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.