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Hybrid economics

Leanardo hearts his PriusWhen fashion and function collide, great things happen. Or, at least, trendy things that aren’t as vacuous and faddish as they may seem; things that can actually be justified to your friends, yet leave you reveling in their very hipness. And so the hybrid went from design exercise to cult item to Hollywood high fashion, and the justifications flew.

Until now. The new Consumer Reports auto issue contains a stark report on the economics of hybrids: the premium over a comparable model from the same manufacturer ranged from $3,700 to $13,300 over the first five years of ownership. Ouch.

Studies like this one from UC Davis suggest that most people don’t focus on the economics of hybrids, buying mainly for image reasons. Similarly, no economist would ever suggest buying a TerraPass — global warming is by definition a tragedy of the commons. But others are adamant that consumers make rational economic decisions and that hybrids have a strong business case, something the CR article attempts to clarify.

There are weaknesses in the CR analysis, as well as implied value judgments that CR does a good job of noting. One of the added costs that CR figures in is extra depreciation, based on the original purchase premium and on the theory that hybrids aren’t going to hold their value.

Fads are, by nature, transitory, and technological change may bring us an uber-hybrid in four years, but I suspect that hybrids won’t depreciate that fast. Depreciation is an issue if you sell the car (or total it), but, if you hang onto your car longer than the average of five years, the impact of this steep initial depreciation will decrease even as the benefits continue to build.

Fuel costs, perhaps the most debated part of the economic question, are variable. For the CR report, they assumed 15k miles a year, with gas starting at $2.50 a gallon and climbing to $4 a gallon, a seemingly hybrid-friendly estimate. For people who drive significantly more, the increase in savings helps offset the purchase premium, but may also be accompanied by higher repair costs, such as the $3000 hit for replacing the battery pack (every 150,000 miles or so).

Finally, CR assumes you’ll be financing the car, and will pay extra interest based on the purchase premium.

So for high-mileage drivers who pay in full and keep their cars more than decade, a hybrid may make sense from a strictly economic standpoint. For the rest of us, it’s debatable, but there is one critical thing all TerraPass people know: the hybrid will burn less gas, period, and each gallon saved is twenty fewer pounds of carbon in our atmosphere.

It’s hard to put a price tag on controlling global warming, but I’d be willing to bet that it’s worth a little extra.

UPDATE: Consumer reports announced yesterday that they had erred in their calculations, and that the original data (on which the above post was based) was deeply flawed. As a result of the corrections, CR now says that, as long as the federal tax credit still exists, Prius and Civic Hybrid owners will save money in the first five years, and the extra cost for the other vehicles drops by about 50%. The biggest error was in their depreciation calculations. The article has already been rewritten on the CR website.

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