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MORE Cash for Clunkers

August 4th, 2009

CARSA couple of weeks ago, I talked about the Federal Car Allowance Rebate System (CARS) program, and the effects it might have on the auto industry and the environment.  It turns out, the program has worked a little too well, at least in some respects.  Nearly as soon as the final rules were published, the $1-billion allocated to the program was exhausted.  Now, the House has authorized an additional $2-billion, though the Senate must do likewise for the program to continue.  The debate is now whether or not to spend this extra cash before fully understanding the effect that the program is having.

Obviously, it seems the program was underfunded.  If we assume the average rebate is $4,000 (which is likely not accurate, but it’s the average of the two possible rebate amounts of $3,500 and $4,500, and the math is easy), then the initial $1-billion represents 250,000 trade-ins and new car sales.  That’s only about 1.7% of the yearly new car sales in the U.S. (prior to the meltdown of the auto-industry).  So the fact that $1-billion was burned through so quickly isn’t surprising.  I tend to think the downturn that we had seen in new car sales wasn’t so much a result of people deciding not to buy cars, but rather deciding to delay their car purchases.  With so much pent-up demand, it’s no wonder the CARS program had such an explosive effect.

The program has certainly had an impact on the auto industry.  Today’s Wall Street Journal (Clunker Plan Gives Car Sales a Lift) describes auto makers’ plans to begin increasing production as a result of the boost in sales.  It also mentions that suppliers to the auto industry plan to benefit as well – ripple effects that result in tangible benefits to the economy.

The environmental impact is less clear.  The US Department of Transportation reports that the average fuel economy of new cars being sold under this program is 25.4 mpg, compared to 15.8 mpg for the vehicles being traded in – a 9.6 mpg average improvement.  Assuming these cars are driven an average of 15,000 miles per year (and assuming my previous statement of 250,000 cars is correct), that’s 390-million gallons of gas saved, or over 3.4-million metric tons of CO2 avoided, at a cost of $290 per ton – expensive carbon mitigation by any measure.

…Of course, to quantify the actual effect, one would have to know the baseline – what would have happened in the absence of the program.  (It’s likely that, since traded-in cars were probably bought when gas prices were lower than they are today, their average fuel economy would still be worse than the new cars replacing them.)  Plus, my calculations are so full of my assumptions as to render them pointless.  But, it makes for good blog discussion!

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