The Benefits and Costs of New Fuels and Engines for Light‐Duty Vehicles in the United States

Rising oil prices and concerns about energy security and climate change are spurring reconsideration of both automobile propulsion systems and the fuels that supply energy to them. In addition to the gasoline internal combustion engine, recent years have seen alternatives develop in the automotive marketplace. Currently, hybrid‐electric vehicles, advanced diesels, and flex‐fuel vehicles running on a high percentage mixture of ethanol and gasoline (E85) are appearing at auto shows and in driveways. We conduct a rigorous benefit‐cost analysis from both the private and societal perspective of the marginal benefits and costs of each technology—using the conventional gasoline engine as a baseline. The private perspective considers only those factors that influence the decisions of individual consumers, while the societal perspective accounts for environmental, energy, and congestion externalities as well. Our analysis illustrates that both hybrids and diesels show promise for particular light‐duty applications (sport utility vehicles and pickup trucks), but that vehicles running continuously on E85 consistently have greater costs than benefits. The results for diesels were particularly robust over a wide range of sensitivity analyses. The results from the societal analysis are qualitatively similar to the private analysis, demonstrating that the most relevant factors to the benefit‐cost calculations are the factors that drive the individual consumer's decision. We conclude with a brief discussion of marketplace and public policy trends that will both illustrate and influence the relative adoption of these alternative technologies in the United States in the coming decade.