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. The purpose of the program was primarily to act as an economic stimulus during the Great Recession by providing the population with monetary incentives to buy new cars, thereby increasing automobile sales, while at the same time reducing carbon emissions by replacing old vehicles with new, fuel-efficient ones.

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.

Requirements for Cash for Clunkers

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 have at least a 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.

Advantages and Disadvantages of Cash for Clunkers

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 majority of vehicles traded in the Cash for Clunkers program were trucks, at 84% of total vehicles traded. The majority of vehicles purchased were passenger cars, at 54% of total vehicles purchased.

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.

Furthermore, most scientific analysts believe that the benefit to the climate was negligible primarily because the program resulted in a very high cost per ton of CO2 avoided.

Pros
  • Provided stimulus to the economy

  • Replaced fuel-inefficient cars with fuel-efficient ones

Cons
  • Created a shortage of used vehicles

  • Only 49% of new vehicles were manufactured in the U.S.

  • Created more hazardous material through metal shredder waste

  • Costly way to reduce carbon emissions

Cash for Clunkers FAQs

Will There Be Another Cash for Clunkers Program?

There has been some discussion under the Biden administration for a program similar to Cash for Clunkers that would be part of Biden's overall infrastructure plan. Senator Chuck Schumer believes the plan could include billions of dollars allocated to a program to encourage Americans to switch from gasoline-powered vehicles to electric vehicles. The program would most likely swap out engines for batteries.

What Is the California Version of Cash for Clunkers?

California's similar plan is called "Consumer Assistance Program Vehicle Retirement." It offers eligible car owners $1,500 for retiring each vehicle, depending on income eligibility. Those that don't meet the income requirement will be given $1,000.

Is It Worth Donating a Car to Charity for the Tax Deduction?

It can be worth donating a car to charity for a tax deduction, depending on the factors. Usually, you can claim a deduction for the exact amount that a charity sold your car for at auction. If the charity sells it at a steep discount or keeps the car itself, then you may deduct the fair market value of the car. It's best to work with a tax advisor to see if it's worth it to donate your call or sell it, depending on the car itself.

The Bottom Line

While the program did result in decreased carbon emissions, a Brookings Institute study suggests that there are more cost-effective policies 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.