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 ecient
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?