Is the car industry’s “Cash for Clunkers” plan better?

Econcartography: Phillips curve, 1980-2005 Guess which country?

The car industry has proposed a revamp of the Gillard Government’s “cash for clunkers” program. They say it will reduce the cost from $400 million to $200 million while still meeting the Government’s target of saving one million tonnes of CO2.

The nub of the proposal is that the rebate on new cars should be increased from $2,000 to $5,000 but targeted strictly at ultra efficient cars like the hybrid Toyota Prius and a number of very small diesel and petrol cars that offer similar levels of efficiency.

This would address a perceived failing of the Gillard Government proposal, which provides the rebate to medium and large cars, including some variants of the new Commodore and Falcon.

Whereas the Government’s proposal would cost a ridiculous $400/tonne of CO2 saved, the industry proposal costs a merely expensive $200 per tonne.

The 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 election campaign.

But the modified approach still has drawbacks. It rewards, at taxpayer expense, buyers who would’ve bought ultra-small cars anyway. It’s also likely to increase the price of cheap, old cars and make life a bit harder for drivers confined to this end of the second hand market (although as it only takes 50,000 clunkers off the road it won’t have as big an impact as the Gillard scheme, which eliminates 200,000). And it doesn’t provide an incentive to make all those other small, medium and large cars that most buyers will continue to buy any more efficient.

In addition, $200 per tonne is still an expensive way to eliminate carbon. For example, a correspondent to The Age last Friday argues that for $400 million, a solar plant such as the one planned near Mildura, would save one million tonnes of carbon every two years. He forgot to mention that it will also earn income.

There’s also a host of other lower cost options as explained in this Climateworks report. And it shouldn’t be forgotten that offsets are going for around $20 per tonne.

I should add that the car industry wants the $200 million “saving” from its scheme put back into the Green Car Innovation fund, which was cut by $200 million during the election campaign.

My thinking is that the whole idea of rebates and clunkers should be scrapped. A carbon price will encourage purchasers in all market segments to look at buying more fuel-efficient vehicles and it will give owners of clunkers some incentive to drive less and with greater frugality.

It won’t however go far enough, as I’ve acknowledged here. Even a $40/tonne price on carbon will only increase the pump price by 10c per litre, not enough by itself to change behaviour significantly.

A carbon price therefore needs to be supplemented by another disincentive – something like a hefty graduated Guzzler tax on new cars. It would be set at a level that reflects the fuel and emissions efficiency of cars. Guzzlers would pay a lot and ultra efficient cars would pay nothing (or even be subsidised).

This approach would be more effective in reducing CO2 emissions than any “cash for clunkers” scheme, or the Government’s proposed mandatory emission standards on new cars. It would not only save $400 million, it would make some money. Of course it would be harder politically – governments find it much easier to throw money at a problem than upset (some) people. And the Australian vehicle industry has considerable influence.

How the revenue from a Guzzler tax is used would have an effect on how easy is to sell politically. It could, for example, be used to subsidise the price of more efficient cars. Or it could be used to assist the local vehicle manufacturing industry with the development of greener vehicles.

2 Comments on “Is the car industry’s “Cash for Clunkers” plan better?”

  1. […] direction in which we should be heading. But we can go further – if we can envisage imposing a green tax on gas guzzlers, then we can think about taxing McMansions […]

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