Managing Incentives for Green Vehicles

With increasing concerns about global warming, energy security,

and gas prices, policymakers have encouraged the adoption of

more efficient vehicles.These automobiles run the gamut from alternative

fuelsuch as hydrogen, natural gas, biodiesel, and electricto the

more prevalent (at least in the United States) hybrid-electric vehicles offered

by a growing number of manufacturers.Hybrids still run on gasoline but are

much more efficient than nonhybrid models of similar size and performance.

Hence, they are often considered in the same category as their alternative fuel

counterparts.

To make up for perceived cost premiums over traditional gasoline vehicles

and other factors that might make consumers wary of new technologies, a growing

number of state and local governments have joined the federal government

in offering incentives for consumers to purchase these green cars.The relative

social and environmental merits of these incentives are open to debate in

the policy community,particularly as rising gas prices make hybrids and alternative

fuel vehicles more competitive purely on the basis of fuel savings.

Lessons Learned

The main focus of my PhD research was to provide policymakers with data

and results with which they could compare policy options, but it also brought

to light a number of useful insights for officials at the practitioner level, who

must ultimately implement incentive policies enacted by state legislatures and

other elected bodies.This article captures a number of lessons learned and best

practices identified in comparing individual state incentive policies. In many

respects, the states provide a sort of policy laboratory where different incentives

can be tried and evaluated.

There are currently two basic categories of incentives:monetary incentives

that provide a cost savings to hybrid owners over time and nonmonetary privileges

that provide a convenience or time savings.The most notable privilege

is the single-occupant use of high-occupancy vehicle (HOV) lanes.While implementation

considerations differ between these broad categories, several common

themes emerge: the need to design them to deliver benefits to consumers

up front, be straightforward and well publicized, and be flexible enough to ac

commodate changing circumstances and unintended consequences.

These principles arguably apply to all government

incentives and policies, but finding a basis for

comparison between different policies and implementation

strategies is often difficult. In this case, the variety and

creativity of state incentives provide an excellent case study.

Overview of Incentives

Traditional government intervention policies into the

market for new technologies include taxes or subsidies to

account for external environmental costs, regulations to

force or promote the adoption of socially beneficial technologies,

and taxes on fuel to induce the innovation and

adoption of more energy-efficient technologies. Although

the federal government has adopted each of these

to some extent for alternative fuel and hybrid vehicles, the

policies most visible to consumers include federal, state,

and local government incentives such as tax deductions,

credits, fee reductions, and other benefits.

Until 2005, the federal government provided a

$2,000 tax deduction for qualifying hybrids, regardless of

fuel economy rating. Starting in January 2006, however,

the Energy Policy Act of 2005 replaced this tax deduction

for hybrids with a tax credit tailored to the specific

hybrid models.The complex scheme is now based on a

combination of the vehicles emissions profile and fuel efficiency

compared with equivalent vehicles and varies from

several hundred to several thousand dollars, depending on

the model.The credit phases out over time on the basis

of the number of total hybrids sold by a particular manufacturer.

At the beginning of the second calendar

quarter after a manufacturer sells a total of sixty thousand

hybrid and lean-burn vehicles, the credit for all its vehicles

is reduced to 50 percent of the original value.The

value is further reduced to 25 percent of the original value

at the beginning of the fourth calendar quarter after

the sixty thousand sales mark and phases out completely

at the beginning of the sixth quarter.The federal government

also offers a more lucrative $4,000 tax credit for

alternative fuel vehicles powered by natural gas, hydrogen,

methanol, and liquefied petroleum gas.

As a complement to the federal incentives,many state

and local governments offer additional incentives to consumers,

which vary widely both in value and means of

implementation.As of late 2007, twelve states either offer

or have offered some type of monetary incentive for hybrid

vehicles,while seven offer hybrids and alternative fuel

vehicles access to some or all of the state HOV lanes. In

some cases, payments come in the form of rebates or tax

credits, paid out by the state after purchase, while other

states offer full or partial waivers on sales and excise taxes,

amounting to an up-front reduction in the purchase

price. Still other states offer incentives over time, such as

reduced annual registration fees or waivers from emissions

inspections.Currently, the state with the highest effective

lump-sum incentive structure for hybrids is Colorado,

which offers credits of $2,500$6,000, depending on the

model, while several other states offer incentives valued

at $1,500 or higher. Each of these states also offers incentives

for alternative fuel vehicles,which are usually even

more lucrative than those for hybrids.At the local level,

incentives vary widely as well, ranging from free or reserved

parking in a growing number of cities to the waiver

of annual vehicle taxes in Arlington County,Virginia.

Up-Front Benefits

The differences in the value and mechanisms for incentives

among states make it difficult to compare them

directly, but states that provide the full value or benefit of

the incentive to consumers up front tend to see the biggest

impact. For example, hybrid market share (new hybrids

as a percentage of all new vehicles) in Connecticut rose

from 9 percent below the national average to 13 percent

higher than the national average following the implementation

of a sales tax exemption for hybrids. In New

Mexico, a similar waiver increased market share from 23

percent above the national average to 34 percent above

the national average.Likewise,Marylands hybrid market

share fell from 14 percent above the national average to

4 percent above the national average when the state ended

a sales tax waiver. On the other hand, NewYork and

Utah saw no significant change in market share compared

with the national average when they ended tax credits for

hybrids, although the value of the credits was greater than

the sales tax incentives in the other states.The greater impact

of sales tax waivers is not surprising because consumers

are much more likely to factor in the cost savings if they

show up on the bottom line at the automobile dealers and

reduce their initial purchase price.

HOV-lane incentives also provide an immediate benefit

and have led to a significant bump in market share for

several states. Virginias HOV incentive is associated

with the states perennial high ranking in market share,

while the Florida market share increased 10 percent compared

with the national average after the state implemented

HOV-lane access for hybrids and alternative fuel vehicles.

On the flip side,Utah recently started providing solo HOV

access to all motorists for a $500 annual fee, but offered

the same privilege to hybrid and alternative fuel vehicles

for only $50 per year.Rather than providing an up-front

benefit, this essentially amounts to a $450 per year savings

over time.Not surprisingly, this policy has not resulted

in a significant increase in market share compared with

the national average.

The choice of whether to offer incentives as tax credits,

rebates, or sales tax waivers is ultimately up to policymakers,

but if the state is committing financial resources

to promote hybrids, up-front incentives appear to be the

most efficient means of accomplishing policy objectives.

Simplify and Publicize

Two other closely linked considerations for state officials

are keeping the process for realizing incentives as simple

as possible andmaking sure consumers knowabout them.

Simplicity

In several states, the process was so complicated that

it likely dissuaded consumers from actually collecting any

incentive money.Pennsylvania originally provided grants

of up to $2,000 to make up the incremental difference

in cost between a hybrid and an equivalent nonhybrid

model, but consumers had to fill out an application form

before purchase and couldnt actually buy the car until the

grant application was approved.According to Pennsylvania

officials, only about 50 people per year actually applied

for grants before the grant program was replaced by a less

lucrative, but more straightforward, $500 rebate in 2006.

WestVirginia also offered a generous incremental credit

of up to $3,750 for hybrids purchased through June 2006,

but the form for redeeming the credit required consumers

to look up the credit value on aWeb site maintained by

the state of Colorado.Virginia offered $200 tax credits for

hybrids purchased through 2005 (equal to 10 percent of

the federal tax deduction in place at the time), but representatives

from the states Department of Taxation could

not tell me how to file for the credit when I purchased

my own hybrid in late 2002. By the time the state clarified

instructions in mid-2003, I would have had to file

an amended return to receive payment.

It is difficult to tell how many people were dissuaded

from purchasing hybrids or failed to receive incentive

payments due to the complexity of the process, but common

sense suggests that simple incentives are more likely

to impact sales, that is, simplicity of redemption for consumers,

not necessarily simplicity in setting the value of

the incentive.Colorado calculates its tax credit for hybrids

using a two-step formula that takes into account both the

fuel savings and the estimated additional cost of a hybrid

compared with its gasoline equivalents. Although consumers

would be hard pressed to calculate the resulting

tax credit values on their own, the state posts the calculations,

resulting incentive values, and detailed instructions

on filing for the credit on a concise, easy-to-findWeb site.

Publicity

Some states lack of publicity for incentives stems from

their giving responsibility (and funding) for advocacy and

implementation of a given policy to different departments.

For example, a state environmental quality agency,whose

mandate is to protect the environment,may develop a tax

credit scheme for green vehicles, but the department of

taxation, whose mandate is to collect revenue, may implement

it.Although the latter department would be expected

to promulgate detailed information on the credit

process to ensure that taxpayers claim the correct amount,

it would not be expected to act as an aggressive advocate

for green vehicles. In 2006,Virginia legislators went against

the recommendations of theVirginia Department ofTransportation

(VDOT),which assessed that hybrids had pushed

certain HOV lanes beyond capacity, and voted to extend

HOV lane privileges for hybrids when the incentive was

set to expire.Not surprisingly,VDOT duly noted the extension

and updated rules on itsWeb site but did little to

actually advocate for increased hybrid sales.

Virginia maintains a state energyWeb site,but it makes

no mention of hybrid vehicles. Although the public is

keenly aware of the incentive in NorthernVirginia due

to newspaper coverage and the visibility of hybrids in the

HOV lanes, the lack of a government-sponsoredWeb site

or publicity campaign denies policymakers and state officials

the opportunity to shape consumer perceptions about

green vehicles (particularly hybrids) and the rationale for

incentivizing their purchase. In fact, newspaper coverage

of HOV overcrowding in NorthernVirginia has likely hurt

the image of green vehicles, as many people now view

purchasing a hybrid less as a way to help the environment

than as a way for those who can afford it to buy their way

into the HOV lanes.

In contrast to Virginia, other states promulgate information

on green car incentives via agencies andWeb

sites focused on energy and environmental issues. Oregons

department of energy provides official information

about hybrid and alternative fuel vehicles and incentives

in the context of other state programs dealing with energy

conservation and climate change.CaliforniasAir Resources

Board maintains the Web site www.driveclean.

ca.gov, which is devoted entirely to promoting

fuel-efficient vehicles.AlthoughMaine doesnt offer monetary

incentives for these green vehicles, the states Department

of Environmental Protection runs a Clean Car

Program,which informs consumers on vehicle environmental

ratings and furnishes special stickers for vehicles

that meet specific fuel-efficiency and pollution standards.

These advocacy and publicity functions work hand in hand

with incentives and may make consumers more likely to

buy green vehicles even in the absence of incentives.Once

policymakers approve any form of incentive, they would

be well served by considering publicity and advocacy as

an important complement to basic implementation and

enforcement.

Build in Flexibility and Feedback

State and local governments should also be careful to

design and implement incentives in a way that provides

feedback and the flexibility to address unintended consequences.

Once again,Virginia provides a valuable example.

Although the HOV incentive policy has helped

promote the sale of hybrid vehicles, it has also led to the

overcrowding of HOV lanes in NorthernVirginia. Ironically,

the HOV-lane waiver predated hybrids and was originally

intended to promote non-gasoline-powered alternative

fuel vehicles.When VDOT turned down initial

requests for HOV permits (controlled via special license

plates) for early hybrid owners, the legislatureunder pressure

from the citizensoverruledVDOT officials and extended

the law to include hybrids.The legislature ultimately

controls the authorization for the HOV incentive and must

now renew it annually, but the large number of hybrid

owners has created a group of entrenched stakeholders with

a vested interest in perpetuating the HOV incentive.

To avoid politicization of incentives, initial legislation

for such incentives could include mandatory feedback

mechanisms and sunset provisions tied not solely to legislative

action, but to empirical data such as HOV overcrowding,

total hybrid sales, or available funding. Monetary

incentive procedures could also include requirements

for collecting survey information to get at the role of incentives

in influencing consumer decisions.These safeguards

would not remove the politics inherent in the initial

formulation of incentive policies, but they would

provide a more rational means of periodic evaluation and

make it easier for politicians to make necessary but politically

unpopular adjustments to incentive policies.

Finally,flexibility can come even from small decisions,

such as the choice of issuing decals or license plates to denote

HOV-lane access or other privileges. California issues

decals,which stay on the vehicle permanently,while

Virginia provides a clean fuel plate that can be transferred

to a new hybrid or alternative fuel vehicle later on.Both

states now limit access for new hybridsCalifornia stopped

issuing stickers after the first 85,000 andVirginia now issues

plates that are not valid on the most congested HOV

segments. InVirginia,however, the ability to transfer plates

continues to provide an incentive for current hybrid owners

to upgrade to newerand potentially even more fuelefficient

hybrids in coming years.

Conclusion

Given the growing trend toward both green vehicles

and incentives to promote their adoption, governments

at all levels will continue to provide valuable lessons learned

for both policymakers and practitioners.Federal agencies

capture much information on the mechanics of incentives,

but stop short of comparing different policies on the

basis of efficacy or outcomes.Researchers would be wise

to take the next step: evaluating policies in a systematic

manner and developing a best practices guide for state and

local governments.This effort would pay dividends in improving

incentives,not only for green vehicles, but a host

of other socially beneficial technologies.