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, mpgillusion.com. 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 FuelEconomy.gov.