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Separating Myth From Fact on “Cash for Clunkers”

As debate rages on in the capital over whether to keep assisting the auto industry by giving out more "cash for clunkers" rebates, two assertions are becoming commonplace: the program is helping diminish U.S. oil consumption, and the program is not paid for with new money.

cash_for_clunkers_paper.jpgPhoto: AP

The first argument was reiterated on Friday by President Obama, who said of the "clunkers" auto trade-in discounts: "This gives consumers a break, reduces dangerous
carbon pollution and our dependence on foreign oil, and strengthens the
American auto industry."

That same day, however, energy analysts were crunching the numbers for Reuters. Even if $2 billion in new "clunker" rebates were offered, they found, the total resulting decline in America's daily oil consumption would be 0.05 percent:

"It has proved to be a highly successful vehicle marketing tool," saidTim Evans, energy analyst for Citi Futures Perspective in New York.

"But you would need a microscope to see the demand impact for gasolinefrom this program because it involves a relatively small number ofvehicles."

The Reuters estimate assumes an average upgrade in fuel efficiency of 10 miles per gallon, which is in line with initial auto industry statistics on new trade-ins.

The analysis also assumes 250,000 trade-ins, which the government estimates is roughly the number that took place during the first $1 billion week of the taxpayer-subsidized "clunkers" program. Given the likelihood of new funding for the rebates, however, that 0.05 percent number could double or triple -- for a total daily oil-consumption reduction of 0.15 percent.

The second argument, that offering $2 billion in extra "clunkers" cash would not amount to deficit spending, stems from Democratic leaders' decision to shift the funds over from a Department of Energy (DoE) loan guarantee program.

That strategy was designed to appeal to fiscal hawks who would have a difficult time voting to add to the already trillion-dollar federal deficit. Indeed. Sen. Claire McCaskill (D-MO) already put her leaders on notice (via Twitter) that she could only vote yes on "clunkers" if no new money was spent.

But the DoE loans in question were approved to encourage the development of alternative energy and biofuels, two "green job" creators that have influential allies on Capitol Hill. Senate Energy Committee Chairman Jeff Bingaman (D-NM) is already criticizing the shift as a raid on the clean-energy pot, and Renewable Fuels Association chief Bob Dineen said he wants Congress to promptly put the $2 billion back home at the DoE:

The ethanol industry understands the trying economic times this countryfinds itself in and thus supports ideas like the "cash for clunkers”program, but is concerned to see the program paid for by depleting therenewable energy loan guarantee program. We hope Congress will movequickly to replenish the fund. One of the advantages of the “cash for clunkers” program is putting more fuel efficient cars on the road,however those new cars should also be running on renewable fuels likeethanol in order to benefit both the changing climate and the domesticeconomy. For the U.S. long term auto and fuel needs, it seemscounterproductive to limit the renewable fuels industry.

Given the political pressure already being exerted, it's difficult to see how congressional leaders can avoid spending a new $2 billion to keep the auto rebates alive. Replenishing the DoE fund would take place in a separate vote later this year, however, making it easier for lawmakers to claim they're not adding to the deficit with this week's "clunkers" vote.

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