Plug-in hybrid electric vehicle (PHEV) technology has the potential to help address economic, environmental, and national security concerns in the United States by reducing operating cost, greenhouse gas (GHG) emissions and petroleum consumption from the transportation sector. However, the net effects of PHEVs depend critically on vehicle design and battery technology. To examine these implications, we develop an integrated optimization model utilizing vehicle physics simulation, battery degradation data, and U.S. driving data to determine optimal vehicle design and allocation of vehicles to drivers for minimum net life cycle cost, GHG emissions, and petroleum consumption. We find that, while PHEVs with large battery packs minimize petroleum consumption, a mix of PHEVs with packs sized for ~25-50 miles of electric travel produces the greatest reduction in lifecycle GHG emissions. At 2008 average U.S. energy prices, Li-ion battery pack cost must fall below $590/kWh at a 5% discount rate, or below $410/kWh at 10%, for PHEVs to be cost competitive with ordinary hybrid electric vehicles (HEVs). We find using new battery degradation data that battery swing in excess of 60% should be utilized to achieve minimum life cycle cost, GHGs, and petroleum consumption. Increased swing enables greater all-electric range (AER) to be achieved with smaller battery packs, improving cost competitiveness of PHEVs. Carbon allowance prices have marginal impact on optimal design or allocation of PHEVs, and PHEV life cycle costs must fall within a few percent of HEVs in order to offer a cost-effective approach to GHG reduction.