The introduction by Ford this month of a hybrid SUV, the Escape, is a classic good news/bad news story. The good news is that American car companies, after a decade of reluctance and even outright hostility, are now publicly embracing hybrid electric vehicles. The bad news is that they are doing so in a way that may lead to some perverse outcomes, challenging policy makers to redesign hybrid incentives to ensure that a hybrid-based transportation system maximizes fuel efficiency and fuel flexibility.
To date, government incentives have focused largely on moving the hybrid from R&D to commercialization. In the last decade, the U.S. government gave American car companies more than $1 billion to develop hybrid vehicles. Japan awarded its car companies only slightly less. Today public R&D is no longer needed. Since 2000 the demand for hybrid cars has grown by a remarkable 88 percent per year. Demand now exceeds supply. Toyota has a nine-month backlog of orders for its Prius, and in the spring the company raised the $19,995 base price of the Prius by $300. The 2005 model, available this week, will cost an additional $580. Every American, German and Japanese car company has announced it will introduce at least one hybrid model in the next two years.
Incentives for hybrid vehicles have also targeted consumers. And here the incentives were expected to be temporary. The federal tax deduction for the purchase of a hybrid drops by $500 a year from a high of $2,000 in 2003, to $500 in 2006, and then to zero the following year. By that time, Congress expects car companies to be selling hybrids at a profit. (Early in 2004, Toyota announced it is already doing so.)
Despite the marketplace success of hybrids, public support is still required. But the introduction of low-mileage hybrid SUVs forces us to rethink the way we offer incentives.
Right now, government incentives rarely distinguish among hybrids. To qualify, a vehicle simply must be equipped with both an engine and electric motors for propulsion. Period. This was acceptable so long as a hybrid was a high-efficiency car. The hybrid Honda Civic and Toyota Prius met this standard. The Japanese companies transformed modestly efficient vehicles into outstandingly efficient ones.
But the introduction of the Ford Escape ushers in the era of low-mileage hybrids. The vehicle's overall fuel economy is about half that of the Prius or Civic. When GMs new hybrid trucks, the Sierra and Silverado, arrive in 2005 they may get little more than 20 mpg.
Hybrid enthusiasts argue that a hybrid SUV achieves a proportional fuel improvement similar to that of a hybrid compact car. They add that because the conventional SUV is such a gas-guzzler, such an improvement can actually save more gasoline. A vehicle that raises its efficiency from 18 to 24 miles per gallon will save more gallons of gasoline per year than one that raises its efficiency from 50 to 65 miles per gallon.
That's true, in theory. In practice theres a problem: the hybrid is inherently more efficient in stop-and-go urban driving; the vehicle can shut its engine off while idling and can accelerate with electric motors. (Idling and acceleration are the major sources of pollution and wasted fuel.) The hybrid, however, is not more efficient on the open highway.
With conventional engines, fuel economy is greater on highways than in the city. With hybrids it is the reverse. The Prius achieves 60 mpg in city driving and 51 mpg on the highway. On the open road, a hybrid Escape gets mileage no better than that of several other vehicles in its class, like Toyotas RAVA4.
So whether, or by how much, a hybrid SUV is more efficient than a conventional SUV will depend on whether it is primarily used inside or outside of cities. I suspect that the bigger the SUV, the less it is used in congested areas, and therefore the less it will achieve better mileage.
All of which creates a challenge for Fords ad agency. Nine out of 10 ads for SUVs or trucks show vehicles bouncing along a tortuous mountain trail, charging through the mud, or speeding through magnificent desert vistas. Will Ford depict its new hybrid in situations where its technology truly shines (i.e. in congested city traffic)? Or will it tout the fact that its hybrid has an acceleration and torque greater than its regular Escape, even though when it uses this horsepower its overall environmental impact is no different from that of the regular Escape? Sadly, to ask the question is to answer it.
Hybrid incentives recently generated controversy in California when the state legislature opened up High Occupancy Vehicle (HOV) lanes to hybrid vehicles with a single occupant. Both the CEO of Ford and the head of the United Automobile Workers vigorously opposed the bill -- not because it allowed hybrids to use HOV lanes, but because it required a minimum fuel efficiency of 45 mpg. Only imported Japanese cars would qualify, they complained.
Some environmentalists had a problem with the California bill from the other side. They noted that the incentive would spur no additional hybrid sales, given the long backlog in existing orders. They noted that hybrids would be given access to an HOV lane in preference to single occupant cars that achieve better mileage. And they note that hybrids achieve their best efficiency when stuck in traffic. On the open highway their efficiency declines. Thus the California incentive will clog the HOV lanes, thereby reducing their value to everyone. And arguably, it will increase pollution by offering hybrids less stop and go driving.
So what is to be done? First, we need to focus on efficiency. That can be done in one of two ways. Some states, like Arizona and Georgia, require the qualifying hybrid to achieve a relative fuel economy significantly better than the average of its vehicle class. Some states and cities require an absolute minimum mileage. Connecticut calls for 40 mpg. San Jose, Calif. for 35 mpg.
The second focus of incentives should be to encourage hybrids that can be recharged from the electric grid system. A little explanation may be in order here. The crowning achievement of hybrids is that for the first time in 80 years they create a new automotive technological platform. They allow a car to run on electricity as well as engine fuel.
However, current hybrid electric vehicles (HEVs) accelerate on electricity but do not actually run very far on it. Their battery capacity is small, and only their engines can charge their batteries. In the industry these vehicles are dubbed HEV(0) for zero mileage on electricity. An HEV(20), on the other hand, can run for 20 miles on electricity and the batteries can be charged from the grid system. People can recharge their batteries overnight while at home or in the parking lot while at work.
When a car runs on electricity, it can achieve a fuel efficiency of nearly 150 mpg while eliminating exhaust emissions. This is why electric vehicles are so attractive. But such vehicles suffer from having a short driving range. The hybrid overcomes this performance problem while still allowing the vehicle to operate primarily on electricity. The average person, for example, only drives his or her vehicle 20 miles per day.
Ford, as Ive noted, is fighting against requiring hybrids to meet an efficiency test to earn incentives. In the late 1990s Toyota successfully fought Californias initial requirement that hybrid batteries be rechargeable from the grid. Indeed, the Prius advertising tag line is, You dont have to plug it in.
You dont have to plug in a plug-in hybrid either. But you can, and by so doing, you can have a dramatic impact on the nations environment and our dependence on imported oil.
Hats off to the public and private sectors for successfully midwifing the hybrid electric vehicle from the drawing boards to the show rooms. Now, we need to move beyond simply rewarding car manufacturers for equipping their cars with propulsion motors. Instead, we need to tailor rewards to the introduction of hybrid technologies and vehicles that dramatically reduce our reliance on oil and that allow electricity to become the vehicles primary fuel.