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This article was downloaded by: [Dalhousie University] On: 08 October 2014, At: 09:57 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK Applied Economics Letters Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/rael20 Should the US Congress appropriate funds for the repurchase of older vehicles? David Bernstein a a Office of Economic Policy, The US Treasury , Lorton, VA, USA Published online: 07 Dec 2009. To cite this article: David Bernstein (2010) Should the US Congress appropriate funds for the repurchase of older vehicles?, Applied Economics Letters, 17:15, 1475-1478, DOI: 10.1080/13504850903035931 To link to this article: http://dx.doi.org/10.1080/13504850903035931 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use of the Content. This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http:// www.tandfonline.com/page/terms-and-conditions

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Page 1: Should the US Congress appropriate funds for the repurchase of older vehicles?

This article was downloaded by: [Dalhousie University]On: 08 October 2014, At: 09:57Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,37-41 Mortimer Street, London W1T 3JH, UK

Applied Economics LettersPublication details, including instructions for authors and subscription information:http://www.tandfonline.com/loi/rael20

Should the US Congress appropriate funds for therepurchase of older vehicles?David Bernstein aa Office of Economic Policy, The US Treasury , Lorton, VA, USAPublished online: 07 Dec 2009.

To cite this article: David Bernstein (2010) Should the US Congress appropriate funds for the repurchase of older vehicles?,Applied Economics Letters, 17:15, 1475-1478, DOI: 10.1080/13504850903035931

To link to this article: http://dx.doi.org/10.1080/13504850903035931

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) containedin the publications on our platform. However, Taylor & Francis, our agents, and our licensors make norepresentations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of theContent. Any opinions and views expressed in this publication are the opinions and views of the authors, andare not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon andshould be independently verified with primary sources of information. Taylor and Francis shall not be liable forany losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoeveror howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use ofthe Content.

This article may be used for research, teaching, and private study purposes. Any substantial or systematicreproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in anyform to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions

Page 2: Should the US Congress appropriate funds for the repurchase of older vehicles?

Should the US Congress appropriate

funds for the repurchase of older

vehicles?

David Bernstein

Office of Economic Policy, The US Treasury, Lorton, VA, USAE-mail: [email protected]

Proponents of vehicle buyback programmes maintain that the earlierretirement of older vehicles will reduce pollution, increase income for lowerincome households and stimulate the automobile industry. This articleprovides a brief assessment of costs and benefits of vehicle buybackprogrammes. There are environmental benefits from the early retirement ofautomobiles and light trucks; however, somepollutants are not closely relatedto vehicle age.Moreover, vehicle buyback programmes are unlikely to reduceconsumption of gasoline by a substantial amount and may even increasegasoline consumption in the short run because vehicle age is associated withan increase in miles travelled. Vehicle buyback programmes are notunambiguously progressive because they will increase the price of oldervehicles, the only source of transportation for lower income groups. Thisanalysis does not justify the creation of a national large-scale vehicle buybackprogramme. However, vehicle buyback programme targeting the highestemission vehicles and vehicles likely to fail emission inspections createssupport for more stringent vehicle emission standards and systems, aproven method to reduce mobile source air pollution. It may be useful toexpand subsidies for existing local vehicle buyback programmes and createincentives for the creation of these programmes by additional municipalities.

I. Introduction

There is considerable support among several prominent

economists for programmes to purchase older high-

emission vehicles. Most recently, in a 27 July 2008

New York Times article, Alan Blinder makes the argu-

ment for a national buyback programme for older

vehicles. He argues that expanded ‘cash-for-clunkers’

programme provides three clear benefits: (1) a cleaner

environment, (2) a more equal income distribution

and (3) an effective economic stimulus.Legislation has been proposed to create a large-scale

national vehicle buyback programme with the addi-

tional objective of reducing consumption of gasoline.

Bills proposed by Representative Sutton and SenatorFeinstein would provide voucher towards the purchaseof a vehicle with better fuel efficiency and would requirethat the new vehicle realizes improved fuel efficiencycompared to the older vehicle being replaced. This fea-ture has been viewed as a way to reduce consumption ofoil and emissions of carbon dioxide, a greenhouse gas.This short article considers the costs and benefits ofproposals to expand vehicle buyback programmes.

II. Background

Versions of vehicle buyback programme have been testedin California, Colorado, Delaware, Illinois, Texas,

The views expressed in this article belong exclusively to its author and do not represent a position of the US Treasury.

Applied Economics Letters ISSN 1350–4851 print/ISSN 1466–4291 online � 2010 Taylor & Francishttp://www.informaworld.com

DOI: 10.1080/13504850903035931

1475

Applied Economics Letters, 2010, 17, 1475–1478

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Virginia and in several Canadian provinces. The goal of

these programmes is to target local pollution by removing

the highest polluting vehicles in a relatively small geo-

graphic area with substantial air pollution. In the case of

the first buyback programme in California, Unocal

implemented the programme to offset increases in pollu-

tion attributable to a new facility that it was building.The proposed vehicle buybacks before Congress

differ from the small-scale programmes in several

important respects. Differences between existing pro-

grammes and the programmes being considered by

Congress include the following:

� Congressional programmes entail a substantiallylarger number of vehicle purchases than currentlocal vehicle buyback programmes.

� Purchases under proposed Congressional legisla-tion could occur anywhere in the country whilepurchases in existing programmes targeted pollu-tion sources in high-pollution areas.

� Congressional legislation involves larger per-vehicle payments than existing vehicle buybackprogrammes.1

� Congressional legislation involves payments in theform of vouchers for the purchase of a new andsometimes newer used car with improved fuel effi-ciency. Current local programmes involve pay-ments in the form of cash.

There are two different legislative proposals being con-

sidered in Congress, one by Representative Sutton and

the other by Senator Feinstein. The main differences

between Representative Sutton’s bill and Senator

Feinstein’s bill involve the type of car that can be

purchased with the voucher received through the vehi-

cle buyback programme. Key differences in the two

programmes include as follows:

� Representative Sutton’s bill includes languagemandating that vouchers be spent on new carsmade in the United States. Senator Feinstein’sallows for some purchase of used vehicles madeafter 2004 and does not include a domestic pro-duction requirement.

� Representative Sutton’s bill includes languagemandating vouchers be spent on vehicles thatoffer at least 27 mpg for cars and 24 mpg forlight trucks. Senator Feinstein’s bill would requirethe vouchers be used for the purchase of a replace-ment vehicle exceeding fuel efficiency standardsfor the average of its class by at least 25%.

III. Analysis

Blinder proposes spending around $20 billion per yearto take 5 million cars that are 15 years old or over offthe road. This large-scale programme differs substan-tially from existing vehicle buyback programmes,which target emissions by the worst polluters in anarrow geographic area. Blinder justifies this expendi-ture on grounds that it will improve both the environ-ment and the economy.

Environmental impacts

The main benefit of vehicle buyback programmes isreduction in tail pipe emissions of hydrocarbons(HCs), nitric oxide (NOx) and carbon monoxide(CO). There is evidence supporting the view thatolder vehicles are responsible for most of the tail pipeemission of these three pollutants. Blinder motivates ageneral vehicle buyback proposal with data from aCalifornia study that concluded that cars 13 yearsand over accounted for 25% of the miles driven but75% of all pollution.However, some studies found that some pollutants

were not related to vehicle age. For instance, in onestudy, Stedman et al. (1991) found that while mostnew vehicles were clear of carbonmonoxide emissions;there was only a slight relationship between vehicleage and HC emissions. A second more recent study byBishop et al. (2006) found an increase in the skew ofemissions near Chicago. In this study, half of the COemissions were from 4.4% of all vehicles. The mainimplication of this research is that a relatively smallpercent of poorly maintained vehicles are responsiblefor most mobile source pollution. A large-scale vehiclebuyback programme may be ineffective at reducingthis pollution.The current California vehicle buyback pro-

grammes target automobiles that fail emission inspec-tions because such vehicles pose the largestexternalities on society.2 A subsidy for individualswith a vehicle, which cannot pass inspection butmost have a car, increases support for stringent emis-sion programmes, which have been shown to be aneffective way to reduce pollution.Previous car buyback programmes have been con-

centrated in relatively small geographic areas withrelatively severe air pollution problems. The analysisby Hahn (1995) suggests that cash-for-clunker pro-grammes will be most effective in highly pollutedurban areas where the marginal cost of pollution ishigh. Hahn found that prices for old vehicles of $1500

1The vouchers in Senator Feinstein’s bills range from $2500 to 4500 for new car purchases and from $1500 to 3000 for a used carpurchase. Cash payments in an existing programme in California are $650 per vehicle.2 California buyback programmes are described at the following site. http://www.arb.ca.gov/msprog/avrp/avrpeo.htm.

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could be justified in a vehicle buyback programme in

Los Angeles. The pollution reduction effects of buying

back cars across the entire country with substantial

numbers of cars coming from areas of the country

with no significant pollution problem are smaller

than pollution reduction efforts in highly polluted

urban areas. Legislation that provides financial assis-

tance to state vehicle buyback programmes in selected

high-pollution urban areas is likely to be more effec-

tive at reducing pollution than a general national buy-

back programme.There are roughly 75 million cars 15 years old or

older. In addition, many 13- or 14-year-old vehicles

will soon be 15 years old. The large stock of outstand-

ing underutilized vehicles suggests that even a large

vehicle buyback programme will have a modest

impact on the total supply of older potentially high-

pollution vehicles.The new vehicle buyback proposals tie the retire-

ment of an older vehicle to the purchase of a newer

vehicle with the added provision that the new vehicle

be relatively fuel efficient. However, some individuals

who will purchase new vehicles under the programme

would have purchased the new vehicle without a vou-

cher. Moreover, the existence of a voucher pro-

gramme creates an incentive for a person who wants

to purchase a new car with improved fuel efficiency an

incentive to purchase an extremely old and inexpen-

sive old car, submit the old car for retirement and use

the voucher to defray costs of the new vehicle. If this

type of arbitrage occurs, many, if not most, of the new

cars purchased with vouchers would have been pur-

chased without the voucher programme.The newest rationale for vehicle buyback pro-

gramme is the hope that such programmes will help

reduce consumption of oil. The potential reduction in

consumption of oil can be attributed to the use of

vouchers for the purchase of newer vehicles receiving

higher fuel efficiency ratings than existing vehicles.

However, if many people using the voucher pro-

gramme are people who would have bought the iden-

tical car without a voucher, the potential reduction in

gasoline will be exaggerated.Another factor impacting potential reduction in

gasoline consumption is that new cars are driven

further than old cars. The Energy Information

Administration estimates that a 14-year-old car will

travel around 8600 miles per year compared to 14 300

miles for a new car.3 This increase in miles driven can

under most scenarios offset the improvement in vehi-

cle miles driven from the vehicle buyback programme.

Table 1 contains the first-year estimate of the reduc-

tion of gasoline consumed from the buyback of one

old vehicle and the purchase of a more fuel-efficient

alternative. The analysis considers two scenarios, con-

stant vehicle miles travelled and vehicle miles travelled

equal to the age class of the vehicle. Both scenarios

assume that the old vehicle obtains 22 mpg and the

new vehicle obtains 30 mpg. Under the identical-mile

assumption, the vehicle buyback programme results in

a reduction in the consumption of 104.2 gallons of

gasoline in the first year. Under the age–class–mileage

assumption, gasoline consumption rises to 85.8 gal-

lons the first year after the buyback and exchange for

the new car.It is likely this estimate substantially understates the

initial increase in fuel consumed from the replacement

of a clunker with a newer vehicle if most vehicles

retired in a vehicle buyback programme are extremely

old and are driven less than 8600 miles per year. The

linkage of the automobile buyback programmes to the

purchase of a more fuel-efficient vehicle does not

automatically increase environmental benefits attribu-

table to the vehicle buyback programme. An expected

increase in vehicle miles travelled in the new vehicle

can more than offset the reduction in fuel consumed

by the substitution of vehicles. Many of these new car

purchases would have occurred without the vehicle

buyback programme.

Economic and fiscal impacts

At first glance, it is extremely difficult to justify the use

of scarce taxpayer dollars to buy back older vehicles.

Such expenditures are especially difficult to justify

Table 1. One-year gallons saved from vehicle buyback

programme cost estimates

Price paid for old cars $3500 $3500mpg of old car 22 22mpg of new car 30 30% Diff. mpg 36.4% 36.4%Miles driven old car 8600 8600Miles driven new car 8600 14 300Gallons consumed old car 390.9 390.9Gallons consumed new car 286.7 476.7Gallons saved in first year 104.2 -85.8

Note: Authors’ calculation based on no change in vehiclemiles travelled and EIA average age class vehicle milestravelled.

3 See Household Vehicles Energy Consumption 1994 by DOE/EIA July 1997. http://www.eia.doe.gov/emeu/rtecs/chapter3.html.

Vehicle buyback programmes 1477

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Page 5: Should the US Congress appropriate funds for the repurchase of older vehicles?

when unemployment, foreclosures, homelessness andloss of health insurance are high and rising.Blinder argues that car buyback programmes will

benefit low-income individuals because low-incomeindividuals tend to own older cars. However, anolder car is likely to be the only vehicle a lowerincome individual can afford. A new ToyotaCorrolla could cost around $16 600 while a 9-year-old Corrolla in ‘good’ condition will likely cost lessthan $4000.4 Even with the voucher, the used car islikely to be the only vehicle low-income individualscan afford. (It should be noted that the voucherprogramme proposed by Senator Feinstein allowsfor the purchase of some older vehicles, whichmight be affordable to lower income individualswith a voucher.)The existence of vouchers for the new vehicle will

motivate some middle-income individuals who canafford a new vehicle to purchase an older vehicle andredeem it for a voucher. This will decrease the supplyand increase the price of older vehicles available tolower income groups. The supply effects could beespecially pronounced if sales are concentrated insmall geographic area. A vehicle buyer withoutcurrent transportation might have to pay much morefor a used vehicle because of the vehicle buybackprogramme.There are some economic positives associated with

a vehicle buyback programme at this point in thebusiness cycle. Blinder’s proposal calls for the pur-chase of 5.0 million new vehicles per year. In a typicalyear approximately 16 million new vehicles are sold inthe United States. Even if only half of the vehiclepurchases represented new sales, a vehicle buybackprogramme could have a major impact on total auto-mobile purchases at a point in time where a majorrecession is forcing restructuring and layoffs in theautomobile industry.

IV. Conclusions

The primary benefit from a cash-for-clunkers pro-gramme is the reduction in the emissions of carbonmonoxide, nitric oxide and HCs – traditional tailpipeemissions. Cash-for-clunker programmes targetingvehicles with high emissions of these pollutants couldgenerate support for tougher emission programs andstandards. The work by Hahn (1995) indicates thatthese targeted vehicle buyback programmes pass willpass a cost–benefit analysis.However, Hahn (1995) also shows smaller gains

from an expanded vehicle buyback programme includ-ing cleaner cars. The quick calculations and discussionin this article indicate that a vehicle buyback pro-gramme will not result in large-scale reductions in theconsumption of fuel. It may be more cost incentive toaugment existing vehicle buyback programmes target-ing high-emission vehicles than establishing a new fuellarge-scale national vehicle buyback programme.It is hard to justify government expenditures of this

type given themore pressing needs caused by unemploy-ment, lackofhealth insurance andother social problems.It may be possible to fund these types of environmentalprogrammes through private funds in emissions tradingmarkets, as part of a cap-and-trade programme.

References

Bishop, G. A., Burgard, D. A. and Stedman, D. H. (2006)On-road remote sensing of automobile emissions in theChicago area: year six, Report Prepared forCoordinating Research Council, Inc., May 2006.

Hahn, R. W. (1995) An economic analysis of scrappage,Rand Journal of Economics, 26, 222–42.

Stedman, D. H., Bishop, G., Peterson, J., Guenther, P. L.,Mcvey, I. F. and Beaton, S. P. (1991) On-road carbonmonoxide and hydrocarbon remote sensing in theChicago area, Report to the State of Illinois, 1991.

4Get price quotes at Kelley Blue book. http://www.kbb.com/?trid=29&psid=2-239-7183-5-89-1&OVRAW=kelly%20blue%20book&OVKEY=kelly%20blue%20book&OVMTC=standard&OVADID=47693188011&OVKWID=1321660011.

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