What Is Cash for Clunkers?

Cash for Clunkers was a U.S. government program that provided financial incentives to car owners to trade in their old, less fuel-efficient vehicles and buy more fuel-efficient vehicles.

Key Takeaways

  • Cash for Clunkers was a government program that provided financial incentives to car owners to trade in their old, less fuel-efficient vehicles for more fuel-efficient ones. 
  • To qualify for the credit, a traded-in car had to be less than 25 years old, have an EPA- rated fuel efficiency of less than 18 miles per gallon, be in drivable condition, and be scrapped. 
  • The program ended in November 2009 after the $3 billion allocated for it had been depleted.
  • Supporters argue that the program stimulated the economy and reduced pollution. 
  • Critics of the program say that it created a shortage of used vehicles, increasing used car prices and harming income earners. They also claim that it was heavy on taxpayers and favored foreign manufacturers. 

Understanding Cash for Clunkers

The Car Allowance Rebate System (CARS) was signed into law by President Obama in June 2009 with mostly bipartisan support in Congress. The law was administered by the National Highway Traffic Safety Administration (NHTSA). Car dealers submitted the required information to the NHTSA on behalf of qualified new car buyers.

The formal name for the program was the Car Allowance Rebate System (CARS). The CARS program gave people who qualified a credit of up to $4,500, depending on the vehicle purchased.

Program Criteria

The program began in July of 2009. To qualify for the credit, a traded-in used car had to meet the following criteria:

  • Be less than 25 years old
  • Have an EPA-rated fuel efficiency of less than 18 miles per gallon
  • Be in drivable condition

The traded-in vehicle was required to be scrapped, have the engine rendered unusable, and have its body crushed or shredded.

In addition, the new car being purchased had to have an EPA-rated fuel efficiency of more than 22 miles per gallon. The program ended Aug. 24, 2009.

The rules for trucks were more complicated.

Light- and standard-duty model trucks, including SUVs, vans and pickup trucks had the following parameters:

  • The new truck must have a fuel-efficiency mileage rating of 18 mpg or more.
  • The new truck must be have at least two mpg higher rating to qualify for the $3,500 coupon or at least five mpg higher for the $4,500 credit.

For heavy-duty trucks:

  • The new truck must have a rating of 15 mpg or more.
  • The new truck must have at least one mpg higher rating to get the $3,500 coupon and at least two mpg higher to qualify for the $4,500 credit payment.

Effects of the Program

Supporters of the program have argued that the program was a success because it provided a stimulus to the economy and replaced many fuel inefficient vehicles with more fuel-efficient vehicles that created less pollution. The program removed over 677,000 fuel-inefficient cars from the road.

However, the program has been criticized. The libertarian Mises Institute called the program an example of the "broken windows" fallacy, which holds that spending creates wealth. Analysts with Edmunds.com partly blamed the program for a shortage of used vehicles. While the program was partly intended as a stimulus for domestic auto manufacturers, only about 49% of new vehicles purchased were manufactured in the U.S.

The National Bureau of Economic Research stated that the program's positive effects were modest, short-lived and that most of the transactions it spurred would have happened anyway. A study by Edmunds claims that the program spurred a net 125,000 vehicle purchases, costing taxpayers an average of about $24,000 per transaction.

The Bottom Line

While the program did result in decreased carbon emissions, a Brookings Institute study suggests that there are more cost-effective polices for reducing emissions. The program regulations required the traded-in vehicle to be crushed or shredded. Metal shredder waste has been found to contain hazardous waste.