Light-Duty Hybrid and Diesel Vehicle Tax Credits in the Energy Bill

A prominent provision of the Energy Policy Act of 2005 creates new tax credits for consumers who purchase various advanced technology vehicles, including hybrid-electric and diesel-powered cars and light trucks. The provision, which became effective in January 2006, differs from previous federal incentives for these vehicles in relying on tax credits rather than deductions, typically resulting in greater savings for consumers.

ACEEE's estimates of the credits that will be awarded to vehicles on the market today or coming soon are shown in the table below. These estimates are based on best-available information, which may include manufacturer press statements or specifications of similar models. Credit amounts for certain models have been acknowledged by the IRS; they are noted as such in the table below. Manufacturers are likely to alter vehicles in the coming years to maximize the credits they earn. [continue below...]

Credits are available only for a limited number of vehicles per automaker. While the credits last through 2010, some automakers will exhaust their shares well before then. The provision is structured so vehicles can earn credits both for achieving greater fuel economy and for saving fuel. Fuel economy improvement is measured against a weight-dependent, model year 2002 baseline, with tiered credits starting at 25% over the baseline fuel economy. With each 25% improvement over the baseline fuel economy up to a maximum of 250%, the tax credit increases by $400.

A "conservation credit", designed to boost the amount of credit available for vehicles in the heavier weight classes, is available as well. A vehicle qualifies for the credit if it is expected to save at least 1,200 gallons over its lifetime relative to a vehicle achieving the baseline fuel economy for that weight class. For each additional 600 gallons of gasoline savings up to a maximum of 3,000 gallons, the vehicle earns $250 in tax credits.

Combining the two components, the maximum available credit is $3,400. However, once a manufacturer sells 60,000 qualifying vehicles, the tax credit is phased out over a period of fifteen months for vehicles that manufacturer produces.

Both diesels and hybrids must meet certain emissions certification levels to qualify: smaller vehicles must have a Federal emissions rating of Tier 2 bin 5 or better, and larger ones must achieve Tier 2 bin 8, a less stringent requirement. While most hybrid vehicles already meet the emissions requirement, no diesels are currently rated cleaner than bin 9. Diesels may begin achieving requisite levels in model year 2008 with the introduction of models utilizing advanced aftertreatment systems, however.

Credit Limitations