Unexpectedly Intriguing!
August 17, 2009

Part of the attraction of the government's "Cash for Clunkers" taxpayer-financed subsidy for new car purchases is the claim that by replacing gas guzzling vehicles with newer, more fuel-efficient ones will greatly benefit the environment.

But will it really? How long might it take for taxpayers to get to enjoy the "green" benefit for the \$4,500 tax credit they're being required to provide?

Environmental economists like Matt Kahn ask questions like these and, fortunately for us, also work out the math to answer them! Our tool below is based upon his math and will answer the question of how long taxpayers will have to wait to get their money's worth of green benefits from the new vehicles acquired through the "Cash for Clunkers" trade-in program in the form of reduced carbon emissions from operating the vehicles.

Just enter the indicated data in the tool below. While most of the data is easily obtainable, the data related to carbon dioxide may not be. The EPA's estimate of 19.4 lbs per gallon is what we've entered for the amount of CO2 produce per gallon of fuel consumed (HT: Michael Roberts). Meanwhile, the cost of CO2 per ton in the calculation refers to the marginal social cost of an additional ton of carbon dioxide, which is subject to debate. Currently, the cost of a ton of CO2 in Europe is roughly \$19 per metric ton (or \$17.24 per U.S. short ton), but many argue that value doesn't incorporate the full "social" cost. We've used Matt's estimate of \$35 per ton in the tool below for that figure, but you're more than welcome to change it!

"Clunker" Data
Input Data Values
Average Miles Driven per Year ("Clunker" Vehicle)
"Clunker" Fuel Economy [Miles per Gallon]
New Vehicle Data
Average Miles Driven per Year ("Green" Vehicle)
"Green" Vehicle Fuel Economy [Miles per Gallon]
"Cash for Clunkers" Taxpayer Subsidy Data
Amount of Tax Credit Provided by U.S. Taxpayers per "Clunker" Trade-In
Carbon Dioxide Emission Data
Amount of CO2 Produced per Gallon of Fuel [lbs per Gallon]
Cost of CO2 per Ton [\$USD]

Clunker vs Green Vehicle Costs
Calculated Results Values
Annual Cost of CO2 Produced by the "Clunker" Vehicle
Annual Cost of CO2 Produced by the "Green" Vehicle
Difference Between "Green" and "Clunker" Costs [Positive if Savings]
Years to "Pay Back" Taxpayer with Lower CO2 Emissions

Using the default numbers, we find that it takes a very long time for taxpayers to get their money's worth for what they were required to spend to support the "Cash for Clunkers" program. At 26.5 years, the time needed to obtain the perceived benefits of reduced CO2 emissions will very likely outstrip the useful life of the new "green" vehicle, suggesting that taxpayers will never realize a positive environmental return on the \$4,500 they provided to subsidize the new car sale.

In the tool above, we've incorporated the assumption that the money provided by U.S. taxpayers to those trading in their "clunkers" is at a 0% rate of interest. As Matt notes, if the interest rate is positive, it significantly increases the amount of time the taxpayer must wait to get a positive return on their "investment" in putting a greener vehicle on the road in place of a less fuel-efficient one.

We'll also note that greater fuel efficiency tends to increase the amount of driving, which would also act to increase the amount of time required to obtain a "green" payback. While we've set the annual miles driven for each type of vehicle to be the same in the tool above, you can change the data to account for this effect.

On the other side of the balance, there may be other benefits that may be realized beyond CO2 reduction from operating a more fuel-efficient vehicle, such as the net reduction of other emissions that may reduce the time needed for taxpayers to get a positive benefit from subsidizing new vehicle sales through this government program.

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