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 hereherehere 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.

10 Comments on “Is Cash for Clunkers a great big new mistake?”

  1. justmeint says:

    Julia is OUR AUSSIE ‘Obama’ Mamma!

    This woman is a real looney! Obviously she has a secret money printing organsiation, hidden from public view. She is offering all kinds of incentives to get the vote! Arghhhh she of all people should know – after all she advertises her hard working family background, that there are people in Australia who just cannot afford new cars, and struggle to keep what they have roadworthy and registered.

    We are pensioners, we are single parents, we are family people just making end meet from pay to pay…. her ‘bright’ (NOT) scheme is out of the reach of ordinary people. Politicians on the other hand can afford it!!!!

    Get real Julia…. there is no Santa Claus, and there is no AGW either!

  2. Michael says:

    This is on par with the $2000 subsidy for LPG conversions bought in by Howard.

  3. TomD says:

    Similar important questions about the energy savings were raised by critics of the US Cash for clunkers program at the time of its introduction there, including the fact that the program did not focus on cars with sufficiently high fuel savings (miles per gallon) which weakened the equation even more.

  4. […] all the brouhaha about ‘cash for clunkers’, the mainstream media seems to have completely missed analysing a new initiative that was also […]

  5. […] This post was mentioned on Twitter by Noel Kelly, Noel Kelly. Noel Kelly said: #cashforclunkers inferred carbon price is $369/CO2 tonne, based on stated goal of saving $1M tonnes at cost of $396M. […]

  6. […] a lot of greenhouse gas – the Government says its proposed ‘cash for clunkers’ scheme would save one million tonnes over the entire life of the scheme. But if it costs $40 […]

  7. […] I bagged the Prime Minister last week for the design of her Cleaner Car Rebate and Mandatory Car Emission Standards initiatives, I think she has got the direction right. Too […]

  8. […] “cash for clunkers” package announced by Julia Gillard during the election campaign (here and here) is the only serious proposal that any politician has advanced for tackling CO2 emissions […]

  9. […] industry scheme seems like an advance on the original poorly thought-through idea. “Cash for clunkers” was evidently hatched at short notice and released in the heat of the […]

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