Giving Green to Get Green? Incentives and Consumer Adoption of Hybrid Vehicle Technology

Federal, state and local governments use a variety of incentives to induce consumer adoption of hybrid-electric vehicles. We study the relative efficacy of state sales tax waivers, income tax credits and non-tax incentives and find that the type of tax incentive offered is as important as the value of the tax incentive. Conditional on value, we find that sales tax waivers are associated a seven-fold greater increase in hybrid sales than income tax credits. In addition, we estimate the extent to which consumer adoption of hybrid-electric vehicles (HEV) in the United States from 2000-2006 can be attributed to government incentives, changing gasoline prices, or consumer preferences for environmental quality or energy security. After controlling for model specific state and time trends, we find that rising gasoline prices are associated with higher hybrid sales, although the effect operates entirely through sales of the hybrid models with the highest fuel economy. In total, we find that tax incentives, rising gasoline prices and social preferences are associated with 6, 27 and 36 percent of high economy hybrid sales from 2000-2006. 1 Both authors are from the John F. Kennedy School of Government, Harvard University, Cambridge, MA. Gallagher directs the Energy Technology Innovation Policy research group and is Adjunct Lecturer of Public Policy and Muehlegger is an Assistant Professor of Public Policy. Our research benefited from conversations with Robert Stavins, Richard Zeckhauser, Meghan Busse, Tie Gao and seminar participants at the UC Berkeley Energy Institute, Yale Environmental Economics Conference and the Kennedy School of Government. Funding was provided by the U.S. Environmental Protection Agency, William and Flora Hewlett Foundation, the Energy Foundation and the Kennedy School’s Institute of Politics. Excellent research assistance was provided by Fanny Chen and Jaclyn Marks. We thank the Sierra Club for providing data on their membership.