## 14 August 2009

### CO2 and Cash for Clunkers

An analysis has been released by the University of California Berkeley's Center for the Study of Energy Markets by Christopher Knittel titled " The Implied Cost of Carbon Dioxide Under the Cash for Clunkers Program" (PDF). Here is its conclusion:
Cash for Clunkers remains an expensive way to reduce greenhouse gases even when we "credit" for criteria pollutants. Table 2 reports the results using the parameters from the base case. The implied cost of carbon is \$516, \$365 and \$269 for three, four and five year scrappage time, respectively. If we increase the social costs of each pollutant by 50 percent, the implied cost of carbon remains above \$237 per ton. This is the lower bound of the estimates in this note. . .

The Cash for Clunker program is both a stimulus and environmental program. In this note, I calculate the implied cost of greenhouse gas emission reductions and find that they exceed those estimates from the Waxman-Markey bill by nearly tenfold.
On that last point the paper says:
Another way to interpret the savings in greenhouse gases is to ask how much more fuel ecient
would the new vehicles have to be for the program to be cost effective? The CBO recently projected the allowance prices under the Waxman-Markey cap and trade program would be \$28 per ton. At any reasonable scrappage rate, the cost per carbon under the CfC program exceeds this tenfold. Indeed, even if the new cars were greenhouse gas free, the clunkers would have had to have been driven 12,000 mile per year for over 20 years if not for the CfC program. This is not surprising once the simple calculations are done. At 16.3 miles per gallon, driven 12,000 miles, the clunkers consume 736.20 gallons per year, thereby emitting 7.36 tons of carbon dioxide per year. At an average CfC rebate of \$4,200, the program must save 150 tons per vehicle to have an implied carbon price of \$28. Once the greenhouse gases of the new vehicles are considered, the clunkers would have had to have been on the road for nearly 60 years, even with no rebound or adverse selection.
Did someone say clunker?

Dan C said...

I'm not sure the primary target of the program was GHG emissions reductions, but rather as a stimulus to the auto industry. One can argue about whether or not they think it actually succeeds in this latter objective, but in the end it is still injecting money into an ailing industry and helping spur consumer spending (and in this respect its done very well).

I realize that the program has been touted, perhaps excessively, for its environmental friendliness, but I see that as more of an ancillary benefit--and if viewed in this way, then any emissions reduction is beneficial.

Roger Pielke, Jr. said...

-1-Dan C

Agreed

However, even the macroeconomic benefits are under question:

http://www.ft.com/cms/s/0/940088ae-8830-11de-82e4-00144feabdc0.html

Maurice Garoutte said...

The calculations seem to assume that the new cars would not have been purchased except for the clunker program. If the assumptions are changed to assume that demand is just moved up one or two years and that after two years the program puts no new cars on the road the CO2 savings would be near nil. If you change the assumption that people will drive new reliable cars more miles than their old clunker the CO2 emissions may go up.

With the same assumptions used to evaluate the stimulus effect on the new car market it will be like a sugar high. With the demand moved forward the future for the market is dim.

The only permanent effect of the clunker of a program is the destruction of working cars. The wealth represented by those cars is gone. Those cars are permanently out of the market for people who depend on low cost transportation.

Mark B said...

Dan C

You say:

"I'm not sure the primary target of the program was GHG emissions reductions, but rather as a stimulus to the auto industry."

And then:

"I realize that the program has been touted, perhaps excessively, for its environmental friendliness, "

So if I understand you correctly, you must be saying that while the program is touted for its environmental friendliness, in truth it was intended as a stimulus to the auto companies.

So the environmental component was a lie. An empty claim of green-ness used to mask a jobs program for Detroit.

Then again, if environmental effects are not worth the money, then why the hell are they pouring sand into perfectly good engines and destroying them? If you take part of the gross national product and destroy it before its time, doesn't that make us poorer? If this is logical as economic policy, then why isn't the government buying cars from General Motors and then sending them straight to the shredder? The logic boggles the mind.

Stan said...

Cash for clunkers is the broken window fallacy writ large. Perhaps we can look forward to a day when politicians understand the concept of opportunity costs and the difference between stocks and flows. Or at least read and understand a bill before they vote on it.

Even better, but less likely, we can hope for a day when journalists have enough intelligence and enough independence to ask a Democrat in DC a probing question.

Dan C said...

-4- Mark B

To your first part: I think it can be both (economic stimulus and environmental), and if you view the emissions reductions as a secondary goal then I see no reason why you can't promote that aspect as well. Is it a bit of greenwashing? Yes. But a cost-benefit on the environmental component alone isn't a fair assessment of the program.

To your second part: I would argue though that you have a bit of a chicken and egg problem--on one hand, you have an ailing auto industry (and economy), and on the other hand you have consumers that are nervous to spend, particularly on big-ticket items like cars. So while some consumers may indeed have simply moved up their purchases by a year or two, the value of this spending to the automakers may be greater now (while they struggle to stay on their feet) than it would be 1-2 years down the road (when they are more financially sound).

I agree with you that, in aggregate, destroying useful items and replacing them with new ones does not create wealth and thus seems a bit stupid. But I also think the timing of consumer spending matters, and that's where the value of the program may lie. Of course, I can't prove that statement to be true, so it's certainly open for debate.

edaniel said...

Have the carbon costs of the capital that constitute the rebate cash been factored into these analyses?

Is this a reasonable question?

Thanks

Vernon Malcolm said...

Now we need "Cash For Shanties" to tear down all those haz mat homes that cripple poor kids from birth and replace them with new, safe, efficient housing.