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Cash for Clunkers — Again?


larry fisher a former New York Times reporter, writes about business, technology and design.

Published January 24, 2023


Some ideas have a way of coming around again, like those geezer rock ’n’ roll acts that tour every few years. And so it is with Cash for Clunkers, the Great Recession program intended to stimulate new car sales when American automakers were in free fall.

Mind you, the new tour would be different from the old tour. While the 2009 Cash for Clunkers initiative was mostly about saving Detroit, the new proposals are more about saving the world. Consider that even if the most optimistic sales estimates for electric vehicles come true, there will still be tens of millions of internal combustion engine (aka ICE) vehicles on American roads emitting carbon dioxide for decades to come. So why not turbocharge the transition, marrying EV purchase incentives to a requirement that the automobiles traded be scrapped and recycled?

Sounds like a win-win — and maybe it would be. But from what we belatedly found out about the first Cash for Clunkers, it’s worth a close look before we leap.

Climate Change Is Not Patient

My colleagues did a study that asked a very simple question: how fast would the fleet of fossil fuel-powered internal combustion light-duty vehicles become an electric fleet if every single car sold from this moment forward was electric?” explained John Sterman, director of the System Dynamics Group at the MIT Sloan School of Management. “The results were very sobering: it would take about 20 years before we got to 90 percent electric. That’s just too long to meet our climate goals.”

And it’s not just ivory tower denizens advocating for a harder push to EVs. Back in 2020, when Covid-19 (and car shortages) seemed transitory, Ford executives urged the government to consider fresh incentives. “Cash for Clunkers was very effective in 2009,” Mark LaNeve, Ford’s vice president of U.S. marketing, told Bloomberg. “It would be nice to think we could have something equally effective.”

The current EV incentive offers a maximum federal tax credit of $7,500 on qualifying new vehicles, which some states augment with an additional $2,500. Under the recently passed IRA, the credit would be extended and a $4,000 incentive to purchase used EVs would be added — though with caveats including a domestic sourcing requirement that some automakers will struggle to meet. There are similar programs of varying generosity all around the world, but most don’t specify what happens to the trade-in vehicle.

In the current market, with EVs sold out for months ahead and used car values still rising in the midst of the new-car shortage, a scrappage program might not get much political traction. And in any event, economists have had some second thoughts about the original Cash for Clunkers that ought to undercut enthusiasm for a repeat. But still …

What Goes Around

Back up for a sec. The Car Allowance Rebate System, or CARS, grew out of an op-ed that Princeton economist Alan Blinder wrote for The New York Times in July 2008. It became law in June 2009 just as the Great Recession was spreading dread worldwide. Congress set aside $1 billion for CARS, to be doled out between July 1 and the end of November. But Cash for Clunkers, as it was commonly known, proved immensely popular and the money was exhausted in just 30 days. Congress hastily added another $2 billion to the pot, but that cash evaporated in less than a month.

Here’s how it worked. Buyers brought their old, heavily depreciated (and usually heavily polluting) cars to dealerships, getting vouchers from Uncle Sam worth $3,500 to $4,500 to spend on a new car. The trade-ins were then immobilized and hauled to junk yards. A total of 677,842 vehicles were junked under CARS, resulting in $2.85 billion in rebates — on average, $4,200 per vehicle.

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Recall that U.S. unemployment reached 10.1 percent in 2009, and sales of passenger vehicles had dropped by 38 percent from November 2007 to June 2009. The government stepped in to rescue GM and Chrysler, while Ford hung on with help from a guaranteed line of credit. CARS subsequently gave the auto industry a welcome jolt, with sales nearly reaching pre-recession levels during the glorious two months of subsidy.

That sales burst was enough to bring Ford out of intensive care: Ford’s share price more than tripled. But the effect was temporary. Sales slumped again when CARS ended, to resume growing only as the economy recovered.

Nonetheless, many horns were tooted: President Obama’s economic advisers estimated that CARS led to 440,000 additional new vehicle sales, while the Department of Transportation put the figure at just under 600,000. But subsequent studies found that sales were simply pulled forward by a few months, as buyers took advantage of the rebates to purchase cars they would have bought anyway. Other researchers noted that the program was inevitably regressive because the rebates only went to people who could afford new vehicles in the midst of the recession.

“Cash for Clunkers had some disastrous unintended consequences,” agreed Michelle Krebs, an analyst with Cox Automotive. And she fears a repeat because, with new EVs selling for an average $66,000, current EV incentives don’t make them affordable for middle-income households. Krebs’s bottom line: incentive programs “screw up the market, making used cars scarce and really expensive.”

And Yet …

MIT’s Sterman has a favorite metaphor: the carbon bathtub. In automotive terms, the tub is filled by sales of new vehicles and drained when old ones are scrapped. EV incentives alter the mix of that incoming flow, like turning up the hot tap on your bath. But the 250 million ICE vehicles in the tub today will continue to run for many years, accounting for one-sixth of total U.S. greenhouse gas emissions. If, however, EV incentives were tied to a scrappage program for the ICE cars traded in, the tub would be drained of polluting vehicles more rapidly.

“We need to bootstrap because just waiting on natural evolution of markets would take a long, long time,” added Sergey Naumov, a business professor at Pennsylvania State University and coauthor (with Sterman and David Keith of MIT), of an article last year on the trade-in approach in the Journal of Operations Management. “You have to stimulate markets a little, but not just by stimulating sales of EVs, which shifts polluting vehicles to the used market — or to markets in Africa or Asia so they will be polluting there.”

Their article is rife with mind-numbing calculations. But in language a superannuated literature major can understand, it draws four straightforward conclusions. First, as noted earlier, EV sales promotion alone will not be sufficient to meet 2050 climate goals. Second, the cost of adding an early retirement incentive for ICE vehicles to the subsidy mix could achieve greater emissions reduction faster, and at reasonable cost. Third, the vehicle subsidies would be a whole lot more effective as climate policy if they were complimented by a major push to accelerate the transition to renewable fuels in electricity production. Last but hardly least, the incentive program should continue a decade rather than the now-yousee- it-now-you-don’t 2009 version, so new EV sales won’t simply be pulled forward in time.

Germany has had the largest scrappage program so far. But it did not require that the engines be destroyed — only that the cars be sent to junkyards. Predictably, many of them were exported to Africa and Eastern Europe.
Bonus and Malus

EVs today present an awkward value proposition: manufacturers charge a premium for a vehicle with less utility than its ICE counterpart. While virtue signaling and Veblenesque conspicuous consumption surely motivated some early adopters, most people won’t spend more for a car that does less.

So from China to Cyprus, from Sweden to South Africa, governments have established incentives to support the adoption of EVs. These mainly take the form of purchase rebates, tax exemptions and tax credits, plus additional perks like access to high occupancy lanes or waivers on fees for parking, ferries and charging. Some governments wield sticks as well as carrots, penalizing ICE vehicles. California, for its part, is banning the sale of new ones altogether by 2035. Washington State, New York and Massachusetts are following suit and another dozen are considering similar measures.

Scrappage programs are less common, and too often pull their punches. Most only stipulate that the purchased car be one with lower emissions than the trade-in (not necessarily an EV) and requirements for recycling the trade-ins are notably missing. Germany has had the largest scrappage program so far. But like the original Cash for Clunkers, it was of very short duration. Moreover (unlike that program), it did not require that the engines be destroyed — only that the cars be sent to junkyards. Predictably, many of them were exported to Africa and Eastern Europe.

France has a “bonus-malus” system offering a financial incentive, or bonus, for the purchase of cars with low carbon emissions, and a fee, or malus, for the purchase of highemission vehicles. Pegged at a maximum of €5,000 (about $5,000) at the program’s inception in 2008, the bonus rose to €7,000 in 2012 (capped at 30 percent of the vehicle price including the value added tax) only to be lowered to €6,300 the following year. In 2015, a super-bonus was introduced, increasing the financial incentive to a total of €10,000, consisting of the regular bonus of €6,300 for purchasing a pure electric car, plus up to €3,700 for customers scrapping a diesel-powered car dating from 2000 or earlier.

Again, the program had unintended consequences, with French news outlets reporting that auto dealers in Norway were buying cars in France, pocketing the bonus and selling them in their own country at a discount. More recently, the French government has canceled any bonus for cars priced above €60,000, a slap at Tesla since most EVs badged as Peugeots, Citroëns and Renaults sell for less.

While all of these programs have stimulated EV sales at least temporarily, data are scarce on how much and at what cost. “I don’t think any of the existing programs in the world so far has exclusively narrowed down the eligibility criteria to EVs only,” noted Naumov. “Our analysis shows that while ICEretiring incentives provide some opportunity to reduce greenhouse gases, the cost-effectiveness of such programs in dollars spent per ton of avoided CO2 emissions is very low. If you focus on EVs only, you can achieve much more with far fewer replaced vehicles.”

Marius Dobilas/Alamy Stock Photo
And What About Norway?

Like a certain senator from Vermont, EV advocates like to point to Norway as an exemplar of how things should be done. By one measure they are absolutely right: per capita, Norway has more electric cars than anywhere else in the world. As Green Car Reports, an EV website, put it, “Norway has gone where no other democracy has gone with electric cars. It has made them more affordable than their gas counterparts, and over time, that has made electric cars, for lack of a better term, normal.”

Here’s how it works. Norway (population 5.4 million) manufactures no cars. So all automobiles are imported and have long been heavily taxed. While Norway does offer a small incentive, about $300, for trading in a clunker, the vast majority of its incentives come in the form of waving taxes on EVs.

EVs bear no value-added tax, which is 25 percent on gas and diesel vehicles; there is no registration tax on used EV sales, no annual ownership tax, and no fuel tax. Road tolls are fully or partially exempt, ferry fares are pared and bus lanes are mostly open to EVs. Curb parking is set aside for EVs, and there is plenty of free charging.

These are not new policies. The purchase or import tax exemptions for EVs have been in place since 1990, the VAT exemption since 2001. But EV sales only began to take off with the introduction of more capable EVs with lithium-ion batteries like the Nissan Leaf in 2011 and really exploded when truly longrange EVs became available. By the end of 2021, 83 percent of new cars sold in Norway were EVs, and the government has stated a goal of 100 percent by 2025. After that, import of ICE cars would be barred. Note once again, however, the lags inherent in the transition: EVs still only represent 16 percent of cars on Norwegian roads.

And even in Norway, not everyone is a fan of the government’s determination to go electric. “If you look at it from a fairness perspective, it’s totally unfair because you subsidize luxury cars,” said Erling Moxnes, a professor at the University of Bergen. “The poor people pay their taxes so that the government can subsidize cars.”

In any case, Norway is a bit sui generis. It’s a country with vast petroleum resources and a humongous sovereign wealth fund (now worth about $225,000 per capita). It has an abundance of hydroelectric power, though this may soon be undercut by climate change. And very high tax rates have long been accepted, if not exactly popular, as the price of social benefits including free health care and schooling. Nevertheless, subsidies for Tesla drivers do strike some Norwegians as excessive.

“A friend of mine was going by bicycle on the ferry close to Bergen,” Moxnes recounted. “The person in charge of tickets said, ‘I’m sorry, but I have to charge you for your bicycle, but that big EV over there, they don’t have to pay,’” he said. “That’s just one example of how these incentives can be a little absurd.”

And here’s a rub: even with the most generous EV incentives in the world, Norway is not expected to meet its goal of zero emissions vehicles making up all new car sales by 2025. Lasse Fridstrøm, senior research economist at the Norwegian Center for Transport Research, told Green Car he thinks 80 percent may be the ceiling, since up to a quarter of Norwegians lack access to charging at their homes.

Jim West/Alamy Stock Photo
First Do No Harm

Then there’s the issue of life cycle environmental impact. While EVs eliminate tailpipe emissions, they still bring with them “negative externalities,” from the environmental devastation caused by lithium mining in Chile’s Atacama Desert to child labor and other human rights abuses in the cobalt mines of Congo. There is also a huge carbon footprint in the production of any new vehicle, and almost all studies have shown that the manufacture of electric cars causes more harm to the environment than the production of ICE cars. This is primarily due to the heavy lithium-ion battery. But cars of all types are made of steel, and steel is a notorious spewer of CO2.

“Steel is typically made in China and the Chinese typically use coal-fired plants so we have huge carbon emissions there,” explained Bent Erik Bakken, research architect at DNV (Det Norske Veritas), a risk analysis organization based in Oslo. “CO2 emissions are bad, but they happen not only when you use the vehicle but when you produce it.”

There are both conservative and progressive arguments against EV incentives. Even if both sides agree that electrifying mobility is a good thing to do, there is a case to be made for letting the free market do its thing. One can also question whether adding more cars of any sort to the world is good policy. France is now offering a € 4,000 e-bike subsidy to people who scrap their cars; you can even get €300 if you buy an e-bike and keep your car.

Karl Brauer, an analyst with iSeeCars, said incentives distort a market that will eventually work on its own. “The regulators and government agencies are trying to force us all to be early adopters,” he said. “Do we want to try to get to 7 or 8 percent market share in the next three years, and have half those people hating the experience? If technology and global events can allow the price of EVs to equate and maybe even get below ICE, the government doesn’t have to do anything. It will just happen.”

There may also be better ways to clean up personal mobility than incentives for new car purchases. The Union of Concerned Scientists is pro-EV and pro-incentives but is also lobbying for more equitable policies and more alternatives.

“If you’re going to do cash for clunkers again, do you need to force everyone to continue to use a vehicle, or could you give the driver a transit voucher?” asks Samantha Houston, UCS’s senior vehicles analyst. “If we’re going to offer incentives, that money is best spent on people who really need them. With any policy, you can’t solve a complex problem with one intervention.”

main topic: Policy & Regulation
related topics: Climate Change, Energy