Out of Control Policy Blog

Was Cash For Clunkers Successful?

Cash for clunkers was a huge success! We helped the auto dealers! We helped the auto manufacturers! We've done more to save the environment! Hooray for this wonderful program!

... at least, that's what some would like you to think.

Was the Cash for Clunkers (C4C) program successful? That's the question at hand. I guess it might depend on what you mean by success. It's not completely clear if the real reason for the program was a subsidy for the auto industry or climate change activism. It is possible that it was both. The thing is that, by the numbers, I don't think the program helped much in either way.

Let's start with the environment. From The New York Times:

On average, cars are driven 12,000 miles per year, according to government statistics. Considering that the traded-in clunkers had an average fuel economy of 15.8 m.p.g. while the new ones deliver 24.9 m.p.g., a swap saved some 278 gallons of gas per year — which would have released almost 2.8 tons of carbon dioxide when burned.

Assuming the clunkers would have been driven four more years, the $4,200 average rebate removed 11.2 tons of carbon from the atmosphere, at a cost of some $375 per ton. If they would have been driven five years, the carbon savings cost $300 per ton. And if drivers drive their sleek new wheels more than they drove their old clunkers, the cost of removing carbon from the atmosphere will be even higher.

To put this in perspective, an allowance to emit a ton of CO2 costs about $20 on the European Climate Exchange. The Congressional Budget Office estimated that a ton of carbon would be valued at $28 under the cap-and-trade program in the clean energy bill passed by the House in June.

So we did get rid of some emissions, but we're paying a ton of money for it. The crazy part is that C4C paid 15 to 19 times more than the current EU cap and trade regiem—and that program has been critiqued as largely unsuccessful as it is. The same thing for the proposed cap and trade bill in the US, a program that has a lot of holes and little political traction at the moment, of which C4C paid 10 to 13 times more than the projected cost.

You might argue that, well, at least we did something, but that is not a good argument. Sure, climate change is a real thing and there might be stuff we can do about it, but just because it is real doesn't mean cost-benefit analysis should go out the window. Just look at the oil saved. Saving oil is a good thing right? How much do you think this program saved? From FEE:

Taken together the average fuel economy of vehicles traded in was 15.8 miles per gallon, while the average for the clunker replacements was 24.9 miles per gallon.  And according to Ford Motor Company, this kind of fuel-economy improvement translates to a reduction of five to ten million barrels of oil consumed over the next five years.

Okay, so an auto company, bound to overestimate as it is, says we saved 5 to 10 million barrels. Not bad you might say. Now how much do you think we use each day? Try 9 million barrels. Yes, the whole, entire Cash for Clunkers program saved one day's worth of oil. At the cost of $3 billion, that means $300 to $600 per barrel of oil, which is currently trading at $68 per barrel. So in a cost benefit, it would have been better just to buy oil with that money and set it aside. But ultimately, though we need ask whether it is the government's role to spend taxpayer money to save oil or reduce CO2 emissions.

Now lets think about the auto dealers:

Sure they sold cars, but how many of those cars were gonna be purchased anyway? The estimated national average for a 2009 Toyota Prius, one of the most popular types of fuel efficient cars purchased, is currently $23,435. Now lets assume you got the maximum trade in, $4,500. You still have to shell out $19,000. So here is my question, how many people weren't planning to get a new car, but once the program started figured, hey, I've got $19,000 just sitting here, I'll get a new car. The answer: very few. What dealers are actually going to discover is that nearly everyone who did buy a car was planning to in the next three to six months. They just bumped up the purchase time to take advantage of the offer.

I've written about this before, but I'll say it again, there is no statistical evidence yet to show that C4C actually caused anyone to decide to purchase a new car that wasn't already planning to. Furthermore, for those few that maybe weren't planning on getting a new car, but did because they actually did have the $19,000 sitting around, the odds are that they "clunker" was in pretty good condition. Good enough anyway for them not to be thinking about getting a new car even though they could afford one. So in that case, we're talking about just destroying value and wealth through taxpayer subsidies. Not good.

To call this program a success is like walking on to a lot where a dozen people are about to sign papers on a new car and saying, "Hey, I'll give you $1,000 if you buy that car." The people, pens in hand, will certainly take the offer and then continue with the paper work. Successful program?

Really, this information isn't that new, its just fascinating to keep berating. This post could be seen as part II of this post from August 24. Also, see my colleague Shikha Dalmia's column in Forbes from a few weeks back or check out Reason's research on climate change here.

Anthony Randazzo is Director of Economic Research


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Comments to "Was Cash For Clunkers Successful?":

Cars4Charities | September 9, 2009, 1:24pm | #

Your figures don't take into account the amount of energy used to crush 700,000 cars or to manufacture the new cars that were purchased. When you add it all up the minimal benefit to new car sales was overshadowed by its negative impact on other industries, including auto repair, auto parts, used cars and charity car donation.

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