Media Briefings

‘CASH FOR CLUNKERS’: Good for new car sales, bad for the environment

  • Published Date: March 2016

Scrappage schemes to support the German car industry during the Great Recession successfully boosted sales of new cars but at the expense of increasing greenhouse gas emissions. That is the central finding of research by Gregor Pfeifer, to be presented at the Royal Economic Society's annual conference in Brighton in March 2016. His study finds that people tended to buy larger cars because of the subsidy – and since these emit more carbon dioxide, over their lifetimes the scheme will cause 2-3 million extra tons of greenhouse gases to be released.

During the Great Recession, many governments took the chance to encourage people to buy new cars while removing old, inefficient ones from the road. Spending more than €15 billion in total, these scrappage schemes subsidised people who wanted to buy newer, fuel-efficient cars.

This study looks at the number of new car registrations in Germany (where €5 billion was spent on giving out subsidies of €2,500). It finds that over one million cars were bought during the scheme’s peak, although around 580,000 of these would have been purchased anyway (either at the same time or at a later date). All in all, this means that the economy was boosted by three times the amount spent by the government. But it came at a considerable cost to the environment.

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In response to the recent economic downturn, governments around the globe intervened with vehicle retirement schemes worth more than €15 billion in total. The primary purpose of such programmes was twofold: stimulating the declining demand for new vehicles and reducing road traffic related carbon emissions.

Focusing on Germany, the country with the most expensive programme (€5 billion), this study examines whether these goals were accomplished. To identify the effects of interest, the authors compare new car registrations and corresponding carbon emissions in Germany, as affected by the 2009 policy intervention, with analogous figures in similar, but unaffected countries. They find that the German scrappage programme backed the domestic vehicle market at the cost of increasing greenhouse gas emissions.

The German policy intervention, subsidising a respective purchase by €2,500, had an immensely positive effect on new car registrations with more than one million programme-induced vehicles during its peak time.

Disentangling such purchases, the researchers estimate that about 580,000 sales were so-called windfall gains – that is, subsidised purchases that would also have happened in the absence of the intervention. The programme-induced purchases consist of about 500,000 car sales that were pulled forward in time, about 170,000 that were delayed, and about 850,000 that would not have been realised at all in absence of the German subsidy (on-top sales).

The latter number implies that almost one million newly registered cars have been purchased on top of regular (non-subsidised) ones and were not simply ‘borrowed’ from future periods. In monetary terms, this amounts to more than three times the €5 bilion budget.

Intuitively, the scrapping programme triggered people to replace their old clunkers by new, mostly small and eco-friendly cars, and thereby had a positive effect on the environment. But due to the subsidy, people faced incentives to upgrade towards larger vehicles, thereby increasing actual emissions as compared with a scenario without the intervention.

Taking such effects into consideration, corresponding carbon figures show that, over the new cars’ entire life span (15 years on average), the German scrappage programme will lead to an overall increase of between two and three million tons of greenhouse gas emissions.

This is mostly because of the group of windfall gains, which is bad in two ways. First, it wastes quite a share of the subsidy funds since those cars would have been purchased also in absence of a scrappage programme. Second, it hurts the environment by producing a substantial amount of additional carbon emissions due to an unnecessary, subsidy-induced vehicle upgrade.

For future retirement schemes to come, it is therefore particularly important that policy-makers don’t offer incentives for the group of windfall gains – which accounted for ca. 30% of the overall subsidised car fleet.

ENDS


Cash for Clunkers in Germany – Stabilising the Car Market, Hurting the Environment
Gregor Pfeifer
Email: g.pfeifer@uni-hohnheim.de