Legislation now moving through Congress to encourage consumers to trade in their old clunkers for newer, energy-efficient cars is well-timed to help beleaguered automakers, lower our dependence on foreign oil, and clean up the air we breathe. The programs outlined in the legislation would offer premium rates for older vehicles as an incentive for consumers to purchase more fuel-efficient models, and would be complemented by a new lending program launched this week by the Obama administration to help automakers and dealers sell more cars.
But first, the legislative details. Two new legislative proposals by Sen. Diane Feinstein (D-CA) and Rep. Betty Sutton (D-OH) would introduce a so-called “cash for clunkers” program to provide incentives to registered owners of older high-fuel-consumption cars to replace these cars with fuel-efficient models or vouchers for public transportation.
Under Sen. Feinsten’s bill, S. 247, old cars that qualify for the program must be drivable, registered in the United States and have a “when-new” fuel economy rating of less than 18 miles per gallon. New vehicles must have a fuel economy rating that exceeds federal targets for that class of vehicle by at least 25 percent and a manufacturer-suggested retail price of less than $45,000 and be a model year 2004 or later.
Initial estimates set the cost of the program between $1 billion and $2 billion a year. Feinstein’s bill envisions the program lasting for four years and encouraging the retirement of up to 1 million vehicles a year, while ultimately saving between 40,000 and 80,000 barrels of motor fuel a day.
Rep. Sutton’s plan would have the government buy cars and trucks that are at least eight years old and send them to the scrap yards or to be recycled for parts and materials. Owners would receive vouchers worth between $3,000 and $5,000 to buy more fuel-efficient North American vehicles or use more public transit. New cars must offer at least 27 miles per gallon on the highway and trucks must meet 24 mpg—the better the fuel efficiency of the vehicle, the better the voucher. The new cars must not cost more than $35,000.
In the first year of such a proposed program, a person trading in a vehicle that is model year 2002 or later would be eligible to receive $4,500 for purchase of a new vehicle, $3,000 for purchase of a used vehicle, or $3,000 for transit fare credit. For model-year vehicles 1999 to 2001, drivers would get $3,000 for the purchase of a new vehicle. Those who trade in vehicles that came out in 1998 or before could get a credit of $2,000 for a new vehicle. A person could obtain no more than one voucher in any three-year period. Dealers and scrap recycling companies could also get payments of $50 per vehicle. Initial estimates set the cost of the program between $1 billion and $2 billion a year.
The vehicle exchange proposals introduced thus far are good starting points, and the Center for American Progress Action Fund looks forward to helping refine the details to produce the most environmentally effective and economically stimulative proposal possible. Both pieces of legislation clearly would address critical problems in our economy. Increasing job losses, oil dependence, and global warming pollution all call for serious action. As the current recession deepens, we are losing jobs in the automotive sector at alarming rates. The number of new cars sold annually in the United States has declined by more than 2 million units since 2005, which has translated into plant closings and the loss of hundreds of thousands of jobs in just a few years.
Or consider that 60 percent of the 21 million barrels of oil we consume daily in the United States is used by the nation’s 250,000,000 cars and light trucks. While cars that are 13 years or older account for only 25 percent of the miles driven, they produce 75 percent of all pollution from automobiles. And when gas prices rise, Americans driving less-efficient vehicles are the most acutely affected, straining household budgets, reducing consumer spending on other goods and services, and exacerbating the economic slowdown. Yet raising fuel economy standards will do nothing to increase the turnover of these existing cars that are already on the road. For that, we need a new strategy.
The environmental benefits of a cash-for-clunkers program are as impressive as the economic and security benefits of reducing our addiction to oil. Cars that are over 13 years old are 10-to-30 times more polluting than newer models. Rapid fleet turnover would translate into dramatic reductions in both greenhouse gases and in the more acute air quality pollutants from older vehicles, such as ozone, particulates, and nitrogen oxides, all of which pose serious threats to public health in high-traffic urban areas.
Above all, however, cash for clunkers would provide much-needed infusion of market demand to the troubled automobile industry, which has seen sales plummet amid the faltering economy. The program has the potential to take millions of the oldest, most inefficient vehicles off the road and shift the entire market toward newer, more economical models, increasing demand and creating jobs. While many cash-for-clunkers participants would likely remain in the used car market, the program would broadly accelerate turnover of the existing vehicle fleet and drive increased sales for the industry as a whole.
Car dealerships—700 of which went belly up last year, on top of the 430 that went out of business in 2007—would benefit from increased customer foot traffic from managing the program. These auto dealer closings wiped out more than 50,000 dealership jobs. The used auto parts industry would also benefit, as would the burgeoning scrap-metal and salvage industries. Cash for clunkers will generate or maintain hundreds of thousands of jobs across the entire automotive supply chain. Top U.S. auto-industry companies, working in partnership with environmental advocates, have actively supported passage of this type of legislation in states across the country.
Enacting a clash-for-clunkers program would also dovetail nicely with the Obama administration’s efforts to boost lending to consumers for, among other things, purchasing new cars to help jumpstart the economy. The Federal Reserve’s Term Asset-backed Loan Facility, or TALF, a $200-billion lending program to help restart the secondary market in car loans and other consumer credit, kicked off last week with two offerings from auto financiers Ford Motor Credit Co. and Nissan Motor Co. totaling more than $4 billion.
TALF will allow these and other companies to make auto loans and then sell these loans to institutional investors through the secondary markets, which in turns allows the lenders to make new loans to another round of new-car buyers. Since the Bush recession kicked in beginning in December 2007, automakers have struggled to sell new cars in part because financing for auto loans was hard to come by for consumers due to the collapse of these secondary markets for auto loans.
The Bush administration’s feckless regulation of the financial services industry exacerbated problems in the secondary markets, which led many institutional investors to shun the secondary market for any kind of loan. Now, with TALF helping to revive the secondary market for auto loans, automakers and auto lenders should more easily be able to finance new car loans, and get consumers into more fuel efficient, cleaner, and more cost saving cars.
Clearly there are many ways in which government spending can stimulate the economy and create jobs as part of a recovery program. Public spending on “cash for clunkers,” however, as part of a larger green stimulus, would have ancillary benefits by reducing our dependence on oil, increasing innovation and investment in the auto industry, and avoiding the devastating social, economic, and environmental effects of global warming over the long term.
Indeed, the transformation of our antiquated and carbon-intensive fuel and energy infrastructure around the platforms of efficiency and clean technology represents the great potential engine of American innovation, economic growth, and job creation in the immediate future and for coming decades. Cash for clunkers represents a step toward that low-carbon future.
Moreover, by targeting those most affected by high oil prices yet most often absent from the larger energy and climate conversation, this program reaches new constituencies for a green economic renewal, and will focus national attention on the opportunity to invest in good jobs in a more energy-efficient economy.
Bracken Hendricks is a Senior Fellow and Benjamin Goldstein is a Policy Analyst at American Progress. To read more from the Center on these issues please visit the energy and environment page of our website.