Could Climate Hawks Dream of Hybrid Vehicles?

Almost 18 months ago, in the Spring of 2023, I published an essay in the Wall Street Journal with Ashley Nunes, Breakthrough’s then director of transportation policy, titled “Don’t Expect Mass Adoption of Electric Vehicles Anytime Soon.” The essay was published just days after the Biden Administration EPA released draft rules for tailpipe emissions under provisions of the Federal Clean Air Act. The rules used highly optimistic assumptions about U.S. EV adoption over the next decade to set fleetwide CO2 emissions standards that would, practically, make it very near impossible for U.S. automakers to produce internal combustion engine powered vehicles unless they had transitioned much of their overall fleet to electric vehicles.

The essay provoked a furious response, some of it from predictable quarters but some of it from researchers who I quite respect, including former colleagues. Robbie Orvis, the director of modeling and analysis at Energy Innovation, accused us of “pouring cold water on technological solutions they don’t like, rather than on promoting technological solutions that might actually address climate change.” Jesse Jenkins, Breakthrough’s first climate and energy director, called our argument “remarkably anti-innovation and ahistorical.” Arthur Yip, another former colleague, insisted that our doubts that automakers would be able to produce electric vehicles over the next decade that most American new car buyers would be eager to purchase “a little neo-malthusian.”

A year and half later, I think that it is safe to say that our skepticism was warranted. Hitting the sales targets that EPA assumed requires strong year over year growth of EV sales, with those sales hitting 50% of total new vehicle sales by 2030 and over 60% by 2032. Instead, U.S. sales of fully battery powered vehicles have been flat over the last year. In 2023, EVs constituted roughly 7% of total new vehicle sales. Sales this year appear on track to maintain about the same share.

EV sales have stayed flat despite generous federal subsidies in the IRA, the shift of most EV sales to leases that circumvent income and domestic content restrictions established in the IRA, increasing competition from a growing slate of electric vehicle offerings on the market, and automakers slashing prices in a desperate effort to move growing EV inventories that dealers throughout the country have been unable to sell.

So what happened? Why did the Biden Administration and climate advocates get EV adoption so wrong and what should we do about it now?

Missing the Mark

In the Wall Street Journal, we argued that a combination of price, performance, and profitability hugely challenge the EV market in the United States. The U.S. EV market is arguably sui generis. America’s sprawling suburban land use footprint, highly decentralized housing and employment markets, and expansive national geography mean that most American households are uniquely car-dependent. While daily driving distances for most Americans don’t exceed, or often even approach, the range available with most EVs today, lack of charging infrastructure and more generalized range anxiety are real problems for many potential EV owners. Moreover, a new car, after purchasing a home, will generally constitute the largest single investment that most US households will ever make. As part of that investment, most Americans reasonably expect that vehicle to be able to travel long distances without frequent stops for fueling or charging, even if they only need to do so a few times a year.

Sprawl and car-dependence, though, are only part of the problem. Anyone old enough to remember the U.S. passenger vehicle fleet prior to the oil shocks of the 1970s will recognize that Americans’ preference for large vehicles long predates the marketing and regulatory innovation that was the SUV. Automakers, meanwhile, make much of their profit from SUVs that are relatively cheap to manufacture but come with lots of luxury features that command a premium. Add it all up and the challenges for EVs in the US market are formidable.

Absent a major shift in America’s land use footprint, built environment, and car culture, the only way through the thicket of challenges to deeply cutting emissions in the US transportation sector is better technology. After years of efforts to develop a commercially viable electric vehicle, two key developments allowed EVs to gain a foothold in U.S. and global vehicle markets: the development and scaling of lithium ion batteries for laptop computers and other mobile applications over prior decades, and Tesla’s innovation to engineer the vehicle around the battery, building the battery into the chassis where it took up far less usable space and improved the stability and handling of the vehicle. Virtually all electric vehicles sold today utilize similar engineering.

Today, moving EVs from niche product for the rich and liberal to mass adoption in the US market largely depends upon the future of batteries. EV range, cost, and profitability all ultimately depend upon the cost and performance of the batteries that power them. Batteries are, by far, the most costly component of an electric vehicle and larger vehicles with greater range require larger batteries. This in turn challenges the business model of most U.S. auto manufacturers.

To achieve a successful transition to a U.S. fleet largely composed of electric vehicles, automakers will need to produce EVs that are large, feature rich, and capable of covering long distances on a single charge, rather than large ICE vehicles that are cheap to make but can be sold at a high markup with lots of premium features. This in turn requires a very large battery, which substantially increases manufacturing cost and hence reduces profitability. Even with generous production and consumer subsidies, producing an electric vehicle that U.S. consumers want to purchase and that automakers can make a profit on has proven difficult.

Already, the EPA has somewhat loosened its proposed tailpipe standards at the behest of automakers. But even so, it is not at all clear that U.S. EV shares are remotely on track to allow compliance with the rule. Goldman Sachs, which remains bullish on U.S. EV sales, projects that EVs will constitute 9% of U.S. vehicle sales in 2024 and 15% in 2025. Presently, they are trending toward 7% this year, a figure that would need to double next year to get back on track with Goldman’s projection. Jenkins’ modeling, which informed the Administration’s regulatory assumptions, projects EV sales at close to 20% of total U.S. sales in 2025.

These and other optimistic EV sales forecasts are predicated on very optimistic assumptions about EV battery costs. Goldman forecasts a 40% decline in battery manufacturing costs by 2025. Should that come to pass, perhaps ultracheap batteries will be sufficient to lure more U.S. car buyers into EVs that offer substantially more range at lower cost, particularly if a far larger charging network materializes. BYD and other Chinese manufacturers may offer proof of concept that such a future is close at hand, as they appear able to produce small and midsize vehicles at remarkably low cost that feature similar or greater range to that offered by U.S. automakers. Were they to gain access to the US market, it is possible that they might be able to produce vehicles profitably that the average American car buyer wants to buy.

But as Seaver Wang and I recently wrote in Foreign Policy, those vehicles bring very problematic environmental and human rights abuses along for the ride. And while many western EV makers also depend on some of those supply chains, they are not enmeshed in them to the same degree that domestic Chinese manufacturers are. So it is not entirely clear that an EV and battery supply chain that actually met western environmental, labor, and human rights standards is capable of achieving similarly low costs, at least in the short term.

Another possibility, though, is that the impressive growth rate of EVs up through 2023, which really drove the conviction on the part of Democratic policymakers and climate advocates that a rapid transition to EVs was feasible, was misleading. EV market share was growing from a miniscule level of market penetration. You don’t need to sell that many additional cars to double the EV share of total vehicles from 1% to 2% (about 100,000). By contrast, doubling that share from 7% to 15%– as will be necessary to hit Goldman’s 2025 forecast– will require selling somewhere in the neighborhood of a million more EVs in 2025 than were sold in 2023 or 2024.

The initial market for EVs was also overwhelmingly composed of upper income liberals. A CalMatters analysis from 2023 found that EV registrations in California are overwhelmingly concentrated in the wealthiest zip codes in the state. A UC Berkeley study from the same year found that close to half the EVs registered nationally over the last decade were clustered in the top 10% of most Democratic counties nationally and over a third in the top 5%. There is only so much market share to be captured if that share is limited to rich coastal liberals. As that market has saturated over the last several years, growth in the share of EVs in the U.S. new vehicle market has flatlined.

Maximalist demands, proposals, and policies by Democrats, the Biden Administration, and climate advocates, meanwhile, have inadvertently undermined efforts to make progress among other consumer segments. The combination of jamming most federal subsidies for EV purchase and production into the highly partisan IRA via the budget reconciliation process, the promulgation of sweeping new tailpipe emissions rules justified by very optimistic projections of EV adoption based upon those subsidies, and blue state policies in California and elsewhere to ban the sale of new ICE vehicles outright have turned what was not so long ago a popular new consumer product that most Americans were excited about into a deeply polarizing technology.

Nunes and I ended our essay with a warning: that the push to rapidly accelerate adoption of EVs via regulatory fiat risked becoming “a new flashpoint in America’s long-running environmental culture wars.” And that is exactly what has transpired. Pew Research finds public support for ICE vehicle phaseouts has sharply turned negative since the passage of the IRA, with 60% of the public now opposed. The share of Americans reporting interest in buying an EV has fallen as well, down as much as 10% over the last year or so, with those seriously considering buying a new EV making up 10% of respondents, with demographics that look strikingly like EV owners today. Meanwhile, the share of respondents saying that EVs are better for the environment than ICE vehicles has fallen precipitously since 2021, from 67% to 47%. Presenting his research on public attitudes toward EVs at the Breakthrough Dialogue this summer, David Shor, a Democratic pollster and data scientist provocatively observed that “if I had a choice between having a politician tout that he helped fund a battery factory or tell people that he wanted to defund the police, I might prefer that he told people that he wanted to defund the police.”

A Coming Pivot Toward Hybrid Vehicles?

Faced with flagging consumer demand for electric vehicles, mounting losses for many automakers, and growing public backlash against EV mandates and even subsidies, something will likely have to give. It remains to be seen how IRA EV and battery subsidies will fare in the event of a second Trump Administration and/or Republican Congress. The same is true of the EPA’s tailpipe regulations, which could face reversal at either the executive level or through the courts.

But whether or not those policies are reversed or scaled back, it is still the case that U.S. automakers and battery suppliers have already made substantial investments in EV and battery supply chains and manufacturing capacity for a market that may not materialize at the rate or scale that those investments anticipated. Even with many automakers delaying or scaling back new production over the last year, it is clear that presently there is substantial overcapacity in place.

The most likely shift in the focus of both policy and vehicle production, it seems to me, will be toward various types of gas/electric hybrid vehicles, combining a gas tank and internal combustion engine to allow for greater range and more convenient refueling with a smaller battery and an electric drivetrain for use for the shorter trips that dominate much day to day driving. Doing so should allow auto manufacturers to utilize the new capacity they have invested in to produce vehicles, large and small, that meet the demands of the American market at a price that consumers are willing to pay and a production cost that won’t bankrupt manufacturers. Smaller batteries also significantly reduce the degree to which domestic mining and processing of critical minerals will need to be scaled up in order to comply with the domestic content requirements in the IRA while still allowing for scale up of and innovation in battery and electrified vehicle production and the build out of a much more extensive and functional national charging infrastructure.

Jenkins, to his credit, seems to have reached a similar conclusion, making the case recently in HeatMap for “range-extending EVs” as a solution to the problem of producing electric only vehicles that don’t have the range and features that most American consumers expect at a price they are willing to pay. Jenkins distinguishes between range-extending EVs and plug-in hybrids, arguing that the latter will be too expensive because they feature not only dual fuel motors but also dual drive trains and won’t have a large enough battery to be used most of the time. But whatever the exact configuration, more gas tank and less battery offer a range of solutions to the many technological, economic, behavioral, and political challenges that the effort to rapidly electrify the U.S. passenger vehicle fleet faces.

Whether an electrified but not fully electric vehicle fleet is just a bridge to a fully electric vehicle future or a longer term solution remains to be seen. A 2020 study of the U.S. power sector cosponsored by Energy Innovation could offer a useful analogue for transportation. In the study, Energy Innovation and its partners at UC Berkeley’s Goldman School of Public Policy and GridLab suggest that the U.S. might get most of the way toward decarbonizing its power sector with a very high share of electricity generated with wind and solar energy and a large fleet of gas fired power plants operating at low capacity factors to firm up the grid. A similar dynamic, in which most miles were powered by batteries but many vehicles had at least a small internal combustion engine to boost range for longer trips, might drive deep decarbonization of a fully hybridized U.S. passenger vehicle fleet.

I personally remain optimistic that over the long term, fully electric vehicles will win the day. But that seems unlikely to happen on the timeframe that the Biden Administration and a lot of climate advocates are betting on. As both the auto industry and policy-makers face up to the shorter term challenges of electrifying the transportation sector, a pivot toward hybrid vehicles seems like an obvious win for all involved.