Cash for Clunkers, Economics of

Michael Giberson

Christopher Knittel, at UC-Davis, has run some numbers on the “Cash for Clunkers” program and concludes that it is an expensive way to reduce carbon dioxide emissions:

The Cash for Clunker program aims to stimulate the economy, provide relief for automobile manufacturers and reduce greenhouse gas emissions. In this research note, I present estimates of the implied cost of carbon dioxide reductions under the Cash for Clunker program. The estimates suggest that the program is an expensive way to reduce greenhouse gases. This is true under a wide range of assumptions regarding the increase in fuel economy of new vehicles purchased under the program, how long the clunkers would have been on the road if not for the program, and whether we account for reductions in criteria pollutants. Conservative estimates of the implied carbon cost exceed $365 per ton; best case scenario parameter values suggest a cost of carbon of $237 per ton.

HT to Keith Johnson at the WSJ’s Environmental Capital, who adds that the government estimates Waxman-Markey to reduce carbon dioxide for only $28 per ton. Knittel acknowledges that the Cash for Clunkers program was intended both as a stimulus program and an environmental program, and he limits his attention solely to analysis of the environmental program.

Robert Hahn, back in the early 1990s, analyzed some early “cash for clunkers” efforts in California and concluded that a program targeted to high-pollution areas could produce net benefits. (Published as “An Economic Analysis of Scrappage,” Rand Journal of Economics, 1995.) Key parts of the analysis, Hahn says, are assumptions about the remaining life of retired vehicles – are you avoiding four years of future clunker-emissions or just two? – and the stringency and effectiveness of existing automobile inspection and maintenance programs, which may already be capturing the ‘low hanging fruit’ (i.e., forcing repair or scrappage of high-emitting vehicles that would otherwise enjoy a long life).

UPDATE: For the interested reader, Political Calculations offers a Cash-for-clunkers tool by which you can calculate how long it would take for taxpayers to obtain environmental benefits equal to program costs, and if you don’t like their assumptions you can easily substitute your own.

9 thoughts on “Cash for Clunkers, Economics of

  1. I was under the impression that “broken window economics” had been largely discredited.

    If “Cash for Clunkers”, limited as it was and is, was and is such a success, why not fund replacement of all sub-optimal vehicles on a continuing basis? Why not break all of the windows and make all of the glaziers happy?

  2. I’m assuming the economics would have worked better if the stimulus portion had been left off. In that case the rules could have called for higher mpg requirements which unfortunately might have pushed folks more towards imports.

  3. At first I thought the term “Cash for Clunkers” was the bonuses paid to AIG, Citigroup, and Goldman Sach executives.

    The program seems to have helped Ford, even though they are losing a billion a month and plan on doing so until 2011. It hasn’t helped GM or Chrysler as yet.

    No car lives forever. Maybe the automtive industry should build cars once gain that wear out at 100,000 miles instead of the modern version that can handle 200,000 or more miles before being replaced.

    Danny L. McDaniel
    Lafayette, Indiana

  4. I think the broken window criticism of cash for clunkers is pretty hard to overcome, but I take Knittel’s analysis as contributing to an understanding of how the program fails on its own terms, even without thinking more broadly about how destroying useful assets can’t make us better off.

  5. I’m glad you posted this! I was going to on one of the breaks at my conference, but then got distracted.

  6. Perhaps the sickest part of this program is that the “clunkers” which have been turned in have come from people who could afford to purchase new vehicles to replace them. Many of them were arguably not very “clunky”.

    On the other hand, many of the worst “clunkers” are being used by people who could not afford to trade them in for new cars, but might have been able to trade up to one of the not-so-clunky “clunkers” which the auto dealers were required to demobilize wen they were turned in under the “Cash for Clunkers” program.

    Brilliant! The Law of Unintended (though fully anticipatable) Consequences rides again.

  7. “Cash for Clunker” also hits hard the poor or the first time car buyer because it drives up the price of used cars by making the used car pool much smaller. After all, transportation is a necessity of modern American life. The main economic point is: car have a relatively short live, why pay billions of taxpayers money when many of these will be permanently off the road in scrap yards in a few short years? Yes, it may marginally help the manufacturers. But it does nothing for the carbon emission arguement.

    Danny L. McDaniel
    Lafayette, Indiana

  8. I agree with all the criticisms of Cash for clunkers above, but they are incomple, including the original post.

    All this discussion seems to ignore the value of cash for clunkers to energy security. I’m an avid environmentalist, but not all externalities are environmental.

    Any marginal reduction in oil consumption reduces imports’ oil imports require that we remain on good terms with unsavory regimes in oil producing states. This cost is borne by the country as a whole in money, lives, and other resources dedicated to our militiary. Until some attempt to quatify this cost is included, it is premature to dismiss cash for clunkers as uneconomic.

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