(FORTUNE Small Business) – Shortly after 7 a.m. on a recent Thursday morning, John Lazar drove up a winding road to Twin Peaks. Gazing out over downtown skyscrapers to the gray waters of San Francisco Bay, the 53-year-old president of Luxor Cab showed a touch of swagger as he assessed his competition in the cutthroat local taxi business. "They're like McDonald's," he said. "And I'm the Ruth's Chris Steak House."

Lazar's value proposition is service and environmental sensitivity. In 2003 he deployed 20 fuel-efficient, diesel-powered London taxis that can accommodate passengers with wheelchairs. And last November, Lazar added five Ford Escape Hybrid SUVs.

Lazar isn't the only fleet manager buying hybrid cars. Big corporations such as FedEx and Hoffmann--La Roche have invested in gas-electric vehicles in recent years, as have more than 80 local governments. J.D. Power & Associates reports that nearly 88,000 hybrids were sold in the U.S. in 2004. Corporate fleets accounted for 11% of all new hybrid registrations last year, according to Bobit Business Media's 2004 Automotive Fleet Fact Book.

Hybrid cars are good for the environment because they consume less fossil fuel and emit less particulate matter than do conventional vehicles. But it is unclear whether owning a hybrid is good for your balance sheet. In a back-of-the-envelope calculation, FSB compared Ford's conventional Escape SUV (24 mpg city, list price $25,000) with a comparably equipped Escape Hybrid (36 mpg city, list price $29,000). We assumed that the SUV is driven 25,000 miles a year, that we're in the 25% federal tax bracket and have received a one-time $2,000 tax deduction from the federal government, and that gas costs $2.25 a gallon. Given that, it will take about 4½ years to recoup the added cost of the hybrid.

Lazar's Escape Hybrids run 20 hours a day, seven days a week, more than 90,000 miles a year. At that pace the breakeven point drops to just one year. Taxis are an extreme case, of course; most fleet vehicles don't run anywhere near that much. Actual mileage varies widely from business to business, but 25,000 miles a year is a good rule of thumb, says Chris Brown, senior editor of Business Fleet Magazine. But when you factor in federal tax breaks (California and other states offer additional incentives), higher resale values, and lower projected maintenance costs, hybrids start to look more interesting. "We're finally seeing something more efficient than a traditional combustion engine," says Brown.

Any vehicle that combines two or more sources of power is a hybrid. The Escape and the Toyota Prius, the two models most widely used by fleets, are powered by a gas engine and a battery that recharges by recovering energy used when braking. The Escape was the first gas-electric SUV to run at low speeds without consuming gasoline. Both the Escape and the Prius stay in electric mode until about 20 mph. Both produce 30% to 50% less harmful emissions than conventional cars and use about two-thirds as much gas.

Besides the eerie quiet of the electric engine, Lazar's drivers say they don't notice any performance difference with the Escapes. "It's as good as my old Crown Victoria," says veteran cabbie Alan Gochberg. So far Lazar's hybrids haven't required extra maintenance. Even so, hybrid cars have been a better deal for Lazar's drivers than for his company. Gochberg leases his Escape hybrid from Lazar and buys his own gas. Depending on the price of gas, he saves $15 to $20 a day in fuel costs--enough over the past six months to take his wife on vacation later this year.

Lazar gets $2,000 in local government incentives for each hybrid he buys. But each new Escape winds up costing him an extra $8,000, because the Escape costs about $10,000 more than the used Ford Crown Victoria sedans he normally buys. And San Francisco cab companies can't charge drivers more than an average of $90 a day to lease their vehicles. Lazar and other taxi owners are lobbying city officials to raise the maximum daily charge. That would help Lazar buy more hybrids, he argues. At least one city official is sympathetic. "I would support the increase if it's tied to an initiative that would actually improve the environment," says Jordanna Thigpen, San Francisco's small-business commissioner.

Meanwhile, Lazar's business is growing--for his drivers, at least. Luxor Cab gets about 5,000 calls a day, up from 3,500 three years ago, and the company boasts 200 drivers, up from 80 in 1998. Lazar claims he didn't buy hybrid cars to boost his bottom line. "I do it because I'm an environmental guy," he says.