Cash for Clunkers: Choose your cars wisely!


You may have heard of the plan going through Congress affectionately labeled "Cash for Clunkers" that would allow you to turn in an old, poor mileage car in order to get a tax incentive for a new, higher mileage car.  Debating whether that is a good use of taxpayers money is one thing, but let's look at the positives:

  • It helps reduce harmful environmental emissions
  • It lessens our dependence on foreign oil
  • It helps sell cars (probably the most important to politicians)

USA Today had a good Q&A of the bill and a good summary can be found below:

Q: If the House bill becomes law, how would it work?

A: The government would send up to $4,500 to the selling dealer on your behalf, if you:

1. Trade in a car that — this is a key point — has been registered and in use for at least a year, and has a federal combined city/highway fuel-economy rating of 18 or fewer miles per gallon.

2. Buy a new car, priced at $45,000 or less and rated at least 4 mpg better than the old one (gets a $3,500 voucher). If the new one gets at least 10 mpg better, you get the full $4,500.

Example: Trade that well-worn 1985 Chevrolet Impala V-8 police special, rated 14 mpg, for a 2009 Impala V-8 rated 19 mpg and the government will kick in $3,500. Downsize to Chevy Cobalt (27 mpg) or even a larger Honda Accord (24 mpg) and get $4,500.

Most people looking to take advantage of the bill will solely be focused on Miles per Gallon (MPG) but this doesn't tell all of the story.  This was pointed out by Richard Larrick , a professor at Duke University and author of the blog,  A column of his recently appeared in my local paper and his goal is to highlight the difference in MPG and GPHM (Gallons per hundred miles).   His main point being that GPHM is actually a better metric to measure how much gas is saved by a particular car.

GPHM tells a driver how many gallons of gas it takes his/her vehicle to drive 100 miles.  Therefore, a 15 MPG car uses 6.67 GPHM, a 25 MPG car uses 5 GPHM and a 40 MPG car uses 2.5 GPHM etc.  Pretty straightforward right?  Basically, while MPG is a number that everyone understands, it isn't a very good metric at actually telling the driver how much gas they have used. As Richard Larrick says in the article:

One strength of gphm for car buyers is that it directly reflects actual gas usage and savings in a way that mpg does not.

For example, say you have two cars at home.  You decide you only want to upgrade one car, so you have two options.  One of your cars is an old "clunker" and gets 14 MPG, and you want to trade that in for an SUV hybrid that gets 26 MPG.  This will be Option 1.  The other car is a 90's era sedan that gets 22 MPG and you want to trade it in to get a 50 MPG hybrid.  This is your Option 2.

Which option would you take to have the biggest environmental, economic, and oil saving impact?

By just looking at the MPG numbers, it seems that Option 2 is a no brainer.  You are improving your MPG percentage by 127% compared to 86% in Option 1.  But if you actually look at the GPHM, the story is a little different.

The clunker you have would need 7.14 (100 miles/14 MPG) gallons to go 100 miles while the new car you are looking at would only need 3.85 (100 miles/26 MPG).  By making the change in option 1 you are saving 3.3 gallons of gas for every 100 miles you drive.  In option 2, your sedan currently needs 4.55 gallons to go 100 miles but the hybrid your looking at only needs 2.  But if you look at what you are saving by making the change in option 2, 2.55 gallons, it is smaller than what you saved by making the change in option 1!  Basically, because the sedan in Option 2 was already more efficient to begin with, you don't save as much by upgrading it!

Whether or not you will agree with the "Cash for Clunkers" bill, hopefully by thinking in terms of GPHM you'll be able to better analyze how you make your car buying decisions from now on!

I developed the sheet below to help you play around with some numbers in case you are faced with the similar scenario as above.  You can change the numbers in the colored cells.  If you need to find mileage figures for your current and new cars, go to

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I read in this article ( ) that all 3 auto credits can be used together. E.g I can claim the CARS voucher and new car tax dedcution next year. Has anyone done that?
The Cars For Clunkers legislation is actually very focused and is only available for a limited four month time frame. It offers participants the opportunity to trade in certain older cars for certain other new ones. Unfortunately, many cars do not qualify for the program and therefore are still ideal for the 'traditional' car donor option. Such non-qualifying cars let people give their cars to non-profit organizations who help people with many different kinds of needs, like supporting youth organizations or our older folks or to help promote the arts and health research. Help yourself with the Cash for Clunkers program if you qualify or if you don't qualify or would like to help others, give your "clunker" to charity and take a tax write-off! Here are 400 not-for-profit organizations that can always benefit from your 'clunker' or unneeded vehicle. To donate your car, just click on the link to the charity on the web pages below.
This bill will help new car sales and the manufacturing industry (JOBS). Our daughter drives an older SUV (15 mpg) and I would very much like to trade it for a newer more fuel efficient vehicle. But when you go to trade as you well know you don’t get much for your trade with having an older car, making it discouraging to want to buy a new car. I do know people are WAITING for this to pass and by WAITING it only hurts car sales even more. That’s why its so important to get this passed as soon as possible. It worked in Europe to stimulate the economy it will work here too. The House got it right, now if only the Senate will get it together. The President’s for it and the American people are too. This needs to be done a.s.a.p.
This bill would put every charity car donation program in the nation out of business since the amount of the voucher would be much greater than the tax deduction. The solution is to simply allow the charity to issue the voucher in lieu of the tax deduction. The charity would then junk the car in accordance with the bill. This way, everyone wins, the car dealer, car maker, car buyer and the charity.
Karen, That's a great point. Do you know if anyone is addressing this fact in the current bill? Have you tried called your Senators and Congressmen? They may say that the purpose is to get cars off the road, not put more on the road. You would have to prove that you are taking even worse Clunkers off the road (cars held together with duct tape) for the cars people turn in for new ones.
Great point. Usually the cars they are driving have even worse mileage than cars that people who can afford a new car would be turning in. Not only that, they also have worse emissions. Have you ever been behind a clunker from the 70's as it takes off from a stop? So much for clean air. What SHOULD happen is the government should replace the poorer peoples clunkers with the newer clunkers that are being turned in. Why keep an old beat up '77 Cutlass on the road when it can be replaced with a '97 Bonneville? I think we're on to something Powell....
Great Post! I like the spreadsheet widget. The one issue that I would like to see addressed in the "Cash for Clunkers" bill is how to get all of the clunkers driven by the poor and working poor in this country. They can't afford a new car and they drive the majority of the older gas-guzzlers and failed emissions vehicles. I saw a statistic of the percentage of gas-guzzling clunkers and it was close or more than 50% of them are driven by poor and working poor Americans. How do we get these off of the road?

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