Thursday, June 25, 2009

Eco-nomics: Will 'Cash for Clunkers' Reduce Carbon Emissions?



In my search for the perfect car to replace my current one, I have stated that I am in no hurry: mine is pretty fuel efficient, relatively low-mileage and has been a great car to own and drive. Above is a picture of the Tesla S, an all-electric car that should be available when mine is ready for replacement and can go up to 300 miles on a single charge. Now we are talking my language!

Anyway, the idea that I would hasten to trade-in my current car raises some interesting general equilibrium issues as I have mentioned: what does this do to the used car market, the volume of new car production, etc.

The new 'Cash for Clunkers' bill is a good vehicle to use to discuss these issues. In it, if you have a relatively low mileage car (18 mpg or less) no older than a 1984 model, you can get a voucher worth up to $4,500 for trading-in that car and buying one with significantly higher mileage. But will this lower fuel consumption and emissions? It is not clear. First, with all of these traded-in high mileage cars on the used car market we can expect the price to be pushed down significantly which will increase quantity demanded even with the high mileage. So people will buy these cars that might not have bought at car at all or who would have bought a higher mileage car. Second, this may lower the threshold for scrapping cars and increase the production of new cars which is pretty energy intensive one imagines. So will the net effect be a reduction in carbon emissions? I am doubtful.

6 comments:

Oliver said...

I would question the assumption that people buying the "clunkers" would otherwise buy a higher mileage car or not buy at all. I suspect the clunkers will simply push the even clunkier cars off the used car lots and into the junkyards. But that may just be wishful thinking on my part.

David E Hollingsworth said...

The traded-in cars will not be in the used market, because they have to be scrapped in order to qualify for the program; see the program's FAQ.

However, there are other undesirable effects that seem likely.

The car up on blocks in the front yard suddenly becomes an asset (assuming that it can be made to limp along for a small price). Okay, so the current owner is not likely in the market for a new car, but someone else will be. If you're a dealer, it seems like you could make money by buying up clunkers, then offering to sell it for, say, $2250, to imminent new car buyers to use as a trade in. Technically this gets rid of the clunker, but how likely was it to be on the road again anyway?

I also wonder if this will hurt charities that have been taking vehicle donations.

Patrick Emerson said...

David,

Ah good find, pretty obvious to go to the source - I was trying to find out this detail via news reports.

So this raises a new but different set of questions: if people will only be given the scrap value of their cars, clearly only completely depreciated cars (or thouse within $4500 of this point) will be traded-in.

Hmmm...

Robert said...

I think your idea of buying up clunkers to trade has been though of already: Cars must be continuously insured and registered to the same owner for the full year preceding the trade-in (from the FAQ).

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Ju said...

well people may be willing to drive farther if they have a newer car, take it out more. but it is unclear on the net change. that being said, while this was suppose to be for consumers, it is not. scams abound, buyers beware. check this : http://butasforme.com/2009/07/17/cash-for-clunkers-the-ultimate-bait-and-switch-marketing-tool/