Cash for Clunkers and Scrappage Schemes

The cash for clunkers program has been a great success in many ways.

Old, inefficient cars are taken off the road and newer, more fuel-efficient, cleaner models replace them. The government subsidises the cars and people get a good deal which they might not otherwise afford. In the US there is the Car Allowance Rebate System (CARS). The program, which has just ended, has been credited with removing 700,000 old cars and trucks from the roads of the US.

In the UK we have hundreds of thousands of new cars on the road since the introduction of the "scrappage scheme" in 2008. It has been hailed as a success by the Society of Motor Manufacturers (SMMT) and has been extended to enable more people to take advantage of it.

There are currently dozens of scrappage schemes in place throughout the UK. A quick web search reveals active schemes.

Around the world, governments have introduced scrappage schemes to stimulate the economy during economic downturn and to simultaneously reduce emissions in line with the Kyoto agreement.

So what's not to like about cash for clunkers?

This page takes a look at whether the environment and the public is getting such a good deal. I don't think this is an open and shut case, by any means but if you are thinking of trading in your car for something better it's as well to think about the issue. Maybe the scrappage schemes such as "cash for clunkers" are not always the best solution. Maybe you can save money and get a good second-hand car - and sell your old car to someone who will nurse a few more years out of it!

Here's a look at recent scrappage schemes.

Please note that this article is a brief overview of a big issue and therefore cannot address all the possible pros and cons.

The scrappage scheme idea

The idea for the cash for clunkers scheme was proposed and argued by Economist Alan Blinder in 2008 in the New York Times. The scheme was supposed to not only help the economy and the car manufacturers but also to reduce economic inequality - and help the environment. The environment would be benefited by the lower emissions and greater efficiency of the more modern cars which replaced the "clunkers".

People who had not much money would be enabled to change their car for a more fuel efficient model.

One test of environmental soundness includes the notion of getting value for energy already spent. Whenever a car is manufactured, huge amounts of energy are used. If you scrap that car early, then you are effectively wasting some of that energy. This is always a part of the equation when modernisation is considered. When we buy new goods and services the "embodied energy" is not so obvious as it has already been paid for.

The arguments against programs such as the cash for clunkers program are neatly summarised by Adam Maji:

[Cash for Clunkers] destroys wealth by not letting these vehicles be used up over their useful life. It destroys wealthby routing scarce resources into activities—in this case, auto construction—that would not otherwise take place, denying other industries access to those resources. It destroyswealth by taking on liabilities, through borrowing, that have to be paid back later by the taxpayers (reducing their purchasing power in the future) or by taxing them immediately (reducing their purchasing power today).

This is an example of the "broken window fallacy" (Frédéric Bastiat) which points out that not all economic activity is beneficial. Money spent on repairing a broken window cannot be bestowed elsewhere. Although the glazier benefits, the home owner is only back where he started - with an intact window - but with less money. Lots of economic activity can be judged against this measure. Green economists sometimes promote alternative measures of wealth such as the genuine progress indicator (GPI), for example, instead of the usual GDP (gross domestic product).

There have also been allegations that the taxpayer has in fact been the overall loser; many of the vehicles would have been sold anyway, so the net subsidy in the US scheme amounted to as much as $24,000 per extra vehicle scrapped.

Economist Christopher Westley dubbed the CARS program the "I Hate the Poor Act of 2009". Cars in the second hand market would have their prices artificially raised by the inflation caused by financing the program and the resulting dearth of good old runners.

The cash for clunkers deal made sure that the vehicles scrapped could not be resold or broken up for spare parts. This necessarily entailed a lot of waste of perfectly good, salvageable parts. This was done because an earlier scheme run in Germany saw scrapped cars reappearing on themarket and being sold on in Africa and elsewhere.

The National Highway Traffic Safety Administration in the USA reported that 23,000 dealers participated in the scheme. Received cars and trucks had their engines filled with sodium silicate solution so that when run, the engine seized. This was to prevent fraudulent activity.

Benefits of the cash for clunkers program

The US Department of Transportation found that many people taking part in the program were downsizing, rather than making equivalent replacements. They calculate that the program resulted in an overall 61% improvement in fuel efficiency. There were unexpected gains, too: more than half of the truck owners traded their vehicles in for cars, so even greater fuel efficiencies were achieved.

There are some positive economic arguments, too; cash for clunkers programs may help people avoid the "liquidity trap". This is the tendency for people to avoid spending during a recession, thereby making the initial problem worse as consumption and demand stutter. However, this has nothing directly to do with carbon reduction. It is clear that we need to find environmental and business strategies which do not promote economic growth at the expense of the environment.

As with most kinds of economic transaction it is clear that there are winners and losers in the equation; but the losers may not be as obvious as the winners. The losers may be the environment and the wealth of ordinary people who ultimately subsidise initiatives such as the cash for clunkers program.

How can the environment be a loser?

Each car on the road takes a lot of energy and resources to build. Collectively, cars on the road contribute nearly 1.5 billion tons of CO2 annually. The cash for clunkers deal does nothing to discourage people from using their cars; it does nothing much to encourage more eco-friendly modes of transport.

In order for the cash for clunkers scheme to work, industry needed to be geared up to meet the demand. The artificial stimulus which the car industry has received has delayed the day when people start to build a more eco-friendly future which is less reliant on the family car.

Many environmentalists would argue that with runaway climate change a real possibility within just a few short years, the time has come to focus on re-structuring industry for a post-carbon future. Anything less is short-selling ourselves for temporary gains.

One practical way this might happen within transport is to get more people moving from four wheels to two. Another useful development is the growth of car clubs. Read about car clubs here and about auto fuel economy. Outfits like Zip cars, or Wombat in the UK, help to reduce our dependence upon the private motor vehicle.

Although the US CARS program finished in 2009, there are still some schemes out there. California still has the Voluntary Accelerated Vehicle Retirement program, for example. It has attracted a lot of criticism.

There are scrappage schemes in place in many European countries and in other parts of the world. Some of these schemes stipulate low CO2 emissions for the replacement cars, which at least encourages buyers in the direction of carbon reduction. The Portuguese government, for example, limits CO2 emissions of the new car to 130 g/km.

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