Study Concludes Cash for Clunkers Program Is an Expensive Way to Reduce Carbon; Paying Nearly 10x the Projected Price of Carbon Credits
The federal government’s Cash for Clunkers aims to stimulate the economy, provide relief for automobile manufacturers and reduce greenhouse gas emissions. However, the program is paying nearly 10 times the projected price of carbon credits per ton in the best-case scenario, according to an analysis of the implied cost of carbon dioxide reductions under the program by UC Davis transportation economist Christopher Knittel.
While carbon credits are projected to sell in the US for about $28 per ton (current price in Europe is about $20), Knittel found that the best-case estimates of the cost of the clunkers rebate is $237 per ton. Conservative estimates resulted in an implied carbon cost exceeding $365 per ton, and more likely scenarios produced a cost of more than $500 per ton.
Knittel did not analyze the program’s other key objectives: stimulating the economy and providing relief for automobile manufacturers.
The results suggest that the program is an expensive way to reduce carbon; this remains true when we account for reductions in pollutants...I do not discuss the merits of the program in terms of stimulus. While the program is an expensive way to reduce greenhouse gases, it is certainly possible that the stimulus benefits outweigh the added environmental costs. I leave this question for a broader analysis of the program, but note that key legislators have suggested that the environmental gains from the program are large.—Christopher Knittel
A gallon of gasoline creates roughly 20 pounds of carbon dioxide when combusted. Knittel combined that known value with an average rebate of $4,200 and a range of assumptions about the fuel economy of the new vehicles purchased and how long the clunkers would have been on the road if not for the program. He also assumed drivers didn’t change their habits, although some analysts have suggested that the owners of new vehicles will drive more than they would have with their old cars.
Knittel is an associate professor and chancellor’s fellow in the UC Davis Department of Economics, a faculty associate at the UC Davis Institute of Transportation Studies, and the policy and business strategy leader of the Sustainable Transportation Energy Pathways Program at UC Davis.
His analysis, titled “The Implied Cost of Carbon Dioxide Under the Cash for Clunkers Program,” was published online 13 August by the University of California Energy Institute. It was funded by the Energy Institute and the Institute of Transportation Studies. The University of California Energy Institute (UCEI), located on the Berkeley campus, is a multi-campus research unit of the University of California system.
Economic Impact? Separately, some US economists are suggesting that the cash-for-clunkers program may be drawing money from other consumer purchases and could also undermine future car sales, according to a report in the Financial Times.
“With income flows very constrained and household balance sheets over- leveraged, any incremental increase is likely to weigh on non-automotive sales,” said Joshua Shapiro, chief US Economist at MFR [Maria Fiorini Ramirez, Inc.], a consultancy, noting that fading interest suggests current car sales are borrowed from the future.
...“It’s a nice success, but there’s a macroeconomic risk going forward,” said Joseph Brusuelas of Moody’s Economy.com. “[In] the first quarter of 2010, the stimulus will begin to wither, and consumption which would have otherwise occurred next year will have occurred in the second half of 2009.”
Christopher R. Knittel, “The Implied Cost of Carbon Dioxide under the Cash for Clunkers Program” (CSEM WP 189, August 2009)