New vehicle technologies and alternative fuels are believed to be key factors in increasing energy security, improving air quality, and reducing greenhouse gas emissions. Proposed legislation (Energy Policy Act of 2003) would extend significant tax credits to fuel-cell vehicles and promote hybrid vehicle use through credits toward other federal requirements (i.e., for alternative fuel use). Analyses using single-period equilibrium models and multiple-period scenario analyses are often used to demonstrate the feasibility of technology to attain policy goals. These analyses typically assume mature markets, large-scale vehicle production, and the widespread availability of alternative fuels at retail stations. These conditions are not currently attained and may or may not be realized in a market economy. The Transitional Alternative Fuels and Vehicles model is used to simulate market outcomes for the use and cost of alternative-fuel vehicles (AFVs) and hybrid electric vehicles (HEVs) over a 20-year period, considering possible transitional barriers related to infrastructure needs, production scale, and technological learning. Without subsidies, no substantial penetration by HEVs is projected, based on their prospective fuel efficiency gains and costs. Hybrid subsidies (on the order of $2,000/vehicle) can induce substantial hybrid penetration and gasoline demand displacement under the U.S. Energy Information Administration's 2001 oil price projections. This result is quantitatively different from that achieved for AFVs. Temporary HEV subsidies are effective at inducing hybrid vehicle penetration but do not have long-term effects once they are removed unless costs are reduced due to learning-by-doing.
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