number of reasons to intervene to improve economic efficiency in these markets. The externalities associated with oil use—including GHG emissions, lack of security of foreign oil supplies, and local air and water pollution—suggest that prices should be higher to reflect the full cost of oil and gasoline use. Higher oil and gasoline prices would induce consumers to buy more fuel-efficient vehicles, including HEVs and PEVs. In addition, because many of these vehicles are being produced for the first time, there are likely to be both pure scale economies and learning over time as more are produced and sold. The hope is that increasing production volumes and penetration into the fleet can significantly lower production costs.

Government policies in recent years have included subsidies for electric drive vehicles and for battery development and production. The 2005 Energy Policy Act provided for subsidies for HEVs that were based roughly on fuel economy that ranged from $250 to a maximum of $3,400 per vehicle. These subsidies were set to phase out after 60,000 vehicles sold per manufacturer, and most HEVs on the market are no longer eligible for the discount. The entire HEV subsidy program expires at the end of 2010. A number of studies have found that the subsidies for HEVs did increase sales, but that the cost of the subsidy policy was high relative to other policies to reduce oil consumption.

The focus of federal subsidies has now shifted exclusively to PEV vehicles that are expected on the market at the end of 2010. Under recent legislation, these vehicles (but not HEVs) will be eligible for $2,500 to $7,500 per vehicle in federal subsidy, depending on battery size. The subsidy will start to phase out after 200,000 vehicles have been produced by each manufacturer and the program will expire in 2014. And, additional subsidies for PEVs are now being considered in Congress. Further, a recent agreement to exempt PEVs from EPA’s new GHG limits has also been reached, which gives them a strong advantage over both ICE cars and HEVs.

Which Policies?

The focus of government subsidies only on PEVs is risky and likely to be quite costly. Although there are environmental and security reasons for reducing consumption of gasoline and other oil products, what is called for are general policy instruments that encourage all fuel-saving options rather than policies that promote one type of technology over others.

HEVs are only now seeing important improvement in technology and becoming more acceptable to broader segments of the population. But they still are more costly than ICEs. We don’t want to lose the progress we have made there. And, there is still much uncertainty about PEVs. They offer promise for a number of market segments in the future, but we know little yet about their performance and how well they will be accepted.

A promising alternative to subsidies for specific technologies targets reduced fuel consumption from the new car fleet as a whole and is known as a “feebate” policy, which combines a subsidy for fuel-efficient vehicles with a fee on gas guzzlers. It can be made revenue neutral across new vehicles sold in every year, meaning that it would require no government money to implement, unlike the subsidy policies that are forecast to cost in the many billions of dollars. A feebate policy could be combined with more targeted subsidies to encourage efforts with important information and spillover effects, such as innovation in battery development or regional PEV experimental programs.

An important caveat to any discussion of the effectiveness of hybrid vehicle policies is that they must be considered in a larger context. Congress recently revised the Corporate Average Fuel Economy (CAFE) standards, which are applied to manufacturers’ new vehicle fleets, making them increasingly strict over the next few years. If these new standards are binding on manufacturers, then they will determine fuel use from the fleet, and the prevalence of any particular technology will not matter. In other words, in the presence of strict CAFE standards, subsidies may not have much effect on overall fuel use.

A final consideration for any policy toward hybrid vehicles is the prices of oil and gasoline. The relative price of gasoline will determine the economic viability of various technologies as well as the effectiveness of different policies. Policies toward hybrid vehicles should be considered along with an overall energy policy that addresses the cost of imported oil and the cost of carbon-based fuels.

Virginia D. McConnell is a senior fellor at Resources For the Future. She works on environmental issues related to air pollution and urban transportation.

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