Scrapping subsidies during the Global Crisis – Evidence from Europe

Nina Leheyda, Frank Verboven, 5 December 2013

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Many governments around the world have introduced scrapping schemes during the last financial and economic crisis. In Europe, they were especially popular during the year 2009. Governments aimed to counteract the sharply declining demand for cars, while at the same time promoting cleaner cars with lower CO2 emissions. The effectiveness of the scrapping schemes for both of these objectives remains an open question. Most recent empirical work has looked at the 2009 ‘Cash for Clunkers’ programme in the US, which cost $2.85 billion and lasted for only one month. Li et al. (2013) find positive short-term effects on car sales (as do Mian and Sufi 2012), but the effect eroded over a longer time horizon, and the environmental benefits were small. In Europe, Sinn (2009) questioned the environmental benefits of the 2009 German scrapping programme. He argued that the fuel savings from replacing old gas guzzlers with new cleaner cars are lower than the energy cost of producing these new cars.

In a recent paper (Leheyda and Verboven 2013), we have quantified the demand and environmental effects of the European scrapping schemes during the financial crisis. Many European countries introduced these schemes at different moments in time, and typically for a longer period than the ‘Cash for Clunkers’ programme in the US. Two main types of schemes have been adopted:

  • Non-targeted scrapping schemes do not specify eligibility criteria, so that they apply to virtually all new cars regardless of their CO2 emissions.

Such schemes were introduced in Germany, the Netherlands, and the UK.

  • In contrast, targeted scrapping schemes specify certain conditions on the cars that can be purchased, especially on maximum CO2 emissions.

These schemes applied in France, Italy, Portugal, and Spain. For instance, under the French scheme of 2009, cars were eligible if their CO2 emissions did not exceed 160 grammes per kilometre.

We analyse monthly car sales from 2005-11 in nine European countries. We consider the sales evolution of essentially all car models and their engine variants. For each car, we know whether it was eligible (depending on its CO2 emissions and other factors), and we know the size of the subsidy (in absolute terms and as a percentage of the purchase price). We measure the policies’ impact by comparing the sales evolution of each car before and after the policy, using countries that did not (yet) adopt a similar policy as a control group.

Table 1 shows the main findings from this analysis – the estimated effects of the schemes on total sales, and on the average fuel economy of new cars.

Demand stabilisation effects

Our first main finding (left part of Table 1) is that the scrapping schemes had a strong stabilising impact on total car sales – in the crisis year of 2009, they prevent a further total sales reduction of 15.9%. The stabilising impact was especially strong in countries that adopted targeted schemes. In those countries, total sales in 2009 would have been 17.4% lower in the absence of such schemes (and 21.1% lower for the eligible cars). However, there was also a strong stabilising impact in countries that did not target their schemes to cars with low CO2 emissions, as they avoided a sales drop of 14.8%.1

Table 1 Impact of removing scrapping schemes on total sales and fuel consumption

Although scrapping policies stabilised sales in all countries, their individual performance varies. For instance, the German non-targeted scheme in 2009 prevented a sales drop of 17.6%. The effect was smaller in other countries with non-targeted schemes – in the UK sales would have been 13.3% lower, and in the Netherlands they would have been 4.4% lower. In most counties with targeted schemes, the stabilising effect was stronger. In Spain, sales would have been 20.3% lower without the scheme.

Perhaps surprisingly, we also find that countries that followed targeted schemes did not protect sales of their domestic producers better than countries that followed non-targeted schemes. For instance, in France (with a targeted subsidy) domestic brands even performed slightly worse than foreign brands through scrapping incentives – sales of domestic cars would have been 13.0% lower absent the subsidies, whereas sales of foreign cars would have been 15.4% lower. In contrast, in Germany (with a non-targeted subsidy) sales of domestic cars would have been 26.0% lower absent the programme, and only 19.6% lower for foreign cars. France may have targeted cars with low CO2 emissions because its domestic producers produce low CO2 cars, while Germany did not target since its domestic producers – both volume and premium – have cars with high CO2 emissions.

Environmental effects

Our second main finding (right part of Table 1) relates to the effects on fuel economy. The schemes induce consumers to substitute to more fuel-efficient cars, but the effects are small. In countries with non-targeted schemes, average fuel consumption of new cars would have been only 0.5% higher in the absence of the schemes. In countries with targeted schemes for low emission vehicles, average fuel consumption would have been 1.3% higher – which is still only a modest effect compared with the large total sales impact of the schemes. We do not know which vehicles consumers scrapped when purchasing a new car, but given the modest improvements in fuel efficiency over the past decade, it does not seem that the average fuel economy of the stock of vehicles improved substantially because of the schemes.

Conclusions

Summing up, the main effect of European scrapping schemes in the crisis year of 2009 was to temporarily stabilise total car sales. Their environmental benefits were very limited, so there is no environmental justification for scrapping policies – especially considering the cost of producing new cars to replace old cars, as stressed by Sinn (2009). Governments across Europe should thus critically assess their scrapping policies. Instead of spending subsidies on cars that are still good, there may be more productive investments to stabilise the economy during a crisis year.

References

Leheyda, N, and F Verboven, “Scrapping Subsidies during the Financial Crisis – Evidence from Europe”, CEPR Discussion Paper No. 9629.
Li, S, J Linn, and E Spiller (2013), “Evaluating "Cash-for-Clunkers": Program Effects on Auto Sales and the Environment”, Journal of Environmental Economics and Management, 65(2): 175–193.
Mian, A and A Sufi (2012), “The Effects of Fiscal Stimulus: Evidence from the 2009 Cash for Clunkers Program”, Quarterly Journal of Economics, 127(3): 1107–1142.
Sinn, H-W (2009), “Scrap Premium for the Economic Stimulus Package”, VoxEU.org, 25 February. http://www.voxeu.org/debates/commentaries/scrap-premium-economic-stimulu...


1 In elasticity terms, a one percentage-point increase in subsidy tends to raise car sales by 1.4% for cars under non-targeted schemes, and by 2.8% for eligible cars under targeted schemes.

Topics: Environment
Tags: Cash for clunkers, Europe, global crisis, scrapping subsidies

Postdoctoral researcher, KU Leuven