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New Light-Duty Hybrid and Diesel Tax Credits for Consumers Estimated by ACEEE

New Light-Duty Hybrid and Diesel Tax Credits for Consumers Estimated by ACEEE


August 12, 2005

WASHINGTON, D.C. — Today the American Council for an Energy-Efficient Economy (ACEEE) posted its estimates of tax credits for 31 hybrid and diesel cars and light trucks that fall under tax credit provisions of the new federal energy bill. These are best-guess estimates, based on a combination of preliminary 2006 model year data, 2005 model year data, and manufacturer announcements, and are intended only to give a sense of the magnitude of the upcoming credits, which will be available starting January 1, 2006.

Estimated credits for hybrid vehicles range from $250 to $3150 (the maximum possible under the provision is $3400), with the Toyota Prius projected to receive the highest credit. The credit amount is largely determined by a vehicle's city fuel economy relative to the average for its weight class, but vehicles that save at least 1200 gallons of fuel over their lifetime relative to the class average gain additional credits. Vehicles must also meet moderately stringent tailpipe emissions requirements to qualify. No diesel vehicle will achieve credits at the outset, because automakers have yet to produce vehicles clean enough to meet those emissions requirements. This situation may begin to change in model year 2007, because ultra-low-sulfur diesel fuel will become widely available in late 2006, facilitating emissions reduction technologies for new diesel models.

The tax credits are the product of several years' work on the part of legislators, automakers, environmental groups, and alternative fuel interests. Senator Orrin Hatch was the lead proponent throughout the many rounds of Congressional debate. The program will increase the variety of classes and makes of hybrids available to consumers. Heavy-duty hybrids will also be eligible for substantial credits, a potentially critical factor for the commercialization of these vehicles.

The tax credit provision has shortcomings, however. Credits for a manufacturer's vehicles are phased out once 60,000 of them have received credits. In addition, the program favors heavier vehicles through the structure of the fuel savings credit and a more lenient emission requirement for vehicles over 6,000 pounds.

In combination with sustained high fuel prices, the tax credits could ensure the continued boom in hybrid sales. However, ACEEE cautions that in the absence of other measures to raise the average fuel economy of all vehicles, new incentives for advanced technology vehicles carry no assurance of oil savings.