The plug-in hybrid electric vehicle (PHEV) could significantly contribute to reductions in carbon dioxide emissions from personal vehicle transportation in the United States over the next century, depending on the cost-competitiveness of the vehicle, the relative cost of refined fuels and electricity, and the existence of an economy-wide carbon emissions constraint. Using a computable general equilibrium model, I evaluated the potential for the PHEV to enter the U.S. personal vehicle market before 2100 and alter electricity output, refined oil consumption, carbon dioxide emissions, and the economic welfare losses associated with the imposition of a strict climate policy. The PHEV is defined by its ability to run on battery-stored electricity supplied from the grid as well as on refined fuel in an internal combustion engine. Sectors that produce PHEV transportation as well as other electric-drive vehicle technologies were added to the MIT Emissions Prediction and Policy Analysis (EPPA) Model as a perfect substitute for internal combustion engine (ICE)-only vehicles. Engineering cost estimates for the PHEV, as well as information about the pre-existing fleet, were used to specify PHEV sector input shares and substitution elasticities in the model.

Based on the model results, several conclusions emerged from this work. First, lower vehicle cost markups may hasten PHEV market entry, especially in the absence of a climate policy. Second, in the short term, the lower cost of electricity compared with refined fuels on a per mile basis is likely to favor adoption of vehicles with longer all-electric ranges. However, realizing the electricity advantage will depend on whether or not current battery cost and performance limitations can be overcome. Third, the availability of biofuels as a carbon neutral fuel substitute could delay PHEV market entry, especially when a climate policy is imposed. Fourth, large-scale adoption of the PHEV will increase electricity demand, reduce refined oil consumption, and could offset the economic welfare cost of pursuing a climate policy, especially if biofuels are not available. Fifth, realizing the maximum carbon emissions reduction potential of grid-charged electric-drive vehicles such as the PHEV will depend on concurrent reductions in power sector emissions.