Exploiting a rich data set of new vehicle registrations in 22 U.S. Metropolitan Statistical Areas from 1999 to 2006, we analyze the determinants in the demand for hybrid vehicles and examine government programs that aim to promote the adoption of hybrid vehicles. We find that both the recent run-up in gasoline prices from 1999 and federal income tax incentives are important in the diffusion of hybrid vehicles, explaining about 14 % and 27 % hybrid vehicle sales in 2006, respectively. We compare the current income tax credit program with a rebate program and find that the rebate program needs less government revenue to achieve the same level of average fuel-efficiency of new vehicles. The cost advantage of such a rebate program is bigger with larger incentives.