Higher Fuel Prices Will Help Reduce Emissions and Government Subsidies

A tripling in fuel prices over the last decade has caused pain for consumers and businesses alike. While recent fuel prices have not yet eclipsed the absolute high prices seen in the summer of 2008, prices have steadied at a new, higher baseline price of around 90 percent of the 2008 spike. However, higher average fuel prices have, for the first time, created the conditions for some advanced vehicle technologies, specifically hybrid electric commercial trucks, to become cost-competitive versus conventional vehicle models without government subsidies. The impact of this shift is just beginning to take hold with businesses. They’re realizing that not only are they leaving money on the table as they pay to fuel conventionally powered vehicles, but they’re missing the associated environmental benefit of significant emissions reductions from new hybrid trucks.

Environmental and economic impact of commercial trucks

Since 1990, the transportation sector has been one of the fastest-growing sources of U.S. greenhouse gases (GHGs). In fact, the rise in transportation emissions represents 48 percent of the increase in total U.S. GHGs since 1990, and the fastest growth of all occurred in the commercial vehicle sector (source: DOT). Today, fuel consumption in the commercial truck and fleet sector is responsible for roughly 7 percent of all carbon dioxide emissions in the U.S. (about the same emissions as a domestic aircraft), and reducing commercial vehicle emissions is a critical part of reducing total GHG emissions. Reducing fuel use and the associated emissions also provides a tangible economic benefit to businesses and consumers alike, because fuel costs are the second largest operating expense for commercial fleets after labor costs. Reducing transportation fuel use can help companies stem the rate of growth of prices on many products. Why?

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Rising fuel prices not only affect the cost to manufacture products but also the cost of getting them to consumers. Studies have shown that about 10 percent of the cost of consumer products can be attributed directly to transportation. Furthermore, even service sector businesses, such as package delivery, maintenance and telecoms, require huge transportation fleets to deliver services or to ferry tools and workers to install and maintain equipment. High fuel prices affect profitability in low margin businesses and put pressure on companies to raise prices over time, directly impacting consumers.

High fuel prices make hybrids competitive

Over the past decade, manufacturers of consumer hybrid vehicles such as the Toyota Prius and Ford Fusion have collectively sold about 2.5 million hybrids in the U.S., which currently comprise about 3 percent annual share of U.S. vehicle sales, primarily to buyers concerned with reducing their environmental impact (source: Argonne Nat’l Lab). In contrast, adoption of hybrids in the commercial truck sector has been a very small fraction of 1 percent annually. This was primarily because the technology was designed to capture government subsidies, yet was too expensive to deliver adequate return on investment (ROI) when subsidies ran out. The vast majority of sales of commercial hybrid trucks have been purchased directly because of federal and state subsidies, which have since dried up after the Obama stimulus ended.

However, the cumulative scale of manufacture of hybrid components and vehicles in the consumer sector has slowly reduced hybrid electric technology costs and improved performance. The combination of consistently high fuel prices and decreasing technology costs has finally created the conditions for a low-cost hybrid electric powertrain option to generate a compelling ROI from fuel and maintenance savings for high annual mileage trucks, without subsidies. Because commercial vehicles average about 25,000 miles per year and generate much larger fuel bills than consumer vehicles, the savings from a hybrid powertrain are correspondingly much larger than what consumers will see on their vehicles.

Decoupling subsidies from emissions reductions

This is an historic moment. Businesses need to justify large-scale purchases of hybrid trucks via financial analysis and we’ve reached the point where hybrids can finally deliver adequate savings to exceed most corporate investment criteria. The race is on by companies like XL Hybrids to deploy technology that saves businesses a lot of money by reducing fuel costs and emissions by 20 percent or more thereby generating savings of up to three times the purchase premium of the hybrid option over the 10-year life of a truck.

Now that hybrid electric vehicles can finally compete with conventional commercial truck models, our economy has an incredible opportunity to decouple meaningful emissions reductions in the commercial transportation sector from the “yo-yo” effect of unpredictable government subsidies and politics. The combined benefit of reducing business costs (hence slowing consumer price increases), reducing environmental impact, and reducing the need for government subsidies is something that we can all cheer.

Justin Ashton is the co-founder and vice president of business development for XL Hybrids. He leads market strategy and serves as the head of sales and marketing. In his spare time, Justin enjoys finding ways to take money away from oil companies. He holds a master’s degree in business administration from MIT. Find Justin on Twitter @justinbashton.