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President Obama Approves the Billion-Dollar "Cash for Clunkers" Act

July 1, 2009

President Barack Obama signed into law on June 24 a measure that directs $1 billion toward rebates for U.S. residents who trade in their cars or trucks for new, more fuel-efficient vehicles. Although unofficially called the "Cash for Clunkers" Act, that title is somewhat misleading, as the trade-in vehicle must be less than 25 years old and drivable, and it must be registered and insured for the full year before the trade-in date. Instead, the Consumer Assistance to Recycle and Save Act focuses on fuel economy, requiring most trade-in vehicles to have a combined fuel economy of 18 miles per gallon (mpg) or less. On the other hand, the trade-in vehicle must be destroyed by the dealer, so people won't be trading in their new Hummers just to cash in on the rebate. The law is essentially focused on those driving inefficient, aging vehicles with little or no market value, encouraging them to buy or lease new, more fuel-efficient vehicles. The new vehicles must also have a manufacturer's suggested retail price of not more than $45,000, so people buying high-end cars can't cash in on the rebate. Rebates will be awarded directly to dealers, who will pass on the savings to their customers.

The U.S. Department of Transportation (DOT) calls the new program the Car Allowance Rebate System (CARS). It requires any newly purchased or leased cars to have a combined fuel economy of at least 22 mpg, while sport utility vehicles and small and medium-sized pickup trucks and vans (collectively called "category 1 trucks") must have a combined fuel economy of at least 18 mpg. But to earn the rebate, new cars must have a combined fuel economy at least 4 mpg higher than the traded-in vehicle. That will earn a $3,500 rebate, but to earn the full $4,500 rebate, the new cars must have a combined fuel economy at least 10 mpg higher than the traded-in vehicle. Category 1 trucks earn the $3,500 rebate for a fuel economy improvement of at least 2 mpg and a $4,500 rebate for a fuel economy improvement of 5 mpg or more.

Those looking to purchase or lease a new large pickup or van must be trading in a large pickup or van or an even larger work truck. The new large pickup or van must have a combined fuel economy of at least 15 mpg. The vehicles will earn the $3,500 rebate for a fuel economy improvement of at least 1 mpg and earn the $4,500 rebate for a fuel economy improvement of 2 mpg or more. Any heavy work truck traded in for a large pickup or van can earn a $3,500 rebate, regardless of the fuel economy, but the work truck must be a vehicle from model year 2001 or earlier. That same restriction applies to work trucks traded for new work trucks, but such trade-ins can only earn the $3,500 rebate if the new work truck is of a similar size or smaller than the old work truck. The act only allows $75 million for rebates on work truck trade-ins, but that still allows for trade-ins of more than 21,400 work trucks.

Depending on the average size of the rebates, the act provides enough funding for rebates on roughly a quarter million trade-ins. The rebates will be in effect through the end of October, or until dealers provide $1 billion in rebates, whichever comes first. The act requires the DOT's National Highway Traffic Safety Administration (NHTSA) to issue final regulations by July 24, putting the act into effect on that date. To support that extremely tight timeline, the NHTSA plans to publish a summary of the act in the Federal Register in the near future. Technically, the rebate takes effect on July 1, but the NHTSA recommends that dealers wait until the final rule is issued to be sure that they don't provide ineligible rebates. The NHTSA plans to include a list of participating dealers on the CARS Web site, and also plans to list eligible vehicles, but until it does so, you can check the official fuel economy of vehicles on the fueleconomy.gov Web site. See the DOT press release and see the act, the NHTSA summary, and other information on the new CARS Web site.