Cash-For-Clunkers Might Increase Fuel Consumption and Damage the Environment

Official statement from the Alliance of Automobile Manufacturers:

And while the Cash for Clunkers program has provided much need economic stimulus to the auto industry, it has also yielded significant energy security and environmental benefits.

Amongst Alliance members Ford reports a 9 MPG increase from trade-in vehicle to new vehicle purchase; GM reports a 54% increase in small car sales since the CARS program was launched; 57%of Mazdas sold so far under the program were highly fuel-efficient Mazda 3’s; Toyota’s top two CARS models – Corolla and Prius – average 39.5 MPG, and accounted for nearly 40% of Toyota’s CARS sales mix. About 70% of their trade-ins have been vans, trucks and SUVs; and Volkswagen reports over 60% of its CARS sales are clean diesel Jetta TDI’s which get an EPA combined 34 MPGs.

NHTSA estimates that the average fuel economy improvement for transactions under the CARS program is 9.6 MPG. This amounts to an annual fuel savings of 58 million gallons of gasoline or an average gasoline savings of $580 a year for each new vehicle owner. That equates to an approximate 575,000 ton reduction in carbon dioxide emissions greatly enhancing energy security and reducing greenhouse gases.

MP: There’s a major problem with some of the figures quoted above: The fuel savings and environmental benefits are based on a false, STATIC analysis, and NOT a more realistic DYNAMIC analysis. In other words, the fuel savings and emissions reductions are based on the false assumption that there will be NO change in driving behavior when a driver’s fuel efficiency improves significantly.

Based on more realistic assumptions (e.g. the Law of Demand), we can expect that increased fuel efficiency will result in an INCREASE in driving. Therefore, the overall net effect on fuel consumption and environmental improvements would be uncertain. That is, if fuel efficiency improves by 20% due to a Cash for Clunkers trade-in, but the driver increases miles driven by 25% because of increased miles-per-gallon (and because he/she is driving a brand new car), he or she would INCREASE spending on fuel, not decrease it. Likewise, there would be an increase in emissions from the increased driving, not a decrease in emissions.

For example, the chart above shows the relationship between fuel efficiency (miles-per-gallon) and vehicle-miles traveled per household from 1983 to 2001, using data (here and here) from the Energy Information Administration. As fuel efficiency increased by 20.4% from 14.2 m.p.g. in 1983 to 17.1 m.p.g. in 2001, the vehicle-miles traveled per household increased by 37.5% over the same period, from 16,800 miles to 23,100. Result? Overall spending on fuel INCREASED. There would certainly be other important factors (fuel costs, disposable income, etc.), but we can be fairly certain that increases in fuel efficiency would contribute to MORE driving, not LESS (or the same).

See Jeff Jacoby’s related April 2009 article The Fuel-Efficiency Paradox, where he writes:

Improvements in fuel economy effectively make fuel less expensive, and when costs fall, demand tends to rise. As driving has grown cheaper in recent decades, people have done more of it – choosing to drive to work instead of taking the bus, for example, or buying a second car, or moving to a house with a longer commute, or sending the kids to college with cars of their own. Between 1983 and 2001, data from the Energy Information Administration show, the number of annual vehicle-miles driven by the average American household rose from 16,800 vehicle-miles to more than 23,000 (see chart above).

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About Mark J. Perry 262 Articles

Affiliation: University of Michigan

Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.

He holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University in Washington, D.C. and an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota.

Since 1997, Professor Perry has been a member of the Board of Scholars for the Mackinac Center for Public Policy, a nonpartisan research and public policy institute in Michigan.

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