Thursday, August 6, 2009

Cash for Clunkers: Handout or Good Idea?

Tonight the Senate voted to approve $2 billion in additional funding for the wildly popular 'Cash for Clunkers' program. Sadly, no Senators consulted our expert opinions on the topic before casting their vote. If they had, we would have told them that the program is TERRIBLE way to provide economic stimulus and reduce pollution, and they should only vote on it if they want to get re-elected. Then they would have laughed at us and voted for it anyways.

The goal of cash for clunkers is twofold: provide economic stimulus and reduce emissions. By giving consumers a $4,500 rebate toward a new car with a trade-in, politicians hope consumers will be more likely to cough up some cash, boosting the economy, and finally get rid of that old SUV.

So how about that economic stimulus? Industry analysts have recently forecast that of the 250,000 cars sold under the first version of cash for clunkers, only 40,000 would not have sold this year anyways. There other 210,000 is simply demand that has been pushed forward. Demand that has been pushed forward a few months isn't economic stimulus in my book. Only 16%, or $720 of the $4,500 rebate, is economic stimulus. The other $3,780 is simply a handout for people who were looking to buy cars anyways--it would be easier to just mail them a check.

Well, what about emissions? Clunker emissions come from two main sources: burning gasoline, and the car's construction. Scrapping a car under the program will increase fuel efficiency (from 15.8 mpg to 25.4 mpg on average), but reduce the clunker's operational life (from 193,800 miles to 138,000 miles on average). Therefore, you can expect to save 1,300 gallons of gas by scrapping your clunker early instead of waiting until it finally dies. However, because you scrap the car early, the energy required to make the car is 28% higher on a per-mile basis. Fuel consumption goes down, but manufacturing energy goes up.

Translating this to emissions, scrapping a car will result in 3.6 tons of CO2 less being emitted from burning fuel. However, manufacturing emissions go up by 3.2 tons of CO2 due to scrapping the car early--resulting in net emission reductions of only 0.4 tons of CO2. What a boondoggle.

Remember the $3,780 that wasn't economic stimulus? Perhaps we can say it is investment in clean energy. This translates to a carbon price of $9,450/ton CO2. The EU carbon market is pricing CO2 at ~$20/ton CO2 right now, meaning cash for clunkers is almost FIVE HUNDRED TIMES more expensive than pricing carbon through a market based system.

Cash for clunkers, we here at TPG really wanted to love you. But if any Senators ask us, we'll tell them you suck.


  1. I'd like to make a rebuttal on a few points:

    1. With the average increase in mileage, every 40 miles driven on a new car saves a gallon of gas versus the old car. The EPA estimates that on average 12,000 miles are driven per year per passenger vehicle (a). That means each new vehicle saves 300 gallons on average per year! This helps to conserve fuel.

    According to the Argonne National Laboratory, a barrel of oil is 42 gallons, and that produces 19.5 gallons of gasoline (b). This means that the 300 gallons of gasoline saves 646 gallons, or 15.4 barrels, of oil per year per vehicle. The 3 billion in C4C (Cash for Clunkers) should give us about 750,00 car exchanges. This means that every year a new car is being driven 11.6 million barrels of oil are conserved! Although this isn't very much given the fact that the US consumes 20.7 million barrels of oil per day, it's still quite a help (c).

    2. Every gallon of gas saved is money in the pockets of the consumers. If 300 gallons of gas are saved per year at the current rate of around $2.50 per gallon (at least here in OH), then each buyer will save $750 each year!

    If we take the amount of years this math is effective for (essentially how much the old car's lifespan was shortchanged) we get 4.65 years ((193,800 - 138,000) / 12,000). This means the consumer will have saved $3,490 over those 4.65 years!

    3. Let's talk stimulus. The point of stimulus is to stimulate the economy by encouraging people to buy durable goods. With C4C, we can be 100% sure that durable goods are being bought with the stimulus money. On top of that, due to the savings in gas costs, the average consumer will be pocketing an extra $3,490 over 4.65 years. That's an APY of 14.4%! If we assume that some of the saved money is also helping to stimulate the economy, then we've effectively scored more than 100% efficiency in stimulation, and we're conserving oil and reducing CO2 emissions in the process!

    I think that's a pretty effective use of money in a down economy, at least if you subscribe to Keynesian economics.


  2. While the end results are a little lackluster, I'm with Corp. The gains aren't as great as they could be, but the fact remains that they're without a doubt gains. Also, even if the gains over planned sales are only 16% at this point, there's an additional two billion of further sales coming now that the program has been extended. From the NPR interview I don't get any indication that they had done the numbers for extending the program. If that's the case, the number of additional sales over the expected should only increase, improving the margin of new cars that otherwise wouldn't have been bought.

    I do agree that ultimately the biggest gain is in the political arena, since the administration has finally produced a plan that is overwhelmingly popular and successful (if only in a superficial sense). God knows they need that popular boost right now.

  3. I have to agree with Corp that in the end, any gain is a win in this regard. I'd also like to point out that the estimates given in the NPR interview don't seem to factor in any sales generated from the 2 billion extension of the program. If sales rates maintain a relatively steady course with what we've seen thusfar, that additional 2 billion should improve the margin of sales over what would have happened anyway. The more new cars on the road in a short period, the more the numbers for CO2 improvements and stimulus will inch upward.

    For the purposes of this blog, I'd have to agree that the program is kind of a dud. The economics/politics are way better than the environmental impact. But honestly right now the administration needs a solid win politically/economically to help perceptions, and I'm inclined to let them have it.

  4. corp is right that there is little question that CARS is doing some good on both fronts Roger discusses here. However, it is by no means the bang for the buck that it should be, as Roger works out.

    On somewhat of a tangent (though one near and dear to my heart), it strikes me as incredible that the administration especially, and Congress to some extent, are ignoring the great role that infrastructure itself plays in the climate/emissions landscape. Something like 1/3 of carbon emissions come from automobile traffic; with a figure like that (even one far smaller), it seems impossible to make a truly meaningful dent in emissions without greatly reducing the amount of carbon emitted from cars and trucks. I've read that many families effectively (if not consciously) allocate a set amount of money to spend on gasoline, adjusting their consumption based on mileage and cost. The end result is very little net reduction in gas consumption from putting better mileage vehicles on the road. Don't get me wrong; it's a step, but a small, insufficient one.

    Building transit infrastructure much better addresses both goals of Cash for Clunkers. It puts people to work building infrastructure that is more durable than roads and better for the environment in the long-term. It gets people out of their cars and into trains, etc., thereby greatly reducing the amount of carbon emitted in toto.

    I know I've gone off on a great tangent, but I'm with Roger (and Yglesias, and Avent, and many others) that Cash for Clunkers was an interesting idea that has been executed very poorly and has distracted from much better potential measures.

  5. While I am admittedly not well-versed on transportation policy and had to slow down a few times to follow along with this discussion, I'm left with the observation that one point hasn't been explored enough: how could the economic stimulus/reducing carbon emissions plan offered by C4C give us a better bang for the buck? Let's pretend we could go back in time and re-formulate C4C.

    I agree with AMT's train (ok pun sort of intended) of thought: a better, or at least good complement, policy would be to in some way encourage folks to get on mass transit.

    But people may not be willing or find it difficult to give up their cars slash leave them at home (not that I fall in that category...I have never owned a car). Here's what I really mean: recognizing our reliance on cars (i mean i do carpool enough that without owning a car i get use out of other people's), how should Congress stimulate the economy and make people reduce carbon emissions on their vehicles without boondoggle results and waste?

    The sentiment I'm getting from the posts is that C4C is a failure partly because it isn't getting people to cut down their vehicle use and gasoline consumption enough to make a dent in our GHG reduction goals. And it is also a failure on the stimulus front because it isn't doing much to stimulate what was already there anyway. Would it simply have taken more stringent carbon emissions standards to make C4C a smarter policy? I gather the answer to that is no. And how should it have boosted spending?

    I am Congressperson X, and I need a policy alternative!

  6. Corp, good points on how consumers will save money from the improved gas mileage. I admittedly didn't include this in my analysis (mostly because I forgot). But I will offer the counterpoint that these consumer savings don't provide economic stimulus, because they're over a period of 4 years. Also, someone who trades in their clunker now instead of in 4 years when their clunker dies will probably end up with a lower mpg car, because cars 4 years from now will have somewhat higher mpg. Thanks for the comments!!


    Interesting rebuttals to many of the issues raised here, by a Michigan Senator Debbie Stabenow. Her best point that I hadn't thought about was the effect this program has had on rejuvenating the auto credit markets, and how there is a fair amount of backlog to match the people who are moving their purchase forward.

    That said, she's from Michigan, and would therefor most likely endorse trading in your soul if it would sell more cars.