Study Concludes Cash for Clunkers Program Is an Expensive Way to Reduce Carbon; Paying Nearly 10x the Projected Price of Carbon Credits
14 August 2009
The federal government’s Cash for Clunkers aims to stimulate the economy, provide relief for automobile manufacturers and reduce greenhouse gas emissions. However, the program is paying nearly 10 times the projected price of carbon credits per ton in the best-case scenario, according to an analysis of the implied cost of carbon dioxide reductions under the program by UC Davis transportation economist Christopher Knittel.
While carbon credits are projected to sell in the US for about $28 per ton (current price in Europe is about $20), Knittel found that the best-case estimates of the cost of the clunkers rebate is $237 per ton. Conservative estimates resulted in an implied carbon cost exceeding $365 per ton, and more likely scenarios produced a cost of more than $500 per ton.
Knittel did not analyze the program’s other key objectives: stimulating the economy and providing relief for automobile manufacturers.
The results suggest that the program is an expensive way to reduce carbon; this remains true when we account for reductions in pollutants...I do not discuss the merits of the program in terms of stimulus. While the program is an expensive way to reduce greenhouse gases, it is certainly possible that the stimulus benefits outweigh the added environmental costs. I leave this question for a broader analysis of the program, but note that key legislators have suggested that the environmental gains from the program are large.
—Christopher Knittel
A gallon of gasoline creates roughly 20 pounds of carbon dioxide when combusted. Knittel combined that known value with an average rebate of $4,200 and a range of assumptions about the fuel economy of the new vehicles purchased and how long the clunkers would have been on the road if not for the program. He also assumed drivers didn’t change their habits, although some analysts have suggested that the owners of new vehicles will drive more than they would have with their old cars.
Knittel is an associate professor and chancellor’s fellow in the UC Davis Department of Economics, a faculty associate at the UC Davis Institute of Transportation Studies, and the policy and business strategy leader of the Sustainable Transportation Energy Pathways Program at UC Davis.
His analysis, titled “The Implied Cost of Carbon Dioxide Under the Cash for Clunkers Program,” was published online 13 August by the University of California Energy Institute. It was funded by the Energy Institute and the Institute of Transportation Studies. The University of California Energy Institute (UCEI), located on the Berkeley campus, is a multi-campus research unit of the University of California system.
Economic Impact? Separately, some US economists are suggesting that the cash-for-clunkers program may be drawing money from other consumer purchases and could also undermine future car sales, according to a report in the Financial Times.
“With income flows very constrained and household balance sheets over- leveraged, any incremental increase is likely to weigh on non-automotive sales,” said Joshua Shapiro, chief US Economist at MFR [Maria Fiorini Ramirez, Inc.], a consultancy, noting that fading interest suggests current car sales are borrowed from the future.
...“It’s a nice success, but there’s a macroeconomic risk going forward,” said Joseph Brusuelas of Moody’s Economy.com. “[In] the first quarter of 2010, the stimulus will begin to wither, and consumption which would have otherwise occurred next year will have occurred in the second half of 2009.”
Resources
Christopher R. Knittel, “The Implied Cost of Carbon Dioxide under the Cash for Clunkers Program” (CSEM WP 189, August 2009)
This would be significant if reducing carbon emissions were the primary purpose of the program, but it's not.
Cash-for-clunkers acts as a trim tab on the rudder. A small force applied to the trim tab moves the rudder, which turns a massive ship. A ridiculously small amount of money, by GNP standards, is changing the behavior of consumers and the industry.
Consumers have leaped far over the low standards for fuel economy improvement set by the program. Ford has announced that, as a result of improved sales, production will be increased in the near term. Cash-for-clunkers is giving a kick start to the economy far beyond its federal outlay. It is giving consumers help in moving away from profligate fuel usage.
The main result of Cash-for-clunkers is a move towards the use of a more appropriate tool for transportation needs. People have bought SUVs and pickups for their ultimate load carrying capacity, a quality used very infrequently, and then operated these vehicles as daily commuters, a high frequency function. Replacement vehicles bought under the Cash-for-clunkers program have been appropriate technology decisions -- i.e., use the correct tool for the task.
Posted by: fred schumacher | 14 August 2009 at 08:30 AM
Fred:
You also point to the basic unfairness of this program which rewards people who bought dreadfully wasteful vehicles at taxpayer expense. 18 miles/gal combined is really pathetic if you think of all the alternatives that were available since the 1980's. Those of us who have vehicles we actually needed (rather than wished for) are shut out. The program should have included vehicles of a certain age in addition to mpg requirements. In other words a 15 year old Corolla, though fuel efficient, for the environment's sake, probably should be taken off the road and replaced with a cleaner new car.
Posted by: RD | 14 August 2009 at 10:10 AM
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The Obama/Reid/Pelosi administration is destroying the country and the economy with their spending. Bush ran the federal debt up high enough with Pelosi and Reid's help. Now Obama wants to QUADRUPLE the debt. What a bunch of hateful people they are... leaving our children and grandchildren to owe over $100,000, EACH, in taxes to pay off the debt. On the other hand they could simply print more money making the present day value of the dollar worthless. Either way, the democrats are scr*wing us and our children.
They can't run the Chsh-For-Clunkers plan yet some want them to make our health care decisions for us. Scary!!!
This is NOT the change that we voted for. We voted for responsible government, not OUT OF CONTROL government.
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Posted by: The Goracle | 14 August 2009 at 11:38 AM
Cash for Clunkers was never about carbon. It's just more Corporate Welfare for companies that can't compete globally.
Posted by: dursun | 14 August 2009 at 12:35 PM
The Cash-for-Clunkers program uses but a relatively small amount of budget of about .2% of the amount spent in the Iraq war, yet can significantly improve the urban air quality. These gas-guzzling clunkers are very like to be spewing out noxious fumes since their catalytic converters are almost used up, and their piston rings and valve stems are like loose and leaking oil, and their oil seals are likely worn out, leaking oil out in the environment. Engine oil are carcinogenic (cancer-causing).
However, the money spent by the US government should be aiming at creating American Jobs: It should fund the purchase of only US-made cars, or cars assembled here with significant percentage of US-made components. In that sense, I can see Mr. Goracle's frustration!
All Stimulus money spent by the US government should stipulate the purchase of only US-made goods or services. That's how our government can get the most jobs and economic stimulation out of the money invested. Interestingly, the US-foreign trade deficit rise again last month. The first priority of the Obama/Reid/Pelosi Adm should be to halt the trade deficit...it's like the Titanic is taking on more and more water...how long can that last until the US economy will sink into the abyss? BTW, the Iraq war was not helpful to the US economy, either, since money was sent abroad to hire foreign workers in Iraq and not circulating back into the USA, unlike WWII during which large number of Americans were employed in US factories producing war materiels.
@dursun,
It's suicidal to let US companies compete globally without world-wide regulation regarding environmental protection, worker safety standards and worker benefits regarding health benefits and retirement. Doing so would turn the US into a third-world countries with mass poverty, slave labor, sweat shops, exploitation of the working class, death-trap factories, and environmental destruction. In fact, it may already slowly happening here: Unemployment rises while those who are working have to work harder with lower wages to take the slack of those were laid off. EXPLOITATION!!! To the detriment of everyone!
Instead, there should be free trade only among countries with comparable standards as mentioned above.
Posted by: Roger Pham | 14 August 2009 at 10:54 PM
Roger:
That is my point. Under the present program designated vehicles can be as new as a year old so "cash for clunkers" is not, strictly speaking, going after old, polluting autos. If it did mpg would not be the overriding threshold.
Posted by: RD | 15 August 2009 at 07:20 AM
So what? C4C wasn't designed to reduce carbon, C4C was designed to take fuel-inefficient vehicles off the road. Moreover, who should give a darn about Goracle's comments? Nearly 8 months ago, folks like Goracle was defending Bush, now he's someone who destroyed the economy with the Democrats help? Folks like me was telling people like Goracle that Bush was leading us to hell, but they didn't listen and will continue to not listen. Sometimes you listen to the facts and sometimes you listen to Beck, Limbaugh and Hannity! The facts will always win! To address the comment that C4C should be focused on purchasing American cars: Almost all of the "foreign" cars bought under C4C was built in US based factories, anchored with American workers, so I say: How "American" is our American cars?
Posted by: Gerald Shields | 16 August 2009 at 02:53 AM
"Sometimes you listen to the facts and sometimes you listen to Beck, Limbaugh and Hannity! The facts will always win!"
Has anybody noticed that the same people who chanted "Drill baby drill!" in the last election are now saying "death panels" are part of the proposed health care reforms? And the facts DON'T always win, a pointless war in Iraq should be proof of that.
Posted by: ai_vin | 18 August 2009 at 10:51 AM
Yes it would have been much more useful to have sent that money to Canada to refurbish a nuclear power plant that is available for refurbisment at the right price. The power plant could be restarted without refurbishment, but it would be economical to do it now while it is idle. ..HG..
Posted by: Henry Gibson | 18 August 2009 at 03:11 PM