Weathervane: A Climate Policy Blog from Resources for the Future

Nov24

The Intersection of Autos and Policy

U.S. auto policy is in the midst of a revival of relevance in the wake of Cash for Clunkers and with the nation watching the Obama administration’s handling of GM. Recently, RFF’s Weekly Policy Commentary series set out to examine key components of other U.S. auto policies.

In this November 13 commentary, RFF fellow Shanjun Li took a closer look at the popularity of hybrid vehicles among U.S. consumers. He writes:

Today, hybrids represent roughly three percent of new car sales because of—or perhaps in spite of—federal subsidies, which are due to expire across the board in 2010.

The evidence to support the success of those subsidies is somewhat mixed. For example, in the two years since federal subsidies for the most popular hybrid, the Toyota Prius, have ended, it has continued to gain market share. While most observers agree that federal subsidies were critical to gain market acceptance of what was then a brand-new technology, is that still true today? Or is what matters most the price at the pump?

And what of those prices at the pump?

In his November 20 commentary, Kenneth Small of the University of California at Irvine wondered if the time has come for a federal gas tax increase. According to Small, the convergence of three key factors—an infrastructure in need of updating, petroleum dependence and climate change, and budget deficits at both the state and federal level—may make the time right to raise gasoline and diesel taxes:

It’s rare that a single policy instrument can solve several problems at once. Rarer still that the political and economic motivations to address these problems converge; and almost unheard of that lessons of history lead to the same conclusion. We are in such a situation today with respect to taxes on motor vehicle fuels. It is time for a dramatic, permanent increase in these taxes.

Read Li’s What Motivates People to Buy Hybrids? and Small’s Triple Convergence toward a Higher Gasoline Tax plus nearly 40 additional commentaries at RFF’s Weekly Policy Commentary Energy and Climate page.

Published: Nov-24-09 | 0 Comments

Aug28

Evaluating Cash for Clunkers: The Jury is Still Out

Cash for Clunkers

This summer’s “Cash for Clunkers” program has been vastly more successful at generating new car sales than expected. Under the so-called Car Allowance Rebate System (CARS) passed by Congress at the end of July, qualifying car buyers could trade in old cars and trucks for more fuel efficient new vehicles and receive a rebate of $3,500 to $4,500, depending on the fuel efficiency gain. The initial $1 billion in funding for the rebates, planned to last for three months ending in October, ran out in a matter of days. In early August, Congress approved an additional $2 billion for the program and, as of this week, it too has been exhausted.

The intent of the program was two-fold. It was designed to increase new car sales and stimulate the struggling car industry in the U.S., while improving the fuel economy of the overall fleet. Whether the program has done a good job of meeting these goals is difficult to determine, both because the full effects will play out over time and because we don’t know the “counterfactual,” or what would have happened if the program had not been adopted. But, we have some information about the program now and more will be revealed in the future.

Stimulating Additional Sales or Shifting the Timing of New Car Purchases?

In terms of the first goal, the program has clearly had a significant impact on sales over the last month. When the dust settles the total $3 billion dollars spent under the program will account for about 700,000 new vehicle sales and the same number of scrapped clunkers. This would results in an 8 percent increase in overall new vehicle sales over what had been predicted for 2009 before the program began. There is some evidence that it also had the additional effect of generating even more sales from people who were drawn into dealer showrooms, but did not qualify for the program. The program clearly drew down the high vehicle inventories and boosted the confidence of both dealers and consumers.

But the truth is we don’t yet know how successful the program has been at increasing the sales rate of new vehicles. To the extent that any vehicles traded in under the program would have been traded anyway, this just represents a transfer from taxpayers to the new car buyers. Or, it is possible sales which would have been spread out over the next few months are occurring now as consumers want to cash in on the benefits of the program. It is really an issue of how the timing and amount of new car sales will change over the next few months to a year. The short-term effects have been dramatic, but how lasting will they be?

Initial assessments by the auto companies suggest that there will be a net increase in total sales as a direct result of the program through 2009. And, although in July there were no plans by auto companies to increase production, in recent weeks several manufacturers have restarted some assembly lines and have hired back workers at some plants. Although it is impossible to know exactly what would have happened without the program, there are ways to analyze the data over the next few months that will provide good information on important outcomes such as total new sales, increased production, and additional jobs.

Improving Efficiency in the Fleet but Increasing Miles Driven?

The other goal of the program was to increase the fuel economy of the fleet by inducing consumer to trade in low fuel economy vehicles for those with better fuel economy. Edmunds has tracked the vehicles traded in and the vehicles purchased under the program. They find that all buyers, regardless of the trade-in, are opting for smaller more fuel-efficient vehicles at a higher rate than before the program began.

Newly-purchased vehicles tended to get about 25 mpg while the clunkers traded in averaged 16 mpg. This will result in a modest improvement in the average fuel economy of new vehicles sold, regardless of any changes in timing of new sales the program has generated. In addition the clunkers are destroyed so unlike other trade-ins, they will not be sold in other markets or to other countries and therefore will no longer contribute to the emission of greenhouse gases. However, this slightly newer car fleet created by the program may be driven more miles since newer vehicles tend to be driven more.

Other benefits

The program has been criticized because it allows the replacement vehicle for trucks trade-ins to have fuel economy improvements that are relatively small compared that for cars. But it is gallons saved that matters for reducing energy consumption. So, a driver who shifts from a large vehicle that gets 15 mpg to a more efficient one that gets 19 mpg will save as much fuel as a driver who goes from a 26 mpg car to a 41 mpg car (saving about 1.4 gallons of gas if going on a 100 mile trip), assuming the same number of miles driven in both cases. Improving the fuel economy of the biggest gas guzzlers is important, even it those improvements seem relatively small.

There are other benefits that may not have been part of the original intent of the legislation but which may be important if the program really does result in a newer fleet. One such benefit is the improvement in safety features of the newer vehicles compared to those they replace. New vehicles, even SUVs and light trucks, will tend to have features such as side airbags, quicker stopping distances, and electronic stability controls. Another benefit is in reduced air pollutants such as hydrocarbon and NOx which contribute to local air pollution.

On the cost side, there is substantial lost value of the vehicles that were traded-in and then destroyed. Their used car values have been estimated to average about $1,500 a vehicle. Although the deal offered must have been enough to make participants better off, there was value to society in these vehicles as reflected in their used car prices.

Could we have done better?

A full assessment of the program must wait for market forces to play out over the next few months. There is much to be learned from this program, about the behavior of consumers to the subsidy, the extent of the benefits, and the full examination of whether benefits exceed costs. We can then evaluate the important question - could we have done better with the $3 billion to reduce GHG emissions and provide jobs?

Virginia McConnell is a senior fellow at Resources for the Future and professor of economics and UMBC. She works on environmental issues related to air pollution and urban transportation.

Published: Aug-28-09 | 0 Comments

Jun08

A Closer Look at 'Cash for Clunkers'

Congress, Cash for Clunkers

A pair of bills making their way through the House and Senate would allow auto dealers to provide vouchers to consumers toward the replacement of their existing vehicles with new vehicles getting better fuel economy. The vouchers are worth $3,500 to $4,500, depending on the type of vehicle being replaced, its fuel economy, and the fuel economy of the new vehicle.

This program is similar in some ways to the vehicle retirement programs that have been used by many states and local areas with the goal of reducing emissions of the local air pollutants hydrocarbons and NOx. These earlier programs were reasonably cost effective (at least compared to many of the local alternatives available), but they really did not generate large emission reductions. Furthermore, the programs that worked best were of necessity short term. In a continuous program there were some incentive problems that would be hard to overcome. For example, basing eligibility of the program on age, as most short-term programs did, created an incentive for a motorist to hold (and perhaps drive) a dirty vehicle that might otherwise be got rid of until it's old enough to be eligible. Likewise, as all cars or trucks of the same vintage were built to meet the same emission standards, it was difficult to target the vehicles that would generate the largest benefits from retirement. Actual emission rates varied tremendously, of course, but largely because of how well they were maintained. And it was difficult to determine how much the vehicles being retired were being used. Obviously, given the same emission rate, the most desirable vehicles to retire are those being used the most, but those are the most valuable ones, and thus the ones least likely to be offered for retirement. At any rate, most programs had safeguards to prevent retirement of vehicles not use (e.g. they had to be registered to be retired).

The cash-for-clunkers program outlined in the bills would avoid most of these incentive problems, fortunately. However, it will not avoid all of them. Like most subsidy programs that try to change behavior, it will tend to reward those who were going to do the right thing anyway—in this case buy an energy-efficient vehicle.

Many households now own at least three vehicles, and often the third or fourth vehicles are not driven very much. That ancient gas-guzzler that’s just sitting in your driveway might be an attractive way of knocking a few hundred dollars of the cost of a new car. And even if it you’re not in the market for a new car, you might profit from selling it to someone who is.

Winston Harrington is a senior fellow at Resources for the Future. His research interests include urban transportation, motor vehicles and air quality, and problems of estimating the costs of environmental policy.

Published: Jun-08-09 | 0 Comments