Cash for Clunkers: How Green Is It?

On July 27 the federal government launched a cash-for-clunkers program. Trade in your old gas guzzler for a higher-mileage new car, and Uncle Sam will give you up to $4,500.

The program has been a huge success—at least in terms of giving a boost to automakers. The response from consumers has been so swift that the initial $1 billion allocated for the program—scheduled to run into November—has nearly run out. Economists say the money is giving the economy a quick stimulus.

But what is the program doing for the environment, or to reduce American's gasoline consumption?

Let's look at some simple numbers:

For that $1 billion, Americans will trade in roughly 250,000 cars and light trucks. The average gas mileage of those "clunkers" (vehicles such as aging Ford Explorers) was 16 miles per gallon, according to data released Aug. 5 by the Transportation Dept. The average mileage of the replacement vehicles (led by Ford's small Focus) is 25 mpg.

Saving a Drop of GasNow do some easy math. Let's assume that the average number of miles driven for both the new and old vehicles is 10,000 miles per year. The clunker thus would have burned 625 gallons per year. The new car? Only 400 gallons. That's a savings of 225 gallons per year per car. It's a nice pocketbook boost for consumers. With gas at $2.70 per gallon, they'll save $600 per year, assuming they drive the same number of miles (which actually is a questionable assumption).

And at 250,000 cars traded in so far, that adds up to 56 million fewer gallons consumed in the U.S. per year

That sounds like a lot. You could drive 1.4 billion miles on that much gas. But it's only a small percentage of the total gasoline consumption in the U.S. Last year, Americans burned about 138 billion gallons. So cutting that by 56 million gallons is a reduction of only 0.04%. And since auto emissions of carbon dioxide are directly proportional to gasoline consumed, greenhouse gas emissions would also go down a minuscule 0.04%.

In terms of the average fuel economy of the entire fleet, the Cash for Clunkers program is hardly even measurable. With 254 million registered vehicles in the U.S., the fact that 250,000 new cars are more efficient is a mere blip. "We're talking about a tiny amount of cars," says Lee Schipper, project scientist in Global Metropolitan Studies at the University of California at Berkeley, who studies fuel economy issues.

Doubting the NumbersExpanding the program with an additional $2 billion, as Congress is doing, will presumably triple any fuel savings and carbon dioxide emissions reductions. But the numbers are still tiny. And more importantly, there are good reasons to doubt the numbers.

For one thing, surveys suggest that people are trading in second or third cars that are driven fewer miles than the national average. If they drive their new cars more (which is likely, given the higher fuel economy), the already small fuel savings get even smaller. On the other hand, it's possible that the added miles driven using the new more fuel-efficient cars could mean fewer miles driven on the owners' other cars, which may use more gasoline. The problem is that the U.S. doesn't collect much information on driving habits, so it's hard to know how this will play out.

A trickier question is what people would have done if not for the clunkers program. There's some evidence to suggest that many would have ended up buying a car eventually anyway. And even without the program, people recently have been buying higher-mileage vehicles. "Strangely enough, the average of all cars and light trucks bought in the first half of 2009 was over 28 miles per gallon,"—compared with 27 mpg for 2008 model-year cars and 26.6 for 2007 model-year cars—says Schipper. "We are scratching our heads about that one," he adds. If the trend is toward more fuel-efficient cars anyway, then the environmental and energy savings benefits of cash for clunkers gets even smaller.

It also is worth asking what else might be done with that additional $2 billion, suggests Nadav Enbar of IDC Energy Insights, an energy advisory and consulting firm. If Congress ends up raiding the Energy Dept.'s loan guarantee program for the money, he worries, the effect on the environment could turn negative. That's because many of those loan guarantees are slated to support renewable energy projects—which may not go forward if the money gets spent on new cars instead.

The bottom line: As a stimulus program, cash for clunkers is bringing some new life to the economy. But don't expect it to help save the planet from global warming or reduce U.S. dependence on imported oil. "That doesn't mean it's not helping Detroit in the near term, but I don't think anyone sees any long-term benefits," concludes Schipper.

Before it's here, it's on the Bloomberg Terminal.