Tuesday, July 28, 2009

Despite an early surge of interest from consumers, analysts say the federal “cash for clunkers” program will fall short of its potential to reduce emissions and stimulate the economy.

Rules allow buyers to make only slight improvements in fuel economy, and any increase in cars sold will likely come at a steep cost.

The Obama administration expects the plan to boost sales by 250,000 over the next three months by providing rebates of up to $4,500 for new-car buyers trading in old models with a combined fuel economy of 18 miles per gallon or less.

The Car Allowance Rebate System, or CARS, has generated enthusiasm among consumers, with some putting deposits down on new cars ahead of the program’s official start.

By drawing shoppers to dealer showrooms, the plan also likely will spur at least some purchases by buyers who don’t qualify for the rebate.

Almost 16,000 auto dealers have applied to participate in CARS, Transportation Secretary Ray LaHood said at a news conference Monday.

Mr. LaHood said his agency has received 45,000 phone calls from people asking about the program.

But analysts say many CARS purchases will be made without the rebate.

Auto site Edmunds.com forecasts that the program will stimulate the sale of only 50,000 vehicles that would not otherwise have been sold.

The $1 billion program would therefore be spending $20,000 to foster the sale of each additional car.

“The incremental sales will be limited and at a considerable cost,” said Jeremy Anwyl, chief executive officer of Edmunds.com.

“In effect, we are paying consumers to do something most would do anyway.”

Mr. Anwyl said Edmunds.coms research shows that 200,000 vehicles worth less than $4,500 typically are traded in for new vehicles every three months.

Because consumers don’t get a trade-in value for their old cars, few are likely to trade in a car worth more than the program’s rebate, he said.

Some analysts are more optimistic about the boost to car sales, but even the North American Automobile Dealers Association projects as much as half, or 125,000 of the cars would have sold without the program.

At that rate, taxpayers still would be paying $8,000 to foster the sale of each additional car.

Even if overall auto demand is boosted by 250,000, that represents just 2.5 percent of the previously projected 10 million new vehicle sales this year.

“That to me is not a substantial increase,” said Karl Brauer, editor in chief at Edmunds.com.

Rebecca Lindland, industry analyst with IHS Global Insight, raised her auto sales forecast for this year by 170,000, but said much of those sales would be “pulled forward” from next year. The program could run for a year without running out of funding as few consumers qualify, she said.

The program’s environmental impact is limited by the amount of funding and the fact that consumers do not have to make a substantial trade up in fuel economy to get a rebate.

CARS requires only a 10 mpg improvement in fuel efficiency for passenger cars and 2 mpg for trucks.

“You can turn in a 14-mile-per-gallon gas guzzler for a 16-mile-per-gallon gas guzzler, with the taxpapers subsidizing your purchase,” said Ann Mesnikoff, director of the Sierra Club’s green transportation campaign.

“What vehicles [consumers] choose to buy with their vouchers will determine how successful it is,” Ms. Mesnikoff pointed out.

The group is encouraging consumers to make “big leaps” in fuel economy, she said.

Consumer Federation of America calls the program “a good thing for consumers” that will have limited impact.

“There are relatively few consumers who will probably be able to take advantage of it because of the limitations of the program,” said Jack Gillis, director of public affairs for the group.

“And secondly, as a mechanism to improve the fuel economy of the nation’s fleet, it’s a pretty weak program,” he said.

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