Rust in Motion: The Political Environmental Trap of Vehicle Tax Exemptions

Transportation is a major source of greenhouse gas and air pollution emissions worldwide, with most automobile pollution coming from vehicles older than 10 years. Yet, many policies discourage the removal of older vehicles from the fleet, with potential consequences for pollution and public health. This paper examines an equity-motivated anti-scrappage policy in Brazil using a border-pair design that exploits state variation in the age thresholds for vehicle ownership tax exemptions. Using municipality-level vehicle registration data from 2013-2020, we find that lower exemption age thresholds increase the average fleet age by up to one year, as they encourage owners to retain vehicles until they qualify for tax exemptions. Using fleet- and satellite-based estimates of pollution and administrative health data, we show that these policies increase on-road CO2 emissions per capita by up to 23% and PM2.5 concentrations by 4%, while deteriorating infant health outcomes. Leveraging state reforms that raised exemption ages, we find evidence that incumbents face greater electoral penalties wherever a greater share of the vehicle fleet re-enters the tax base, consistent with a “political environmental trap.” Within an MVPF framework, we find that lowering the exemption age by five years generates a net welfare loss of $0.78 for every $1 of forgone government revenue.