“Cash For Clunkers” Programs Compared
The United States yesterday introduced a federal ‘Cash for Clunkers’ scheme, providing incentives for motorists to trade-in old vehicles for new, more fuel-efficient models. The scheme is an example of a program, which has become popular as a response by many governments to the current crisis facing the automotive sector. Oxford Analytica looks at how these schemes have fared in Europe.
United Kingdom. The UK scheme has government and manufacturers offering 1,000 pounds each towards the cost of a new car or van if owners trade in a vehicle more than ten years old they have owned for at least a year:
- Increasing prices. In January, due to the recession and oversupply, some analysts were claiming cars were at their lowest ever prices in real terms. Following introduction of the scrappage scheme (and depreciation of the pound) car prices have increased steeply from manufacturers. Prices were also likely to be driven up by the need to recoup some of the costs of the manufacturer’s 1,000-pound share of the 2,000-pound grant.
- Environment. The environmental benefits of the UK scheme have been diluted by the omission of the government to put in place a minimum vehicle efficiency standard under the scheme. Indeed, the benefits of the scheme are highest for targeting the worst polluting cars. For example, using the metric of gallons per hundred mile (gphm) a Toyota Prius gets 2.17 gphm, a RAV4 4.17 and a Range Rover 7.14. This highlights how targeting these worst polluting cars is likely to lead to the largest environmental gain.
- Oversupply. The environmental and economic logic of providing incentives for people to scrap cars still with several years of useful life may also be questioned as it takes energy to produce new cars and may exacerbate problems of oversupply in the sector.
Germany. Germany’s scheme provides a scrappage premium of 2,500 euros (3522 dollars) for new car purchases and has been widely held responsible for a 40% surge in car sales in March and 18% increase in April compared with similar times last year:
- Boosting imports. German vehicle production in April fell 34% compared with a year earlier with exports also falling 48%. Increased sales have been driven by Japanese, South Korean, Italian and French small, low priced cars — for example Hyundai’s sales in Germany have increased by 140% since the beginning of the scheme.
- Diluting stimulus. There is also concern in the wake of a collapse in the used car market that scrappage has shifted activity from used-car sector to new cars. New car buyers may also be bringing forward their plans to buy, to take advantage of the temporary scheme. This suggests future sales will be lower when the scheme ends causing a ‘hang-over’ in sales. There is also the chance that people are trading-in second cars which they do not value highly and did not drive much.
- Short-run political gain? The temporary German scheme has now been extended to the end of 2009. With an election due in September 2009, this highlights the danger that these schemes can become entrenched in the political economy. This would not only be costly for the taxpayer but would fuel an over production of cars, distort competition between sectors and delay the restructuring of the automotive sector penalising firms that could better read industry trends. However, these negative arguments can be tempered by the observation that the scrappage scheme in Germany seems to have rewarded the producers of small, efficient cars that were better positioned for the downturn anyway — potentially accentuating the structural shift desired by policy makers.
If designed well, vehicle scrappage schemes can provide an effective temporary boost to ease the effects of the economic crisis on the auto sector and consumers.
European experience suggests sales of small, cheap cars especially benefit. However, scrappage schemes are likely to disappoint as a tool to assist struggling car manufacturers that produce larger, more expensive and often polluting vehicles.
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