Cash For Clunkers 101

What You Need To Know
by Kevin Ransom

U.S. auto sales continue to slump, but the car industry (and the overall economy) may get a much-needed jolt -- that is, if backers of the so-called "cash for clunkers" bill have presumed correctly.

But, it's not a given that they have.

The plan is gaining steam in Congress. It has also earned the support of Detroit carmakers, the Obama administration and the United Auto Workers. But some critics still question whether it will sufficiently boost new-vehicle sales or adequately jump-start the economy.


The bill, introduced by Ohio Rep. Betty Sutton, D-Ohio, would give government-backed vouchers to car buyers who trade in their older, less-fuel-efficient vehicles for new vehicles that boast better fuel economy. The vouchers would be worth either $3,500 or $4,500, depending on the vehicle class and the extent of the fuel- efficiency upgrade. In early May, the bill won the approval of key House Democrats and the White House.

The program would last for one year, and backers say it would encourage the purchase of 1 million new cars and trucks. The plan would be a part of a larger energy bill, which House leaders hope to pass before the Memorial Day recess.

"This 'cash for clunkers' program will help consumers, stimulate our economy, improve our environment, maintain jobs, reduce our dependence on foreign oil, and help our domestic auto and related industries," Rep. Sutton said. "This approach demonstrates that we can achieve multiple worthy goals."

When the measure was first announced, Ford Motor Co. Chairman Bill Ford wrote an opinion column in USA Today, predicting that the program would boost sales by 2.5 million vehicles. The country should "use the tools that our government possesses, and routinely deploys in so many other ways, to help move the economy more swiftly to a better place," Ford wrote.

General Motors spokesman Kerry Christopher echoed those sentiments.

"GM supports this plan, and we urge Congress to move forward quickly to enact this program for the U.S. market," said Christopher. "We hope that it would offer some stimulation in the marketplace, and that's what all of us need right now. It's a good opportunity to stimulate new car sales."

Meanwhile, a competing bill in the Senate would give consumers fewer vouchers than the House plan and would require that the subsidies be limited to new cars that get 25% better gas mileage than current minimum fuel standards (27.5 miles per gallon for passenger cars and 23.1 for trucks). The Senate generally pushes for tougher environmental standards than the House.

Some groups are critical of the House plan, saying that the vehicles purchased under the program should be required to meet higher mileage standards. One critic is Therese Langer, Transportation Program Director for the American Council for an Energy-Efficient Economy. She points out that, under the proposed House plan, a standard pickup truck could qualify with a fuel economy rating 15 miles per gallon -- which is significantly lower than the current Corporate Average Fuel Economy (CAF? standard for trucks.

"The scrappage bill (originally) introduced in the House in January only offered vouchers to vehicles that met much higher fuel-economy thresholds," Langer said. "But now, the effort is geared toward helping carmakers sell all the vehicles that are sitting on their lots -- even the less fuel-efficient ones."

"People in Congress are tying themselves in knots trying to figure out how to help the auto industry, and the industry does need help," Langer said. "But Congress should design the program to achieve the desired increase in vehicle sales without sacrificing environmental priorities -- and without saddling consumers with gas guzzlers at the taxpayer expense."

The House plan also does not provide vouchers for the purchase of used cars, and auto recyclers don't like it because the clunkers would then have to be crushed.

Backers of the plan are taking their cues in part from nations like England and Germany, where such plans have helped to increase vehicle sales. Earlier this year, a similar program in Germany boosted the nation's vehicle sales by more than 20%: Verband der Automobilindustrie, the German auto-industy lobby, declared that a "significant proportion" of buyers traded in old cars for compact and medium-size cars.

But critics of the House plan point to the fact that German consumers were, and still are, taking a much bigger hit at the gas pump than we are here in the U.S. Gasoline prices in Germany were in the $6-per-gallon range at the time -- so German buyers had a much bigger incentive to swap their guzzlers for new, gas-sipping economy cars. Gas prices in most European nations are currently about three times higher than in the U.S.

The consumer migration to smaller vehicles in Germany was also driven by the fact that, this summer, the German government will impose a special carbon-emissions tax on larger vehicles. That means big-car owners in Germany will have to pay fees of more than $1,000, because larger vehicles emit higher levels of CO2.

"We hope that the Senate looks at this carefully," Langer said. "and (we hope) that it moves ahead with a bill that not only helps the auto industry, but also furthers the nation's energy goals."

Need to Know: The details of the House's "Cash for Clunkers" bill:

Passenger Cars: The old vehicle traded in must get 18 mpg or less, while the new cars must get at least 22 mpg. If the mileage of the new car is at least 4 mpg higher than the old vehicle, the voucher will be worth $3,500. If the new car gets at least 10 mpg more than the old car, the voucher will be worth $4,500.

Light-Duty Trucks: The old vehicle must get 18 mpg or less, and the new truck or SUV must get at least 18 mpg. If the mileage of the new truck or SUV is at least 2 mpg higher than the old truck, the voucher will be worth $3,500. If the mileage of the new truck or SUV is at least 5 mpg higher than the old truck, the voucher will be worth $4,500.

Large Light-Duty Trucks: New large trucks (pick-ups and vans weighing between 6,000 and 8,500 pounds) with mileage of at least 15 mpg would be eligible for vouchers. If the mileage of the new truck is at least 1 mpg higher than the old truck, the voucher will be worth $3,500. If the mileage of the new truck is at least 2 mpg higher than the old truck, the voucher will be worth $4,500.

Work Trucks: Consumers can trade in a pre-2002 work truck (a pick-up or cargo van that weighs between 8,500-10,000 pounds) and get a voucher worth $3,500 for a new work truck in the same or smaller weight class. There will be a finite number of these vouchers, based on the market share held by the vehicle's class. There are no EPA mileage measures for these work trucks. But since newer models are cleaner than older models, the age requirement should improve environmental quality, say backers. Consumers can also "trade down" and receive a $3,500 voucher if they swap an older work truck for a smaller light-duty truck that weighs 6,000 - 8,500 pounds.