Tuesday, August 04, 2009

Cash For Clunkers Might Actually Increase Fuel Consumption and Damage the Environment

Official statement from the Alliance of Automobile Manufacturers"

And while the Cash for Clunkers program has provided much needed economic stimulus to the auto industry, it has also yielded significant energy security and environmental benefits.

Amongst Alliance members Ford reports a 9 MPG increase from trade-in vehicle to new vehicle purchase; GM reports a 54% increase in small car sales since the CARS program was launched; 57%of Mazdas sold so far under the program were highly fuel-efficient Mazda 3’s; Toyota’s top two CARS models – Corolla and Prius – average 39.5 MPG, and accounted for nearly 40% of Toyota’s CARS sales mix. About 70% of their trade-ins have been vans, trucks and SUVs; and Volkswagen reports over 60% of its CARS sales are clean diesel Jetta TDI's which get an EPA combined 34 MPGs.

NHTSA estimates that the average fuel economy improvement for transactions under the CARS program is 9.6 MPG. This amounts to an annual fuel savings of 58 million gallons of gasoline or an average gasoline savings of $580 a year for each new vehicle owner. That equates to an approximate 575,000 ton reduction in carbon dioxide emissions greatly enhancing energy security and reducing greenhouse gases.

MP: There's a major problem with some of the figures quoted above: The fuel savings and environmental benefits are based on a false, STATIC analysis, and NOT a more realistic DYNAMIC analysis. In other words, the fuel savings and emissions reductions are based on the false assumption that there will be NO change in driving behavior when a driver's fuel efficiency improves significantly.

Based on more realistic assumptions (e.g. the Law of Demand), we can expect that increased fuel efficiency will result in an INCREASE in driving. Therefore, the overall net effect on fuel consumption and environmental improvements would be uncertain. That is, if fuel efficiency improves by 20% due to a Cash for Clunkers trade-in, but the driver increases miles driven by 25% because of increased miles-per-gallon (and because he/she is driving a brand new car), he or she would INCREASE spending on fuel, not decrease it. Likewise, there would be an increase in emissions from the increased driving, not a decrease in emissions.

For example, the chart above shows the relationship between fuel efficiency (miles-per-gallon) and vehicle-miles traveled per household from 1983 to 2001, using data (here and here) from the Energy Information Administration. As fuel efficiency increased by 20.4% from 14.2 m.p.g. in 1983 to 17.1 m.p.g. in 2001, the vehicle-miles traveled per household increased by 37.5% over the same period, from 16,800 miles to 23,100. Result? Overall spending on fuel INCREASED. There would certainly be other important factors (fuel costs, disposable income, etc.), but we can be fairly certain that increases in fuel efficiency would contribute to MORE driving, not LESS (or the same).

See Jeff Jacoby's related April 2009 article The Fuel-Efficiency Paradox, where he writes:

Improvements in fuel economy effectively make fuel less expensive, and when costs fall, demand tends to rise. As driving has grown cheaper in recent decades, people have done more of it - choosing to drive to work instead of taking the bus, for example, or buying a second car, or moving to a house with a longer commute, or sending the kids to college with cars of their own. Between 1983 and 2001, data from the Energy Information Administration show, the number of annual vehicle-miles driven by the average American household rose from 16,800 vehicle-miles to more than 23,000 (see chart above).

(Thanks to Dallas Walton for the idea to write this post.)

Update: Worse, cash for clunkers might cause more driving, since new cars are more fun to drive, and more fuel-efficient cars are less costly to operate. Plus, it takes energy to scrap old vehicles and produce new ones, so the net effect of the program might even increase the use of fossil fuel.

~Harvard professor Jeffrey Miron, writing for CNN.

26 Comments:

At 8/04/2009 11:42 AM, Anonymous Benny The Real LIbertarian said...

You know, this cash-for-clunkers program might be one of the few government intrusions into the marketplace that makes sense.
I often think instead of endless federal programs, we should have "X" prizes, or sunsetted cash incentives.
The cash-for-clunkers program seems to get older, lower mpg cars off the road (good for our balance of trade), while getting auto sales up. It cost all of $1 billion, and did not result in another federal agency or department being created.
Sheesh, ramp the clunkers program up to $10 billion--the bailout of AIG alone cost $185 billion, and we just spent $1 trillion establishing a Islamic-socialist-fascist state in Iraq.
BTW, I don't thik we should have spent $185 bilion on AIG, or engaged in a decade-long socialist-Islamic-fascist nation-building effort in Iraq.
I advocate elimination of many federal departments.
But in thw world we have, the "cash-for-clunkers" actually sounds like the limited duration program that makes sense.
Like "X" prizes. We should have offered a $10 billion prize for the head of Osama bin Laden, and let it go at that. We would have had his head long ago, and saved $1 trillion.

 
At 8/04/2009 11:55 AM, Blogger 1 said...

I see that benny the pseudo librarian didn't bother with the link for basic economics: "You know, this cash-for-clunkers program might be one of the few government intrusions into the marketplace that makes sense"...

Consider taking Cafe Hayek's Quiz for Clunkheads

What's odd is that even the WaPo finds this program questionable: When the Clunker Is Greener

The Christian Science Monitor has this interesting bit: ‘Cash for clunkers’: What happens to the old cars

 
At 8/04/2009 12:37 PM, Anonymous Anonymous said...

Harvard econ Jeff Miron wrote an op-ed over at CNN that mentioned that driving will likely increase as MPG increases.

It was truly fucking depressing that literally 95% of the comments were incredulous at this "unsupported fabrication", and essentially calling Miron an idiot and a hack. To be fair, he didn't support his conclusion with any data, though common sense would dictate that none was necessary.

 
At 8/04/2009 1:22 PM, Anonymous Benny The Real "Librarian" said...

As I said, "in the world we have."
I don't understand the right-wing whipping itself up into a frenzy over this $1 billion cash-for-clunkers program, which is about what we spend every day in Iraq. It is 1/185th what we spent on AIG.

Next, let's get angry about Obama's birth certificate.

If Bush had launched this program, there would be fulsome praise about it's use of sunsetted incentives, rather than permanent programs and federal agencies, such as seen in the Department of Agriculture. Oh, except the right-wing never criticizes DOA permanent subsidies, whcih run into the tens of biliosn every year.
Let's get pinch-faced about $1 billion cash-for-clunkers.
Yeah, tell me about it.

 
At 8/04/2009 1:57 PM, Blogger NoWhining said...

"You know, this cash-for-clunkers program might be one of the few government intrusions into the marketplace that makes sense."

Benny -see "The Broken Window Fallacy." You may have to dust off the Econ 101 textbook you have serving as one leg of your coffee table.

"If Bush had launched this program, there would be fulsome praise about it's use of sunsetted incentives,..."

Benny,
See "ad hominem" and "straw argument" in the logic 101 textbook propping up the other end of your coffee table.

 
At 8/04/2009 2:02 PM, Anonymous Benny The Bad Coffee Table Man said...

NoWhining:
I use old egg cartons, not books, to prop up my coffee table. Actually, books would be better...

Again, I am saying "in the current context."

In the current context, this is one program I am not going to fret about. It has some positives; the ones I like is that it is sunsetted, limited, and uses the "X" prize approach, rather than permanent federal agencies.

I expect to see a lot of forthing about federal agricultural programs next. Well, not really. For some reason, waste is okay if it is directed at rural areas.

 
At 8/04/2009 2:06 PM, Anonymous Anonymous said...

Hmmm... so, me replacing my '84 Jeep Cherokee with my new Honda Civic will increase my fuel consumption during my 1 1/2 hour slow-crawl to downtown Chicago? The ULEV sticker vs. an '84 Jeep Cherokee: nahhh... the clunker wins hands down, you know it!

But because I now have a fuel-efficient car, I suppose I could buzz around a lot to burn up more fuel... if only I could muster the energy after finishing up work, driving home in rush hour (1 1/2-2 hours), getting something to eat... I’d first have to find a reason why I’d need to drive around for an additional hour…

 
At 8/04/2009 2:10 PM, Blogger Angela said...

@Benny:

That might be a record for the greatest number of strawmen in a single response.

 
At 8/04/2009 2:49 PM, Anonymous Benny "Strawperson" the Libertarian said...

Angeles:
Please correct that to "strawpeople," you sexist pig.

 
At 8/04/2009 3:27 PM, Anonymous Anonymous said...

Based on Mark Perry's analysis, we should attempt to devise a solution that disincentivizes people to use more gas.

Hmm...what simple, currently-in-place system could we use to do that?

 
At 8/04/2009 3:49 PM, Blogger Paul said...

The original post depends on elasticities. I am sure someone has done some econometric work on elasticity of fuel expenditure (short run and potentially long run). I am guessing that fuel output is relatively inelastic in the short run, a fact fairly evident from the relatively small drop in driving from huge fuel price changes over the last year. If this is true, it undercuts your argument in the short run.

If good research doesn't exist, perhaps one of the regressers at UM could write a nice paper.

 
At 8/04/2009 3:58 PM, Blogger QT said...

Benny,

The effect of this stimulus is miniscule in terms of the # of cars that will be sold at $4500.00 per pop after you factor in the cost of government administration. Even if we imagine that all government services are donated, $4500 per vehicle works out to 222,222 vehicle sales. The auto industry needs millions of sales to pull out of its slump.

At the same time, the destruction of perfectly serviceable vehicles will undoubtedly raise the price of second hand vehicles and parts.

This misguided policy will do little for the auto industry while adversely impacting the poorest members of society...the student looking for a starter car, the small business owner looking for a second hand truck.

As Charles Krauthammer says, this is lunatic economics.

BTW, let's keep it friendly, guys.

 
At 8/04/2009 4:38 PM, Blogger mweb said...

The trends cited assume that fuel efficiency is the only reason for the increase of driven miles by a household.

There could be other factors such as urban living growing more expensive over the years and pushing people further away from their jobs.

If the correlation is true, are you proposing that these more fuel efficient vehicles are damaging to the environment? And won't reduce our dependence on foreign oil? After all, that's what the program promotes - purchasing more fuel efficient vehicles.

 
At 8/04/2009 4:40 PM, Anonymous Ἐγκώμιον Shill said...

"
fucking depressing that literally 95% of the comments were incredulous at this "unsupported fabrication", and essentially calling Miron an idiot and a hack. To be fair, he didn't support his conclusion with any data, though common sense would dictate that none was necessary.

8/04/2009 12:37 PM
Anonymous Benny The Real "Librarian" said...

As I said, "in the world we have."
I don't understand the right-wing whipping itself up into a frenzy over this $1 billion cash-for-clunkers program, which is about what we spend every day in Iraq. It is 1/185th what we spent on AIG.

Next, let's get angry about Obama's birth certificate.

If Bush had launched this program, there would be fulsome
"

Lookie, kids, we can learn new words, words like fulsome. I just looked it up. Now I know a new word.

What has me puzzled is the FBC, Federal Bureau of Clunker. Hey, if they don't feel fulsome from the FDIC then perhaps the FBC will make them feel more satisfied. Although I cannot justify the FBC as a stand alone scam, I am sure that within the backdrop of its parent scam it will look much more logical to us all. I can hardly wait for a better look at a larger part of the fractal.

 
At 8/04/2009 6:44 PM, Anonymous Benny The Real Libertarian said...

Cutie/QT

$1 billion is what we are talking about?

Again, that is 1/185th of what we spent on AIG. It is one day's of outlays for our follies in the Mideast (now magnified by Obama, btw, who is heading into Pakistan and Afghanie. Yeah, there is so much history to suggest that occupying Afghanie will be immensely profitable. And I am sure the $1 trillion invested into Iraq will pay huge dividends. Huge, as Trump would say).
Okay, so now we are losing our bowels over $1 billion for clunkers (a progam that will in fact take gas-hogs off the road, and decrease US oil imports somewhat).
Next up: That Obama birth certificate. Is it real? How about Vincent Foster. They never got to the bottom of that, either.

 
At 8/04/2009 6:58 PM, Blogger randian said...

Likewise, there would be an increase in emissions from the increased driving, not a decrease in emissions.

There would be an increase in CO2, which is not a pollutant. The real pollutants, CO, NOx, particulates, and hydrocarbon vapor, would go way down. Modern cars are so clean their emissions are barely measurable, and are in fact unmeasurable once the engine and catalyst are fully warmed. A Lexus LS460 is an Ultra-low Emissions Vehicle, for example.

At this point, the future emissions standards being demanded by CARB and EPA are worse than useless. Not only will they not result in any measurable improvement in air quality over today's standard, but they will cost consumers billions of dollars to pay for them. It's obvious it's no longer about the environment, it's about (a) bureaucratic turf building and (b) hatred of the automobile.

 
At 8/04/2009 7:06 PM, Blogger randian said...

One neat thing is how Japan deals with this. Registration fees increase as a car gets older and starts to pollute more. Yes, it's an implicit subsidy to the automakers, in that eventually you'll want to get a new car, but it is effective at getting smokers (the auto kind) off the road.

If you look at California's registration fee, you see it goes down as a car ages. Combined with a mild climate, old smokers last a long time on California's roads. An attempt to change this was made, but the authors were slammed by the media as hating poor people because the bill would have increased registration fees on the older cars they tend to drive. Implicitly, the poor have more of a right to pollute than the middle class or rich do.

I'm amused when the left's "poor people activists" and "environmental activists" are at each other's throats over issues like this.

 
At 8/04/2009 7:47 PM, Blogger QT said...

Benny,

In terms of the trillion dollar deficit, I guess it is a drop in the bucket. As we accountants say, the nichels add up to the dollars.

For my nichel, I would at least like a policy which is effective. ie. actually makes a material difference wrt the auto sector or the environment. This policy does not work on either level so I consider it a clunker. Additionally, it helps to encourage more consumer debt. Have we not learned the lesson of excessive leverage?

WRT birth certificates, foreign policy and ag subsidies, aren't we changing the subject just a tad? If you think that I have missed something on Cash for Clunkers, could you tell me what that might be?

If we actually were serious about lowering fuel consumption, we would raise the gas tax. Mankiw has converted me to the logic of pigovian taxes.

 
At 8/04/2009 8:39 PM, Anonymous Anonymous said...

Visit the blog of www.nicholas.duke.edu/thegreengrok/cashforclunkers for the most intellectually honest left wing assessment of the environmental impact of this program. He posted back in April based on proposed policy, not the final policy, but it's a good basis for understanding how ineffective this program is.

$4500 for trading in a vehicle with 18 mpg driven 5000 miles per year for a 22 mpg vehicle, but $0 for a 19 mpg vehicle driven 20,000 miles per year for a 45 mpg vehicle. The program was designed by MORONS, the same people who want to reform our health care system.

 
At 8/04/2009 9:07 PM, Blogger QT said...

Anon,

Thanks for the very informative article.

 
At 8/04/2009 10:59 PM, Anonymous Anonymous said...

"Cash for Clunkers" violates Bastiat's "That what is seen and that what is unseen" essay. Plus the government is paying with borrowed money. Destroying cars and trucks that are still useful is just like Goodfellow's son breaking the shop's window. You might generate economic activity but it comes at great expense and prematurely destroys a useful product and the capital used is not employed for more productive ends.

 
At 8/04/2009 11:16 PM, Blogger Benjamin said...

Cutie/QT-
Yeah, Vincent Foster is not the topic, and I was being dramatic.
But where was all this rancor when Bush fed $185 billion to AIG? $1 trillion to the Iraqis?
But say "Detroit" and American conservatives go bananas. That's my point.
BTW I don;t think 222,222 car sales is anything to sneeze at. I say ramp it up 10 times.
As for getting gas hogs off the road, I say great. Now more money will circulate in our economy, due to less oil imports. BTW I back a gas tax, to $4 federal, so as to break OPEC's effing cartel-thug state back.
Manufacturing in America has actually gotten a bad name in both the liberal and conservative wings of our parties. That is bad news for the USA.
Conservatives scowl when you say "Detroit." Money siphoned out of the Detroit economy, and poured into rural development programs, built up rural America. The Army Corps of Engineers built rural water systems, and the feds built highways and power systems. Rural health clinics--all federal dollars. Ag subsidies by the tens of billions every year, huge rural housing programs.
It was wealth from Detroit, Chicago, NYC, L.A, built all of that.

 
At 8/05/2009 4:03 AM, Blogger 1 said...

"Worse, cash for clunkers might cause more driving, since new cars are more fun to drive, and more fuel-efficient cars are less costly to operate"...

I don't know about that bit, "more fun" since I've had a bit of a drive in a Prius which is in my opinion only marginally safer than putting a box on a roller skate...

Consider the following from Green Hell blog: Gasoline refiners crippled by Waxman-Markey

'Ailing U.S. oil refiners could face a crippling period of contraction under a House-approved climate change bill, making the country more dependent on imported refined products'...

 
At 8/05/2009 10:03 AM, Blogger NoWhining said...

"But where was all this rancor when Bush fed $185 billion to AIG?"

Were you not following this blog during that period? I dare say the overwhelming consensus in this forum was against that policy from the very beginning. Let's not create premises that don't exist to support an argument that has nothing to do with the topic at hand.

 
At 8/05/2009 10:09 AM, Blogger QT said...

Benny,

Total # of passenger vehicles in the U.S. is 250,851,833. 222,222 represents 0.000886% of the vehicles in the U.S.

Total vehicles sold in 2006 was7,667,066. 222,222 cars would represent 0.028984%.

In other words, the program would not even remotely stimulate the auto industry, transform the U.S. auto fleet or reduce carbon emissions by any real means.

The entire exercise is political with the sole objective of buying favor by bribing taxpayers with their own money.

 
At 8/05/2009 1:28 PM, Anonymous Anonymous said...

You all assume you are trading in only one car. I'd like to see the data on that, because I know people that traded in two.

If you have a clunker, as I do own a clunker van -- and its a recreational vehicle that does maybe 500 per year, especially because while its insured and driveable, it does need lots of repairs, and I go into a dealer...I'm going to trade in my clunker, and my toyota, and I'm going to get a car that replaces both the toyota and the van...probably an SUV.

My MPG per year, will be lower, not greater...the SUV will replace the MPG on my daily driver toyota - as well as the minimal miles on the clunker trade in.

The government is only going to track the comparison to one of the cars in my trade-in...they'll declare victory, I'll get the $4500...it all works out.

Except for the taxpayer, but like others have said, the spending isn't going to be contained...ever. Best to just jump in there and take your share.

 

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