Piles of junked cars.
In the first round of funding, Cash-for-clunkers took 220,000 fuel-inefficient vehicles of the roads.


Another view of the U.S. federal government voucher plan

By Noel Adams

The Cash-for-Clunkers program was funded with one billion dollars which was supposed to keep the program alive until November and was widely expected to take about a quarter of a million cars of the road. It appears that the program was more popular than expected, the one billion dollars being depleted in just one week.

President Obama proposed that the program be extended with an additional two billion dollars. This proposal has met with opposition from both conservative republicans and environmentalist.

Republican Senator Jon Kyl, of Arizona said, "I'm concerned about the process and about how the government is going to pay for this . . . $4,500 is a lot of money to give somebody to buy a car who was already going to buy a car." Senator John McCain, also from Arizona, threatened a filibuster.

Huffington Post blogger Sheldon Filger said, “Using borrowed money to subsidize the purchase of foreign made automobiles does not make economic sense. Cash for Clunkers is a showroom lemon masquerading as brilliant economic policy.” While Fellow Huffington Post blogger Cameron Sinclair says “Why is it that tax paying bike owners are helping foot the bill for our gas guzzling colleagues?” Daniel Sperling, Professor of engineering and environmental science at UC Davis is quoted as saying that a Cash-for-Clunkers plan is “Very hard to justify in terms of oil-use reduction.”

Cash-for-clunkers gives people a rebate for trading in an older low mileage car, truck or SUV for a new car that gets better mileage. It requires the car to be at least 10 years old but less than 25 years old and get combined city and highway mileage of 18mpg or less. The car must have been in use, titled, and insured under the persons name for at least one year prior to trading the car in and it must be in working order. The replacement vehicle has to get at least 22mpg for a car or 20mpg for an SUV and cost less than $45,000.

If the car purchased gets between 4mpg and 9mpg better than the clunker (2mpg – 4mpg for SUVs) then the program provides $3500. If the car gets 10mpg or more (5mpg for SUVs) then the program provides $4500. The dealership must also pass along any other rebates or promotions that they, or the manufacturer, are providing for the purchased car.

The clunker has to be taken off the road, the engine must be disabled, then the car can then be parted out with the exception of the power train, and ultimately shredded. In most cased the cars appear to be going directly to be recycled.

One of the best features of this program is that the money does not count as income so it won’t increase the amount of tax you will pay. Unlike the tax credits given for the purchase of new electric cars and hybrids, it will also not push you into the alternative minimum tax black hole. In effect it is free money – no wonder the program is popular.

The down side is that this program adds money to the national debt, but keep in mind that it won’t be the full billion dollars. The car salesman, who will work on commission, will make more money because of this program and so will pay more tax. The people who make the cars, and the people who work at the factories that supply components, will make more money so they will also pay more tax. The cars will mostly be financed which means more work for lending institutions, improved money flow through our banking system, and more taxes heading for Washington. States will also benefit directly from the program since the vehicles purchased will mean revenue from sales tax and vehicle licensing.

As far as I can see, the program has been widely successful. While the program was supposed to take 250,000 older gas guzzlers off the roads it only managed to take about 220,000 vehicles from the highways. The reason for this is that most people have bought cars that are 10mpg better than the cars their old clunker, meaning they got the maximum value of $4,500.

Many environmentalists feared that people would use the program to trade up from one SUV to another but it appears that the overwhelming number of people have traded in their old SUV for a car. By far the most popular clunker being sent to the crusher is the Ford Explorer SUV while the Ford Focus tops the list of the cars being bought in the program. Other popular cars include the Honda Civic, Toyota Prius, and Chevy Cobalt. The only SUV in the top ten vehicles purchased was the Ford Escape. I should be noted that most of the top ten vehicles purchased in the program, including those from foreign manufacturers, were actually built right here in the USA.

So what does this mean for the environment?

With 220,000 cars traded in at an average fuel saving of 10mpg represents and annual reduction of demand for gas of about 66 million gallons. Now, burning one gallon of gas produces 19.4lbs of carbon dioxide so this clunkers program represents a drop in CO2 output of 1,280,400,000 per year.

Now, these older cars that are being scrapped are also more polluting than the cars that are replacing them. They produce more smog forming ozone and oxides of nitrogen. They will push more unburned hydrocarbons into the air.

All in all, this seems like a pretty good win for the environment. There might be ways to spend a billion dollars and get better results but I doubt anything would produce these sorts of benefits in one week.

The program wasn’t really meant as a benefit to the environment anyway, it was intended to stimulate the auto industry by providing cash to nudge people into making a new car purchase. This has been widely successful with dealers having trouble keeping enough of the more popular cars on the lot. The environmental impact was just gravy.

The House of Representatives approved the two billion dollar extension of the Cash-for-clunkers program late last week but it wasn’t until late on Thursday the Senate finally approved the funding. On August 7, 2009 President Obama signed the extension into law so we are likely to see twice the environmental benefits listed above that we gained from the original program.

We can also learn something from the success of Cash-for-Clunkers. This type of incentive could be just what is needed to boost sales of new technology vehicles like the Chevy Volt or Nissan Leaf when they become available next year.

Some people have often suggested putting a huge tax on gas to spur growth of alternative fuel vehicles. I have always opposed this because of the drag it would have on the economy, and the fact that the revenue from this gas tax would need to be replaced when the use of gas dropped significantly.

Tax credits do work to some extent but the American public is used to instant gratification so the promise of paying less taxes next march, if you don’t finish up paying the alternative minimum tax, is much less appealing than a big, tax free rebate the instant you buy the car.

When we start to role out the next generation electric cars and plug-in hybrids the government should consider structuring incentives to provide tax free dollars at the time the car is purchased instead of tax credits. This could be done by a new version of
Cash-For-Clunkers, or some other rebate type incentive. If President Obama wants one million plug-in hybrids on the roads by 2015 such a p

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Published: 10-Aug-2009


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