The success of what has become know as the “Cash For Clunker’s” program got me thinking about the power of incentives to effective behavior.
The program – officially called Car Allowance Rebate System (CARS) – was passed by congress and implemented by the Department of Transportation. A download from their website describe the program as follows:
The Car Allowance Rebate System is a new program from the government that will help you pay for a new, more fuel-efficient vehicle from a participating dealer when you trade in a less fuel efficient one.
While this program has had the benefit of stimulating new car sales, it really hasn’t done enough to achieve it’s key objective – improving fuel efficiency and reducing greenhouse gas emmisions. New cars being purchased through this program only need to have a fuel economy rating of 22 miles per gallon – 3 MPG below the currently mandated 25 MPG average that an automaker’s entire fleet must achieve. This is simply not a very impressive goal for a program that taxpayers are being asked to underwrite – especially when it is being sold to the public as a green initiative and not an industry bailout.
The concept behind the program is a good one, and is worth pursuing. But the current program is very expensive, and won’t achieve the results an initiative of this size should. I would like to see a new version of this program set up to replace it that leverages both incentives and disincentives, is simpler to administer, and reduces the burden to taxpayers.
The new program would be based around how a new vehicle’s milage compares to the currently mandated fleet average. Based on today’s average, 25 MPG would be the initial benchmark. Any car with better gas mileage would receive an incentive rebate of $1000 for each 10% of MPG improvement it has over that benchmark. The total rebate would cap out at $5000. Helping to subsidize this rebate would be a tax on vehicles falling below the 25 MPG rating. This will take a similar approach of adding $1000 to the cost of a vehicle for each 10% of MPG it falls below that average mark. It would be capped at $5000 or 10% of a vehicle’s total cost – whichever is less. The benchmark could potentially rise each year. If the actual fleet average MPG from previous year end’s up being higher than the benchmark 25 MPG, it will become the new benchmark for the next year. If it is lower, the current benchmark would remain unchanged.
A program like this – with escalating incentives and disincentives – has the potential to shift consumer interest from larger cars over to hybrids and other alternative fuel technology vehicles. It can also shift the focus of the auto manufactures as well. The market advantage for any company that ‘out-innovates’ its competitors in the fuel efficiency area could be significant, and the penalty for falling behind could be severe. This will force every auto company to invest more and prioritize innovations in technologies that will keep them competitive in this space. They simply can’t take on the risk of neglecting it.
As for getting rid of the clunkers that are out there on the road today, I would create a standing offer of $1500 for any insured car in working condition regardless of age or particulars – no new car purchase required. That could put cash into people’s pockets that they could spend anywhere, or save for a rainy day. Any business could be approved to accept these vehicles – not just car dealers. They could receive a $500 processing fee, and would need to follow the same terms around destroying the vehicles and recycling them for scrap.
By being marketplace driven, these approaches could end up improving fuel efficiency standards far more effectively than any government mandated standard could. Not only that, they could also help the US auto industry begin to produce vehicles that are globally competitive.
As a nation we need to become leaders in green technology. It is not just an imperative from an ecological perspective, but also from an economic one. Success in green tech will define the winners over next 25 years in the same way that success in digital technology has defined the winners over the last 25.
It’s too important for us – and for the world – to just pay lip service to it.