Cash for Clunkers – A win-win?
Posted April 30, 2009 at 9:29 am 
Filed in: Recently, the concept of providing trade-in vouchers for older cars that consumers can use only if they purchase new, more fuel-efficient vehicles has gained currency. These “cash-for-clunkers” proposals–two in the House of Representatives and one in the Senate–are now in the mix of energy/climate negotiations in the House Energy and Commerce Committee. The appeal is obvious: boost new car sales and get gas guzzlers off the roads at the same time, reducing oil dependence and combating greenhouse gas emissions.
Market purists would say that the best way to motivate consumers to upgrade their vehicles to more fuel-efficient models is to properly price fuel. Once fuel prices reflect all externalities, and assuming consumers are rational and possess good information about the life-cycle value of higher fuel efficiency, then their new car purchases will become more fuel efficient as the cost of fuel rises.
At the same time, there are several policy reasons why market reliance alone in the face of near-term macroecnomic, energy security and longer-term climate change concerns may be inadequate.
First, taxpayers are devoting billions of dollars to preserving a domestic auto industry. It makes sense that some of those billions be devoted to transforming that industry into one that serves our energy and climate needs as expeditiously as possible.
Second, fuel is not priced appropriately today, and isn’t likely to be priced appropriately any time in the near future, even if legislation setting a “price on carbon” makes it through Congress this year or next–a doubtful proposition, to be sure.
Third, the economic downturn actually exacerbates the problem of aging vehicles consuming inordinate amounts of fuel. In 2008, the median vehicle age in the United States set a new record, just shy of 10 years, according to a study by R.L. Polk & Co. (http://www.autobloggreen.com/2009/03/04/americans-keeping-their-cars-on-the-road-longer-than-ever/). Consumers with shrinking incomes aren’t likely to see the merit in an up-front vehicle investment that won’t pay off for several years–particularly so long as the downturn depresses fuel prices.
So, the easy answer to promoting vehicle stock turnover in the absence of effective market sticks is, as usual, the deployment of taxpayer funded carrots. Senator Dianne Feinstein (D-CA) and Representatives Steve Israel (D-NY) and Betty Sutton (D-OH) are promoting competing plans that differ in details but are modeled after policies that worked to increase vehicle sales in both the EU and South America.
The bills would provide vouchers ranging from $2,000 to $5,000 to consumers who are trading in fuel-inefficient clunkers (based on age of the vehicle and/or low fuel efficiency) for the purchase of vehicles that are 25 percent better than federal fuel efficiency standards (in Sen. Feinstein’s and Rep. Israel’s bill) or simply meet new fuel efficiency standards (Rep. Sutton’s legislation).
Under either approach, cost is an issue, as it should be. Some suggest that funds from future carbon allowance sales could offset at least some of those costs. Another approach would be to use royalties from increased domestic natural gas and oil production as an offset. Neither source of funds would be available at any robust level within the next five to ten years, however.
But concern over costs shouldn’t preclude a thorough examination of this potential win-win solution. With the billions of taxpayer dollars going to bail out the domestic auto industry, wouldn’t it be nice to see some of that money end up in the pockets of consumers to increase our energy security while reducing greenhouse gas emissions at the same time?
Helping consumers, revitalizing an industry, increasing energy security, and combating climate change–that’s more like a “win-win-win-win.”
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