Cash for Guzzlers

Congress appears to be moving closer to providing financial incentives for Americans to trade in older cars for more efficient new models. There are good reasons to support such a measure--and a few caveats--though the longer it takes to implement, the less relevant its benefits might seem. That argues against incorporating it as yet another element of the mammoth American Clean Energy and Security Act of 2009--the Waxman-Markey Bill. (Monday's posting examined another aspect of that legislation.) If this provision were enacted quickly, the US would join Germany and the UK, both of which have instituted similar, temporary "cash for clunkers" programs to spur car sales that have been devastated by the recession and credit crisis. This has important implications for the recovery of ailing US automakers, including the Fiat/Chrysler alliance that is expected to result from the latter's bankruptcy filing.

The incentives of up to $4,500 per car are intended to promote the sale of up to a million new, more energy-efficient cars at a time when total US car volumes are down by roughly a third from their pre-crash levels. Despite a drop in the market share of large SUVs, the resulting slower turnover of the US car fleet will delay efforts to make the fleet more efficient, with a corresponding impact on both oil consumption and emissions. The measure also targets the most valuable segment of available fuel economy gains: "gas guzzlers" for which every one-mpg improvement can translate into 40-75 gallons per year in savings for the average driver, compared to gains of less than 10 gallons per year for each one-mpg increment above 35 mpg. While it's not clear that the implied price of oil associated with these subsidies could justify the outlay, it at least stands a much better chance of delivering a financial payout for taxpayers and consumers than devoting subsidies of many thousands of dollars per car to chasing the rapidly-diminishing returns on fuel economy above 50 mpg.

At the same time, we should be clear about what such a program can and can't do. While it could provide a well-timed boost to help struggling carmakers get back on their feet, the program's one-year timeline risks merely accelerating car sales that would happen anyway, leaving Detroit in an even bigger hole next year, after the benefit expires. It is a stop-gap, not a substitute for the sales growth that should accompany the eventual economic recovery. Nor would the old cars traded in disappear from the fleet, unless the final legislation required their scrapping. That compromises the measure's fuel-efficiency benefits in two ways, by keeping the same guzzlers on the road, just in different hands, and by depressing used car prices, making other older, less efficient cars more affordable, relative to the more efficient new cars the measure is intended to promote.

It also can't summon into existence vehicles that don't yet exist. That means it probably won't help the Euro-style economy cars that Ford is gearing up to produce in a converted truck factory, because they likely wouldn't be ready in time. It can't help GM with the launch of its new Chevrolet Cruze 40-mpg subcompact, which is apparently still over a year away. And it certainly won't affect the retooled cars Chrysler is supposed to build using Fiat's technology--they will still be on the drawing board when this benefit ends. The cars (and carmakers) that will benefit the most are the ones already on offer. While it should help Toyota reverse the slide in Prius sales that accompanied lower oil prices and the expiration of its eligibility for hybrid car tax credits, most of the cars likely to benefit will be solid, mid-mpg models like the Honda Accord and Chevy Malibu. A revolution in fuel economy is not in prospect with this legislation.

My advice is to view this measure as a belated addition to the economic stimulus package that might also do a bit of good in reducing oil consumption and emissions. And unlike some of the slow-acting and less-well-defined elements of the February stimulus--which I've recently heard referred to as the "porkulus"--this program appears to be prompt, precisely targeted, and well-bounded.