How Green is the Cash for Clunkers?
PIM of SPAIN | August 6, 2009 at 05:28 amby
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Under the arguments to improve the environment, stimulate auto sales and help struggling automakers the Cash for Clunkers program, was introduced. The program has been a huge success—at least in terms of giving a boost to automakers. The response from consumers has been so swift that the initial $1 billion allocated for the program—scheduled to run into November—has almost run out.
Important is to focus on the ‘new normal'. Nearly a decade ago the norm was 0% financing that sold about 20 million cars. Today's ‘new normal' with all the stimulus is to get to 10 million units sold. Since 2000, a large number of vehicles sold were not for replacement the number of cars on the road rose nearly 30 million, doubling the original 15 million. This created an over saturation of the auto market. Which now is unwinding, a process that very likely will take years.
At least the cash for clunkers is a motivation for people who are credit-worthy to buy a new car if they need so and probably are bringing future sales forward again, delaying the new normal process of re-equilibration of the car market.
Although the majority of people should like to participate, they are not able to finance the purchase of a new car. And the very few with cash at hand can do a great buy, more discount or extras. Because of these aspects the results are mixed. But at least it is a better solution than subsidizing automobile manufactures. Let the customer decide which brand they prefer. As previously suggested in other articles, no bailout or stimulus packages, but financial incentives for the taxpayer is a better option. Anyhow the consumption era is over for a very long while, count with that.
Another question is what people would have done if there had not been a clunkers program. There's some evidence to suggest that many would have ended up buying a car eventually anyway.
But what is the program doing for the environment, or to reduce American's gasoline consumption?
“For that $1 billion, Americans will trade in roughly 250,000 cars and light trucks. The average gas mileage of those "clunkers" (vehicles such as aging Ford Explorers) was 16 miles per gallon, according to data released Aug. 5 by the Transportation Dept. The average mileage of the replacement vehicles (led by Ford's small Focus) is 25 mpg.”
With 250,000 cars sold so far the fuel saving adds up to 56 million less gallons on a total consumption per year of 138 billion gallons so the greenhouse emissions go down by 0.04%
"Strangely enough, the average of all cars and light trucks bought in the first half of 2009 was over 28 miles per gallon,"—compared with 27 mpg for 2008 model-year cars and 26.6 for 2007 model-year cars—says Schipper, project scientist in Global Metropolitan Studies at the University of California at Berkeley, who studies fuel economy issues. "We are scratching our heads about that one," he adds. If the trend is toward more fuel-efficient cars anyway, then the environmental and energy savings benefits of cash for clunkers gets even smaller.
The bottom line: “As a stimulus program, cash for clunkers is bringing some new life to the economy. But don't expect it to help save the planet from global warming or reduce U.S. dependence on imported oil. That doesn't mean it's not helping Detroit in the near term, but I don't think anyone sees any long-term benefits," concludes Schipper.
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