Economic Snapshot for August 5, 2009
The “Car Allowance Rebate System” (CARS) — better known as “cash for clunkers” — offers $3,500 to $4,500 to households that trade in an old car for a newer one with higher fuel economy. CARS has proven to be very popular, and the $1 billion originally slated for credits appears to have been all but exhausted less than a week after the program went into effect. By encouraging Americans to upgrade older, less fuel efficient cars, the CARS program is generating much-needed sales for troubled automobile manufacturers and related industries while decreasing gasoline consumption and improving environmental outcomes.
Reduced gas consumption means less dependence on foreign oil, and more money in the pockets of consumers that could be used for domestic consumption. According to the Department of Transportation, the average fuel efficiency of old cars traded in via the program is 15.8 miles per gallon, while new cars had an average MPG of 25.4. These fuel economy improvements will save an estimated $821 per traded vehicle annually (see chart below).
On average, total gas consumption will drop by 87 million gallons per year, and American consumers will use 2.6 million fewer barrels of foreign crude oil. The environmental impact of reduced gas consumption is considerable as well. We estimate that the program will result in about 850,000 fewer tons of CO2 emissions per year (3.4 tons per vehicle annually). The per-vehicle reduction equals more than two-thirds of the annual per household CO2 emissions linked to electricity use.
CARS is a success — the rare program that boosts U.S. manufacturing while simultaneously improving environmental quality. Congress should increase funding and extend the program.
Fuel economy of old and new cars is taken from Department of Transportation statistics on CARS. The average miles driven per year — 14,450 — is the per vehicle estimate from the US Department of Transportation for 2006, the latest available data. We assume that the average credit is $4,000 and that all of the $1 billion is spent on credits, thus producing 250,000 trade-ins. We use the forecasted annual gas price of $2.36/gallon from the Department of Energy. We derive CO2 emissions from the EPA and the Intergovernmental Panel on Climate Change, who assume that 1 gallon of automobile gasoline is equivalent to 19.4 pounds of CO2. Finally, we assume that 58% of all crude oil is from foreign sources and that 44% of all crude oil goes to gasoline production (both estimates from the Department of Energy for 2008).
—Research assistance provided by Joanna Dicke and Caitlin O’Neil.