Is Cash for Clunkers a great big new mistake?

Clunker - 1992 Nissan Pulsar

Did Julia Gillard read my post last Thursday arguing that she should take action in the election campaign to improve the fuel efficiency of Australia’s cars? Possibly not, but I wish now I’d left in the sentence saying that whatever happens, please don’t make the same mistake as President Obama and bring in a poorly-designed “cash for clunkers” program!

Now the PM has announced today her own Cash for Clunkers initiative (here and here) with the ostensible purpose of saving one million tonnes in carbon emissions (this is not an annual saving but the total over the life of the scheme).

The scheme will be financed by cutting back other programs, including the solar and carbon capture and storage programs, and the renewable energy bonus scheme (see here).

President Obama at least had the excuse that his scheme was primarily a pump-priming exercise designed to lift consumer spending in the wake of the GFC. In our context however, Cash for Clunkers looks like seriously bad policy. Even on the skimpy detail released today, it is evident there are clear failings.

First, it would be hard to think of a more expensive way to offset carbon emissions. Even accepting at face value the PM’s claim that the scheme will save one million tonnes of CO2 at a total cost of $396 million, that means it costs $396 to save a tonne of carbon.

The going rate to offset a tonne of carbon is around $20 or less (see here, here, here and here). But even if we play conservatively and assume it costs $50 per tonne, that would give an all-up cost of $50 million – still much less than what Cash for Clunkers will cost.

Second, the scheme takes no account of the embodied energy and associated emissions involved in bringing forward the production of the 200,000 new cars that will replace clunkers.

Third, scrapping the 200,000 trade-ins will very likely increase prices of old, second hand cars and make those who rely on them for transport worse off.

Fourth, the scheme will create additional economic demand at a time when the threat to the economy is excessive demand and a possible further interest rate increase is in the offing. Conversely, we can expect the market for new cars to be depressed for a period once the scheme has finished.

I won’t say it’s a flaw at this stage, but the equity implications of this scheme also warrant closer examination. Who runs a fifteen year old car but can afford to buy a new car just because it’s $2,000 cheaper? My guess is many of the beneficiaries will be middle class households upgrading second and third cars.

Somewhere in all this, consideration also needs to be given to what proportion of clunkers would have “died off” of natural causes and what proportion would in any event have been replaced by more emissions-efficient vehicles.

In fairness, there are other benefits to getting old cars off the road (e.g. newer cars cause less pollution and are safer) that should be acknowledged, but the PM has not mentioned these. This scheme has all the hallmarks of having been pulled together at short notice to offset the poor public reaction to the proposed 150 person Citizens Assembly on how Australia should respond to climate change.