Ifo Viewpoint No. 101: Scrappage Scheme in the German Economic Stimulus Package
Munich, 3 March, 2009
The old-car scrappage scheme of the German government creates no economic benefits and makes no ecological sense.
John Maynard Keynes teased his audience with this proposition: When the economy is in the doldrums, the state should put banknotes in bottles, bury them in a mine, cover them with rubbish and then let the private sector dig them up. This would certainly get the economy going again.
Few have taken this ironic advice as seriously as the German government with its cash bonus for scrapping an old car. To pay people 2,500 euros for destroying an old car so that they can buy a new one is just like burying the Keynesian bottles and digging them up again. A nine-year-old, German-made car is far from being a clunker. An accident-free BMW or Mercedes often stays on the road for 20 years, and it is not unusual for a VW Golf to last 15 years. The engines of the premium manufacturers run for 300,000 kilometres and more, and with an average performance of 20,000 kilometres a year, after nine years they clock in only 180,000 kilometres. In addition, since the 1980s the steel used for the chassis has been galvanised so that rust is no longer a problem. Some carmakers even give a 30-year guarantee against corrosion. In short: scrapping a scrap nine-year-old car makes no economic sense.
Germany has been selling many of its used cars to Africa, Eastern Europe and Central Asia, countries that teem with old German cars. Thanks to their robust construction, German vehicles cope well with the bumpy local roads. In 2006 Germany exported 551,000 used cars for some seven billion euros. Now the state is willing to pay 1.5 billion euros (later increased to 5 billion euros) for re-routing some of theses exports to the scrap yards. An astonishingly twisted logic!
But are there no ecological reasons for the government’s scrapping bonus? The Süddeutsche Zeitung recently ran a lengthy front-page article citing experts according to whom the scrapping bonus will contribute to environmental protection because it will help replace gas guzzlers with efficient, modern vehicles. This, the article maintained, would even be the case if we take into account that the production of a VW Golf costs 25,000 kilowatts of energy and a top-of-the-line car 50,000 kilowatts.
Let us look at this more closely. A new Volkswagen Golf Mk6 with a 1.4 litre engine has an average fuel consumption of 6.4 litres per 100 km. With a yearly mileage of 12,000 km, it emits 1,790 kilograms of CO2 through its exhaust pipe. On the basis of the 25,000 kilowatt hours of energy used for the production, we have likely CO2 emissions of 10,790 kilograms or 1,199 kilograms a year, assuming the car runs for nine years (based on a typical German energy mix of 50 percent electricity at a 40 percent efficiency rate as well as 50 percent fuel produced at a five-percent efficiency loss).
Converted into the individual years, the production alone accounts for 67 percent of the CO2 emissions that the new engine emits on the road. If we replace an old car with a new Golf, this only helps the environment if the fuel consumption of the old car was more than 67 percent higher than the fuel consumption of the new Golf. This could be the case in some instances if the new Golf replaced a gas guzzling luxury vehicle. If the car replaces a model with a similar engine size, this savings cannot be achieved because nowhere do we find economising effects in fuel consumption of the necessary order of magnitude.
For the Golf itself there are no savings effects. Ten years ago, a Golf (Rabbit) Mk4 with a 1.4 litre engine got the same 6.4 litres per 100 km fuel consumption that a similarly sized new Golf Mk6 gets. The efficiency gains in the newer motor are used to propel a heavier vehicle and not to reduce fuel consumption. For this reason, replacing an old Golf with a new one means an increase in CO2 emissions of around two thirds.
We can calculate almost as many factors as we choose and the results are still the same. Even with an annual performance of 20,000 km and a service life of 15 years, the critical percentage for the additional consumption of the older car vis-à-vis the new Golf Mk6 is still 24 percent. For vehicles of the same engine size, this percentage is rarely reached. The calculation is even clearer for a luxury car. Here replacing an old with a new car is even less beneficial since the energy consumption for production in comparison to fuel consumption is higher than for smaller vehicles.
However we look at it, in all plausible scenarios, CO2 emissions rise if an old car is scrapped and replaced with a similar-sized vehicle. If we are serious about protecting the environment, we should not scrap our old cars but instead the scrappage scheme in the economic stimulus package.
Professor of Economics and Finance, University of Munich
President of the Ifo Institute
Published as "Abenteuerliche Wegwerflogik“, WirtschaftsWoche, no. 6, 2 February 2009, p. 48.