Cash for Clunkers is a double economic stimulus that pays for itself in oil savings so CO2 savings are free

Given the silly sniping at this small, wildly successful program, I feel obliged to update my last post.

BusinessWeek’s Auto Beat whines, “They say the program was effective in selling cars, but the boost won’t last long enough to really help the car industry for very long.”  Ya think?  It’s a friggin’ stimulus, and a tiny one at that — $3 billion.

A person passes a car in a dumpster placed in front of an auto ...And then we have the academics — UC Davis’s Christopher R. Knittel actually did a study on “The Implied Cost of Carbon Dioxide under the Cash for Clunkers Program,” which got lots of media attention like “Cash for Clunkers Pays Ten Times Market Rate for Greenhouse Gas Reduction.”  I could have saved them a lot of trouble had they bothered to read my May post, which noted As a means of reducing greenhouse gas emissions, this “cash for clunkers” deal is probably among the least cost-effective uses of federal dollars one could imagine.”

Memo to media:  It ain’t “Cash for carbon.”

I was not a big fan of the final version of “Cash for Clunkers” because its mileage improvement requirements were so inadequate, as Senators Dianne Feinstein (D-CA) and Susan Collins (R-ME) explained here.

But in the real world, the public has mostly turned in gas-guzzlers in exchange for fuel-efficient cars “” which perhaps should not have been a total surprise since oil prices are rising, gas guzzlers remain a tough resell in the used car market, and most fuel-efficient cars are much cheaper than SUVs.  So as a stimulus that saves oil while cutting CO2 for free “” it has turned out to be a slam dunk, far better than I had expected.

You can read the government’s final report on Cash for Clunkers aka Car Allowance Rebate System (CARS) here.  The economic bottom line, “According to a preliminary analysis by the White House Council of Economic Advisers, the CARS program” will:

  • Boost economic growth in the third quarter of 2009 by 0.3-0.4 percentage points at an annual rate thanks to increased auto sales in July and August.
  • Will sustain the increase in GDP in the fourth quarter because of increased auto production to replace depleted inventories.
  • Will create or save 42,000 jobs in the second half of 2009. Those jobs are expected to remain well after the program’s close.

I should note that Detroit sold 39% of new vehicles in the program.  Further, as AP reported yesterday, “The Toyota Corolla was the most popular new vehicle purchased under the program. The Honda Civic, Toyota Camry and Ford Focus held the next three top spots. All four are built in the United States.”

I don’t think the CEA factored in the economic benefit of lowering people’s gasoline bill, which puts more money in their pocket to save or spend in their community.

Even Seth Borenstein, the AP science writer I admire greatly, who has a long piece explaining that CARS is a very cost-ineffective way to save CO2, noted that “America will be using nearly 72 million fewer gallons of gasoline a year because of the program, based on the first quarter-million vehicles replaced.”

Well, the basic stats for the second phase, which brings the total cars sold to 700,000 are about the same:

84 percent of consumers traded in trucks and 59 percent purchased passenger cars. The average fuel economy of the vehicles traded in was 15.8 miles per gallon and the average fuel economy of vehicles purchased is 24.9 mpg. – a 58 percent improvement.

Yes, it costs energy to manufacture new cars, but most of that is in the steel and other metal in the car, so you get a lot of that energy back when you scrap it.

Yes, people drive newer cars further, but vehicle miles traveled declined 3.6% in 2008 compared to 2007, in large part because of gasoline prices, though Brookings believes more fundamental trends are at play.  I expect gasoline prices to rise relatively steadily over the next decade, to more than $5 a gallon, so exactly how VMT play out is far from clear.

Let’s assume the new cars are driven nearly 20% more over the next 5 years, and that the average price of gasoline over the next five years is $3.50.  Then we’re “only” saving 140 million gallons a year or roughly $500 million a year.  The $3 billion program “pays for itself” in oil savings in 6 years.  And most of that oil savings is money that would have left the country, so it is a (small) secondary stimulus.

Using a rough estimate of 25 pounds of CO2 per gallon of gas (full lifecycle emissions), then we’re saving over 1.5 million metric tons of CO2 per year — and all of the ancillary urban air pollutants from those clunkers — for free.

The bottom line is that the program seems to be a shot in the arm for the auto industry and economy, while achieving better energy and environmental gains than expected.  Let the sniping begin!

4 Responses to Cash for Clunkers is a double economic stimulus that pays for itself in oil savings so CO2 savings are free

  1. Andy says:

    I didn’t drive less when I owned a clunker. I just prayed a lot more. I suppose we’ll soon be hearing complaints from the Christian right on that aspect.

  2. daniel smith says:

    OK, this all makes sense as far as it goes. But why should the people who were dumb enough or selfish enough or ostentatious enough to buy these monstrous vehicles in the first place be the ones to benefit from the program? I have to say, that really burns me. Why not, for instance, slap a tax on the SUVs, whether old or new, and use the proceeds to subsidize ANYone buying a small car? I expect that couldn’t be done because it would be clear that someone would have to PAY (i.e., the tax). With this nifty system, we can make it appear that nobody has to pay anything. Wahoo! Except, if we bother to think about it, we all have to pay for the handout through our taxes, plus, of course, there are all the people who’ve had to breathe the extra pollution from SUVs, people who’ve gotten run over by them (I can’t imagine they have not contributed to extra traffic deaths), and so on.

    Or am I missing something here?

  3. Bob Wallace says:

    One of the reasons that people bought very large vehicles, even when they might have preferred something smaller, was that the tax code rewarded large/heavy truck purchases and SUVs are considered trucks for tax purposes.

    Craig Severance gives a nice explanation of how a change in the tax code pushed buyers toward larger, less efficient vehicles.

  4. Your article failed to mention all the “unintended consequences” of cash for clunkers like its negative impact on auto repair shops, auto parts stores, used car sales and car donation charities.

    [JR: There are unintended positive consequences and unintended negative consequences. They are I think second order effects, given how small the program is.]