Car trade-in scheme may be a clunker of a rumour

Dr Eric Crampton
The Dominion Post
16 May, 2022

There’s an old adage that one should buy stocks not on new news, but on the rumour of it. By the time whatever it is is news, everyone will know it, and the effects will be priced in.

Unfortunately, that’s a lot easier for stocks than it is for used cars. One cannot simply buy an index that tracks the local price of 1995 Toyota Corollas.

It’s a bit of a shame.

Last week, Sean Plunkett’s new media venture, The Platform, broke a rather interesting rumour. According to the rumour, the government is set to announce a Cash for Clunkers scheme this week – either as part of the Emissions Reduction Plan, or in the Budget.

What is Cash for Clunkers?

America tried this one on over a decade ago.

During the Great Financial Crisis, the American government was looking for ways to give people money to spend while doing even more to prop up the automobile industry.

It came up with the Car Allowance Rebate System – more popularly known as Cash for Clunkers.

If you owned a car that took more than about 13 litres of petrol to go a hundred kilometres, and if it were less than 25 years old, you could get between $2500 and $4500 toward the purchase of a more fuel-efficient vehicle. You had to have owned the vehicle for at least a year to be eligible.

It really did not work out all that well.

The programme aimed to provide economic stimulus, to support the domestic automobile industry, and to improve environmental outcomes by improving overall fuel economy.

As economic stimulus, it failed. Rather than encouraging a lot of new car purchases, the programme mainly subsidised purchases that would have happened anyway. Some households brought forward a new car purchase by a few months to get the subsidy; others had already planned on purchasing a car during that period.

In other words, it was a very expensive way of getting people to slightly change the timing of a new car purchase. It did not otherwise succeed as stimulus – it had no effect on employment or other indicators.

And because it only really shifted the timing of new car purchases, it was not particularly effective as support for the car industry.

But it also failed as an environmental programme, unless cost really is no object. People did buy more fuel-efficient vehicles, but the programme was far less effective than a carbon tax in encouraging emission reductions. Every ton of carbon dioxide avoided cost between $106 and $335 in 2009 US dollars – or between $245 and $772 per tonne in current New Zealand dollars.

For the same cost as a tonne of emission reduction through Cash for Clunkers, you could buy between three and ten tonnes of emission credits in our Emissions Trading Scheme and shred them so that nobody could use them.

The programme failed as stimulus, and it largely failed as support for the auto industry. If stopping climate change were your only goal, Cash for Clunkers was a particularly ineffective way of achieving it: you could do far more good at the same or lower overall cost, using less silly measures.

We do not yet know what will be in Cash for Clunkers with Kiwi characteristics.

Because transport is within the Emissions Trading Scheme, the programme cannot have any effect on national net carbon emissions. The only thing that can reduce emissions within the sector covered by the Emissions Trading Scheme is lowering the cap on net emissions.

And while the government can use Cash for Clunkers as justification for reducing the cap, it could reduce the far more cost-effectively without the programme. When we asked New Zealand expert economists whether tightening the ETS cap on net emissions is a less expensive way of reducing net emissions than adding in policies like fuel economy standards, not a single one disagreed.

So a New Zealand Cash for Clunkers is highly unlikely to help anything.

But the fun potential opportunity is in the rest of the used car market.

When America’s Cash for Clunkers scrapped almost 700,000 used cars, used cars become scarcer. Newspapers at the time reported it got harder to find a used car. Edmunds, who produce indices of car prices, argued Cash for Clunkers contributed to substantial run-ups in used car prices.

If our government starts buying up lots of used cars to send to the scrapyard, in the middle of supply chain issues hitting auto imports more generally, anyone with a shed filled with decent older cars might find it’s a seller’s market by the end of the year.

Buying on the rumour can be risky. Rumours can be wrong or miss details that can matter.

But if I had a farm shed with some space in it, I’d have spent the weekend looking for a few decent used cars.


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