A pair of bills making their way through the House and Senate would allow auto dealers to provide vouchers to consumers toward the replacement of their existing vehicles with new vehicles getting better fuel economy. The vouchers are worth $3,500 to $4,500, depending on the type of vehicle being replaced, its fuel economy, and the fuel economy of the new vehicle.
This program is similar in some ways to the vehicle retirement programs that have been used by many states and local areas with the goal of reducing emissions of the local air pollutants hydrocarbons and NOx. These earlier programs were reasonably cost effective (at least compared to many of the local alternatives available), but they really did not generate large emission reductions. Furthermore, the programs that worked best were of necessity short term. In a continuous program there were some incentive problems that would be hard to overcome. For example, basing eligibility of the program on age, as most short-term programs did, created an incentive for a motorist to hold (and perhaps drive) a dirty vehicle that might otherwise be got rid of until it's old enough to be eligible. Likewise, as all cars or trucks of the same vintage were built to meet the same emission standards, it was difficult to target the vehicles that would generate the largest benefits from retirement. Actual emission rates varied tremendously, of course, but largely because of how well they were maintained. And it was difficult to determine how much the vehicles being retired were being used. Obviously, given the same emission rate, the most desirable vehicles to retire are those being used the most, but those are the most valuable ones, and thus the ones least likely to be offered for retirement. At any rate, most programs had safeguards to prevent retirement of vehicles not use (e.g. they had to be registered to be retired).
The cash-for-clunkers program outlined in the bills would avoid most of these incentive problems, fortunately. However, it will not avoid all of them. Like most subsidy programs that try to change behavior, it will tend to reward those who were going to do the right thing anyway—in this case buy an energy-efficient vehicle.
Many households now own at least three vehicles, and often the third or fourth vehicles are not driven very much. That ancient gas-guzzler that’s just sitting in your driveway might be an attractive way of knocking a few hundred dollars of the cost of a new car. And even if it you’re not in the market for a new car, you might profit from selling it to someone who is.
