Cars
The Truth About Hybrids
Going green doesn't pay, but maybe that's okay.
By Mark Solheim, Senior Editor, Kiplinger's Personal Finance
November 2005
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With gasoline prices in the stratosphere, a lot of car buyers are checking out gas-electric hybrids. Hybrids have been around since Honda introduced the Insight two-seater in 1999. The Toyota Prius and Honda Civic Hybrid soon joined the Insight (still the most fuel-efficient vehicle on the road), but for the past few years, hybrids have been a curiosity embraced mainly by the environmentally conscious and the early-adopter crowd.
That started to change when Toyota introduced the bigger, more powerful 2004 Prius, just as gas prices were flirting with $2 per gallon. A year ago Ford unveiled the Ford Escape Hybrid small SUV and, soon after, Honda brought out the hybrid version of the Accord, the first hybrid sedan with V6 power. The Lexus RX 400h and Toyota Highlander Hybrid followed. And this fall, the Mercury Mariner Hybrid debuts. GM's Silverado and Sierra pickups are also available as hybrids.
About 200,000 hybrids will be sold this year in the U.S., a fraction of the nearly 17 million total vehicles sold. Next year, the Nissan Altima and Saturn Vue hybrids will arrive, as will the Lexus GS 450h luxury sedan. Toyota, which has a Camry hybrid in the works, has pledged to sell a million hybrids a year by the end of the decade, and Ford says it will produce 250,000 a year by then. Other carmakers are scrambling to form alliances for their hybrids. GM, which is partnering with DaimlerChrysler and BMW, will offer full-size SUV hybrids in 2007. Even Porsche has a hybrid Cayenne in development.
Cost versus benefit
You typically pay a $3,000 premium for a hybrid, but that balloons to $5,000 more for the Lexus RX 400h versus a comparably equipped RX 330. And some dealers take advantage of the high demand for hybrids to tack big markups on to the sticker. So is a hybrid worth the money?
Financially speaking, no. You won't necessarily get your money back from savings at the pump. Edmunds.com recently calculated the five-year ownership cost of 2005-model hybrids versus their conventional gasoline-engine counterparts. For the vehicles to have identical costs, fuel would have to cost from $5.60 a gallon (for the Ford Escape Hybrid versus the Escape XLT AWD) to $10.10 a gallon (for the Toyota Prius versus the fuel-efficient Toyota Corolla). Compare the Prius with the best-selling Toyota Camry LE and you break even when gas costs $2.28 per gallon. At today's pump prices, you'd come out ahead.
But for some people, the feel-good factor is, if not priceless, at least worth a few grand. "People buy a car for the emotional component, and they buy it for the bundle of features it offers them," says Bradley Berman, editor of HybridCars.com, a Web site packed with information about hybrids. "These cars are fun to drive, and it's fun to try to increase fuel economy by watching the gauges and changing your driving habits."
Tax incentives also help make the math more friendly. If you buy a hybrid in 2005, you can claim a $2,000 one-time deduction on your tax return (the Edmunds analysis accounted for the tax breaks). If you buy a hybrid in 2006, you're eligible for a tax credit based on a complex formula that takes into account lifetime fuel savings of individual hybrids (the Edmunds calculations don't consider this credit). Credits will range from about $650 for the Accord Hybrid to $3,150 for the Toyota Prius. But the law sets a limit: Only buyers of the first 60,000 hybrids sold per carmaker get the full credit. After that, credits will decrease, and they will end entirely after 15 months. So if you want the full credit, buy early in 2006.