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, policies often discourage removing older vehicles from the fleet, with consequences for pollution and public health. This paper examines an equity-motivated anti-scrappage policy in Brazil using a border-pair design exploiting state variation in vehicle tax exemption age thresholds. Using municipality-level vehicle registration data from 2013-2020, we find lower exemption thresholds increase average fleet age by up to one year, encouraging owners to retain vehicles until they qualify for tax exemptions. Using fleet- and satellite-based pollution estimates and administrative health data, we show these policies increase on-road CO2 emissions per capita by up to 23% and PM2.5 concentrations by 4%, while worsening infant health. Leveraging state reforms that raised exemption ages, we find incumbents face greater electoral penalties where more vehicles re-enter the tax base, consistent with a “political environmental trap.†Within an MVPF framework, lowering the exemption age by five years generates a net welfare loss of $0.78 for every $1 of forgone government revenue.