Gasoline Prices, Government Support, and the Demand for Hybrid Vehicles in the United States*

We analyze the determinants of hybrid vehicle demand, focusing on gasoline prices and income tax incentives. We find that hybrid vehicle sales in 2006 would have been 37% lower had gasoline prices stayed at the 1999 levels, and the effect of the federal income tax credit program is estimated at 20% in 2006. Under the program, the cost of reducing gasoline consumption was $75 per barrel in government revenue and that of CO2 emission reduction was $177 per ton. We show that the cost effectiveness of federal tax programs can be improved by a flat rebate scheme.