Thomas White Global Investing
Green Reports

August 13, 2009

The Green Report

Is the Cash for Clunkers Program Helping the Environment?
Is the Cash for Clunkers Program Helping the Environment?

The couple looked excited as they swung into the driveway of the local automobile dealership. They had been thinking of giving up their jalopy for quite some time, but couldn’t find any buyers. Now the perfect opportunity had come up – the U.S. government’s “Cash for Clunkers” program.

The U.S. is the latest to hop onto the Cash for Clunkers juggernaut, which is being led by many countries across Europe. It all began in 2008 when French President Nicolas Sarkozy unveiled a $37.36 billion stimulus plan to help the country ward off the recession. France offered $1414 to scrap an older car that was at least ten years old. But it was in Germany that the Cash for Clunkers scheme really took off. Car sales were juiced up, factory jobs were saved, and the streets were rid of the gas guzzlers.

Introduced in July 2009, the U.S. retread of the German program is the $1 billion Car Allowance Rebate System (CARS). The initiative targets the reduction of carbon emissions by enticing citizens with refund vouchers to trade in their gas guzzlers for more fuel efficient vehicles. To qualify for a $3500 rebate, newly purchased cars are required to have a minimum fuel economy rating of 22 miles per gallon (mpg) and must register an improvement of just four mpg compared to the old clunker. The $4,500 credit requires an improvement in fuel economy of at least ten mpg.

The program became so popular that the kitty ran dry in the very first week. Now the government has extended the program, increasing the budget by another $2 billion. Data from the Department of Transportation has shown that 83% of the vehicles traded in have been trucks and SUVs, while 60% of the purchases are compact cars. Encouragingly, the newly purchased vehicles clock an average of 25.4 mpg compared to the old discarded SUVs and trucks, which averaged 15.8 mpg. This is a fuel-efficiency increase of 61%.

According to U.S. President Barack Obama, the program, “gives consumers a break, reduces dangerous carbon pollution and our dependence on foreign oil, and strengthens the American auto industry.” There is no doubt that the program has ignited a spark in the U.S. automotive industry, which ran out of steam during the global financial crisis. In July, the U.S. automotive industry reported the highest sales for this year, selling 11.2 million units in the month at an annualized pace. But will Cash for Clunkers really help the environment in a meaningful way?

So far, about 250,000 Americans have traded in their cars and that means the gallons consumed have gone down by 56 million per year. Although this may appear to be a huge figure, it is only a fraction of the percentage of the total gasoline consumption in the U.S., which last year amounted to138 billion gallons. That means 56 million gallons is a reduction of only 0.04%, which directly translates into a mere 0.04% in carbon emissions as well.

The debate over the program is raging on and has drawn divided responses. On the positive side, the program takes some of the dirtiest cars off the road thus reducing the severity of pollution. For individuals, the program offers obvious economic perks. As they buy more fuel efficient cars, vehicle owners will end up saving more than $700 in fuel costs yearly.

But opponents of the program are stacking up criticism. They maintain that the program has not addressed the root trouble behind emissions – gasoline. It is a classic case of “efficiency paradox” – by encouraging people to get new cars with higher fuel efficiency, the government is inadvertently promoting more driving. Critics also point out that the program may actually be increasing the overall use of fossil fuel, as it takes energy to reduce the vehicles in the junkyard to a heap of compacted metal. What’s more, it is important that these clunkers are indeed put to rest. In Germany, clever thieves stole more than 50,000 clunkers and turned them in for cash on the black market, shipping them out to roads elsewhere in Africa and Eastern Europe. Taking note of this, U.S. law requires that dealers destroy the clunkers’ engines before a rebate can be awarded, a requirement that is absent in Germany. Critics roar that this will raise the cost of used vehicles for poorer Americans.

Yet, these opponents also offer two solutions to counter the efficiency paradox. The first one is to introduce higher gasoline taxes, which would discourage people from taking out their cars, instead opting for cleaner modes of transport. The second solution is to increase rush-hour tolls on highways, which would encourage travelers to car pool, take public transportation or simply drive earlier or later, reducing the congestion in the air and waste of fuel through idling.

While the program’s role in helping the environment still remains clouded, the common thread that both proponents and critics share is that the Cash for Clunkers initiative is a good stimulus program that is revving up a slumbering economy. It may not be the catch-all solution, but as Bruce Belzowski, a scientist at the University of Michigan’s Transportation Research Institute noted, “There’s 260 million vehicles on the road and you’re talking a quarter-million vehicles….if you don’t start somewhere, where are you going to start?”




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