The Biden Administration is setting a goal that half of all new car sales by 2030 be electric vehicles. Many automakers have pledged to back that goal and there are commitments to add 500,000 charging stations nationally as part of infrastructure legislation.
What’s missing though, is a program to either extend or expand current electric vehicle tax credits or create a mechanism to get the public to trade in their old cars for new EVs. If the industry falls short in meeting its goal of every other sale being an electric car, momentum may grow for a Cash for Clunkers program similar to a previous program that used federal incentives for owners of older cars to trade them in on new models.
What is Cash for Clunkers?
Cash for Clunkers is shorthand for the Car Allowance Rebate System. This government incentive program passed in response to the 2008 recession to spur auto sales. The plan gave participants up to $4,500 for their old running vehicles (cash for their clunker). The money would be used to purchase a more fuel-efficient new or late-model used vehicle. The program ran from July 1 to August 24, 2009, distributing some $3 billion.
A new version of the program was proposed last year by Sen. Charles Schumer (D-NY). It targets older internal combustion vehicles in favor of zero-emission electric cars. It would earmark $392 billion towards replacing 63 million cars and trucks, or about 25-percent of the current U.S. fleet, with EVs. However, this proposal is not part of the infrastructure bill currently under consideration.
How does Cash for Clunkers work?
The original program that ran in 2009 gave new vehicle buyers vouchers of $3,500 to $4,500. The payments went towards scrapping vehicles up to 25 years old that were still licensed and in running order. The idea was to scrap older, less fuel-efficient vehicles for new models with better fuel economy.
The program succeeded in stimulating the market and removed some 700,000 vehicles from the road. But critics said that it unnecessarily scrapped cars that low-income motorists could have used. And according to Kelley Blue Book data, the reduction in the vehicle population resulted in higher used car prices.
What are the Requirements for Cash for Clunkers?
To be eligible for the original Car Allowance Rebate System, a vehicle had to be less than 25 years old, in running condition, and have an EPA fuel economy rating of less than 18 mpg. The program also required that the vehicle be turned into the dealer for disposal. That process included rendering the engine inoperable, and having the body either crushed or shredded.
The replacement vehicle needed to have an EPA rating of more than 22 mpg. Replacement trucks with an EPA rating of more than 18 mpg and earning an additional 2 mpg got $3,500. If it earned 5 mpg more, the top $4,500 credit would apply. Heavy-duty trucks had to meet a 15 mpg minimum rating, get 16 mpg for the $3,500 payment, or at least 17 mpg for the full $4,500 amount.
Will there be a Cash for Clunkers program in 2021?
Unlike the previous program, which was designed to spur a recovery in a market that saw a sales collapse of 40 percent, the new effort is an environmental initiative. The goal is to spur sales of electric vehicles, which currently account for about 2 percent of the vehicle fleet. While car sales fell dramatically last year due to COVID-19 shutdowns, demand quickly snapped back to pre-pandemic levels. However, a shortage of vehicles from production cutbacks due to the coronavirus and a microchip shortage is actually helping bring profits to the industry on higher vehicle prices.
While the infrastructure bill focuses on building 500,000 new charging stations, the push to extend the current $7,500 federal EV tax credit is stalling out. Proponents want to raise the per manufacturer cap from 200,000 to 600,000 units. Currently, Tesla and General Motors no longer offer the credits having exceeded the volume threshold. The incentive would drop to $7,000 and convert to a direct rebate going to the transaction.
Here’s where elements of the Schumer proposal would apply. It would funnel additional money to those trading in a gas vehicle at least eight years old. This incentive would start at $3,000 and ramp upwards based on the range of the new electric car purchase. There would also be an additional $2,000 available to lower-income families. That incentive would be capped at twice the federal poverty level. However, we may not see these incentives until it because clearer that the industry won’t hit that 2030 50 percent EV-sales goal.
Cash for Clunkers Pros and Cons
Those promoting a new Cash for Clunkers program believe it would stimulate the market. But more important, its focus on electric vehicles would hasten the transition away from traditional internal combustion engines. The extra money may eliminate the current price differential between more expensive EVs and lower-priced conventional cars. Eliminating these vehicles would cut emissions and boost the overall fuel efficiency of the U.S. fleet.
While the program is a way to get older, less fuel-efficient, and less safe vehicles off the road, cons see it as scrapping perfectly good, low-priced vehicles that low-income individuals can use. It would also raise the prices of used vehicles when these prices are reaching all-time highs. In fact, many of the eligible cars may be worth more than what the government wants to pay to scrap them. There are also concerns that the auto industry’s EV capacity and the nation’s charging infrastructure may not be mature enough to support replacing 25-percent of the vehicle fleet in such a short period.
Keeping Your Clunker
If your vehicle is near the $4,500 mark and runs reasonably well, you may want to keep it. As vehicles of a similar vintage hit the scrapyard, the value of your vehicle will most likely rise. The program requires that the vehicle be running. Once turned in, the yard disables the engine and either crushes or shreds the body.
The condition of your vehicle, however, is a key consideration. If it’s properly maintained, or you recently bought new tires, had a brake job, or performed other major repairs, you’ve invested money that you won’t see a return on if the vehicle ends up scrapped. Conversely, if your car’s transmission is slipping, it’s burning oil or needs some other major repair, you’ll soon be out a lot of money to keep your car on the road. You can estimate what these potential out-of-pocket expenses will be by visiting Kelley Blue Book’s Service and Repair tool.
Trading in Your Clunker
When facing big-ticket repairs or maintenance, you may find the $4,500 rebate attractive. But remember to check the vehicle’s value to determine what the real benefit of that money will be to you.
A vehicle worth, say, $3,800 would realize a net gain of $700. If it’s worth more, the rebate’s value decreases. If its value is less, the rebate becomes a larger factor in your decision.
This scenario also applies to expenses you may incur to ensure that your car is running when you turn it in. Also, keep in mind that the car you turn in for scrap will increase the value of similar vintage vehicles. But again, it comes down to running condition. Also, factor in how much you’ve put into the car and what you reasonably expect to get in trade-in value. Another provision that might help you make the decision is whether the new law allows you to retain the scrap value of your vehicle — that’s extra money in your pocket.
Scrapping Your Clunker
This is a fairly easy call, especially if your clunker doesn’t run. First, you need to determine what it will take to get your vehicle in running condition. It doesn’t have to run great, just good enough to get it to the vehicle collection point. Again, Kelley Blue Book’s Service and Repair tool will help you figure how much it will cost to get your vehicle back on the road.
If it’s a fairly minor fix, like a fuel pump ($300-$500) or timing belt ($350-$450) replacement, then the repair is worth the return you will get from the full rebate. However, if your vehicle needs a new transmission ($2,500-$4,500) or an engine rebuild ($4,500-$4,000), you’ll see all the benefits of the Cash for Clunkers go up in a blue cloud of oil smoke. If your clunker is in such poor condition, perhaps it’s time to call for a tow truck to haul it off to the junkyard.
