A Senate proposal to induce drivers to replace older, less fuel efficient cars with newer fuel efficient cars will be a waste of government spending with little impact, writes FBR Research in a note put out today.
The proposal, known as “cash for clunkers”, aims to increase new auto sales, while eliminating emissions from crappy old cars. In order to achieve those goals though, FBR says, “Proposals that are impactful enough to be effective are likely to be prohibitively expensive, while a frugal approach is
unlikely to generate significant participation.”
According to their calculations, based on the only bill with broad support in the Senate, less than 5% of U.S. vehicles will be able to participate. Additionally, the bill will reduce U.S. oil use by just 80,000 barrels per day in 2012, less than .5% of demand.
The project is supposed to cost almost $1.1 billion if 575,000 drivers participate. Depending on the model of the car, drivers will get between $1,500 and $4,500 as a voucher to trade in their old cars in Accelerated Retirement of Inefficient Vehicles Act of 2009 (ARIV) which has been proposed in the House and Senate.
Here’s why FBR thinks this program will fall on its face:
A conservative example is a driver driving a very inefficient SUV with a trade-in value well below the $1500 subsidy (16 miles per gallon and $500). The purchase of an eligible used 2005 fuel-efficient SUV of similar size would likely cost upwards of $10,000. Even in this conservative estimation, the net $1000 subsidy amounts to under $17 per month, less than the likely finance charges for a qualifying used SUV based on a five-year loan. Even including the gasoline savings at $2.18/gallon, the fuel-efficient SUV is likely to cost more than an earlier model inefficient vehicle that did not qualify for the credit. We do not believe that the economic incentive is likely to drive significant behaviour changes in SUV/pickup truck owners. The program is likely to draw participation from some owners of light trucks and SUVS nearing the end of their useful life, or with potentially expensive problems that reduce their resalevalue below that of the credit.
In contrast, eligible drivers could realise significant savings by using a voucher to purchase smaller vehicles like a 2005 sedan which gets over 37 miles per gallon, has lower maintenance, repair costs, and lower depreciation than older light trucks. However, on the whole, we believe that with gas prices below the $2.50 range, there is may be a little incentive for large numbers of SUV/pickup drivers to adopt a wholly different approach to their vehicles, which would appear to have significant lifestyle implications.
On the whole, we believe that the program as introduced is unlikely to result in the retirement of one million, or even a half million fuel-inefficient vehicles on the margin. Over 4% of eligible vehicles are scrapped each year, and we believe that much of the participation is likely to come from vehicles with higher repair costs that are close to being taken out of the market anyway. We believe the scrapping of older vehicles is unlikely to reach the 10% projected by proponents.
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