Rules May Limit Cash for Clunkers Program

Jon Edwards decided to buy a 2010 Toyota Prius after finding out that the $4,500 credit he would receive through the program is several thousand dollars more than his Saab, above, is worth.

By NICK BUNKLEY and SARA PETERS
Published: June 26, 2009

DETROIT — In Europe, hundreds of thousands of car owners have taken advantage of government subsidies to get rid of their old vehicles and trade up to new ones. Car sales in Germany are up about 40 percent from a year ago.

But a similar so-called cash-for-clunkers program that starts in July in the United States is not expected to have nearly the same impact. While the program, which President Obama signed into law this week, gives consumers a credit that is in line with the payments in Europe — up to $4,500 — what qualifies as a “clunker” in the United States is far more limited.

Further, the American program has $1 billion in financing, enough for about 250,000 consumers to use it, and ends Nov. 1, or sooner if the money runs out. Germany, on the other hand, originally expected to spend 1.5 billion euros to get 600,000 old cars off the road. But the program proved so popular, the government this spring raised the budget to 5 billion euros for two million cars and extended the deadline to the end of 2009.

Still, if the alternative is to simply wait for the market to recover on its own, dealers and carmakers in the United States say they will take what they can get.

“It’s better than nothing, that’s for sure,” said George Pipas, the Ford Motor Company’s chief sales analyst. “Anything to get consumers off the couch and give them a reason to go to the dealership.”

The program, formally known as the Car Allowance Rebate System, is aimed at reducing fuel consumption by removing older, gas-guzzling vehicles from the nation’s roads. The cars and trucks turned in will be scrapped and their owners given a credit of either $3,500 or $4,500 toward a new vehicle. The amount of the credit depends on the fuel-efficiency rating of the new vehicle. The official Web site for the program is cars.gov.

In Europe, where nearly a dozen European countries have clunker programs, the details vary. But generally, the programs require only that the vehicle being turned in is old. In Germany, eligible cars have to be at least nine years old, and the subsidy covers the purchase of any new car, regardless of its size or fuel efficiency.

The American program, by contrast, is far more complicated. To qualify, consumers must turn in a vehicle that is no more than 25 years old and has a combined city and highway fuel economy rating of no more than 18 miles per gallon, as calculated by the Environmental Protection Agency. The E.P.A. lists vehicles’ ratings at the Web site FuelEconomy.gov.

The old vehicle must be drivable, and it must have been insured by and registered to the same person for at least the last year, preventing shoppers from buying an old car and flipping it to get a discount on a new vehicle. The credit cannot be applied toward a used vehicle or toward new vehicles that cost more than $45,000.

To get the full $4,500 credit, consumers must buy either a new truck or sport utility vehicle that is rated at least five miles per gallon higher than the scrapped vehicle or a passenger car that is rated at least 10 miles per gallon higher than the scrapped vehicle. Because the old vehicle will be destroyed, the credit is given instead of the regular trade-in value — not in addition to it — though some dealers might compensate customers for the vehicle’s scrap value.

The rules mean that the owner of a 2003 Chevrolet Trailblazer, which qualifies because it gets about 16 miles per gallon, would get nearly $2,000 less under the program than by making a normal trade-in. Conversely, a 1992 Honda Civic, which is worth only a few hundred dollars, does not qualify because its gas mileage is too high.

“It has to be worth not very much and it also has to get very poor E.P.A. fuel economy,” said Jack R. Nerad, the executive editorial director and market analyst for Kelley Blue Book. “It’s a fairly narrow profile. You’re talking about people who are probably economically challenged to begin with and they have to be able to qualify for a new car purchase in the midst of a deep recession. Those are some difficult parameters.”

But Mr. Nerad said the program could have a broader impact just by encouraging consumers to look at new vehicles, something many have not done because of uncertainty about their jobs and finances during the recession.

“Some people will be moved to check out the program and start shopping for new cars,” he said. “Even if they discover the program won’t work for them, they’ll get the new car bug. Anything that improves dealer traffic generally results in sales increases.”

The day the program starts is still to be determined. The law states it will be whenever the National Highway Traffic Safety Administration finishes its rules for the program, which it must do within 30 days of the law’s being signed on June 24. (The cars.gov site says to “contact your dealer in mid-July.”)

The prospect of the program persuaded Jon Edwards, who owns a 1997 Saab 9000 that is rated at 18 miles per gallon, to visit a Toyota dealership near his home in Freeport, Me. Mr. Edwards, who said he usually buys used vehicles and drives them “into the ground,” decided to buy a 2010 Toyota Prius after finding out that the $4,500 credit he would receive is several thousand dollars more than his Saab is worth. The Prius, a newly redesigned hybrid sedan, gets 50 miles per gallon.

“I have had my eyes on a Prius for a long time. But the program really gave me incentive,” Mr. Edwards said. “It is safe to say that without the program, I would not buy a 2010 Prius.”

Mr. Edwards’s dealer, Adam Lee, who owns a chain of nine showrooms in Maine, said he was excited about the program but wished it required people to buy even more efficient vehicles.

“Most trade-ins will come in with cars worth between zero and $1,000 dollars,” Mr. Lee said. “Because of this, we are expecting to do really well with the program. When people are trading in cars like this, the cars are now worth $3,500 or $4,500.”

Mr. Nerad and other experts say most of the vehicles that will be turned in are likely to be trucks rather than cars, because trucks generally get worse mileage. Twenty-two of the 32 vehicles listed by Consumer Reports as the “best gas guzzlers to junk” for the program are trucks. Mileage requirements for new trucks are more lenient. For the $3,500 credit, new trucks have to get only two miles per gallon better than the old vehicle, while new cars must get at least four miles per gallon more.

In addition, the Detroit automakers, whose sales have suffered the most, could benefit less than import brands. Only eight of the 48 models that Consumer Reports recommends buying under the program are domestic: five from Ford, three from General Motors and none from Chrysler.

In Conroe, Tex., Chris McCollum, the sales manager at Buckalew Chevrolet, hopes the program brings in more shoppers but described it as “not that big of a deal.” A similar program that ran in Texas for about 18 months resulted in about two dozen sales for the dealership, about 40 miles north of Houston.

“People would not be driving a $200 car if they could finance a more expensive car,” Mr. McCollum said. “On the surface, this program looks good and has potential to help dealers. But this is not by any means a saving grace for car dealers.”