How Targeted Vehicle Scrappage Subsidies Can Reduce Pollution Effectively

Policymakers are showing renewed interest in subsidizing scrappage of old and heavily polluting vehicles. In late 2019, Senator Schumer proposed spending almost half a trillion dollars over 10 years to subsidize scrapping older vehicles and replacing them with electric vehicles. The US House of Representatives Select Committee on the Climate Crisis and Joe Biden have mentioned similar ideas as part of comprehensive climate policy packages. At the same time, many states are considering scrappage programs to reduce transportation sector emissions and achieve long-term climate objectives. See, for example, California’s Clean Cars for All program and other programs by states belonging to the US Climate Alliance.In addition to providing economic stimulus by providing money to households, subsidizing scrappage appeals to policymakers because the subsidies can complement other environmental policies for the transportation sector. Most existing national climate policies focus on new vehicles, like setting emissions rate and fuel economy standards for new vehicles and offering tax credits for buying new electric vehicles. These policies cause newer vehicles to emit less pollution than older vehicles, and economy-wide transportation emissions decline over time as the new vehicles replace older ones. Subsidizing scrappage of older and higher-emitting vehicles can hasten the turnover of the vehicle fleet and further reduce emissions over time.Notwithstanding this appeal, research on vehicle scrappage programs has shown that their environmental benefits to be disappointing. In the Car Allowance Rebate System (commonly known as “Cash for Clunkers”), during the summer of 2009, a new car buyer received $3,500-$4,500 to scrap an older vehicle and replace it with a new fuel-efficient one. The program cost about $3 billion (2009$) and reduced emissions at a fiscal cost of about $300 per metric ton of carbon dioxide, which is substantially higher than contemporaneous programs (Palmer and Burtraw 2005 and Li et al. 2013). Aside from improving the environment, the program aimed to stimulate the economy during a deep economic recession by promoting new vehicle sales. However, Hoekstra et al. (2017) find that the environmental and stimulus objectives interfered with one another, severely hampering the stimulus effects.Cash for Clunkers (and similar programs in other countries) had such small environmental benefits because they had little effect on scrappage behavior. Of the $3 billion of spending in Cash for Clunkers, most went to households who would have bought new vehicles anyway—either during the program period itself or later in the fall of 2009 (Mian and Sufi 2012). Older vehicles tend to be driven relatively little during the final years before they are scrapped, and many of the 700,000 vehicles that were scrapped under Cash for Clunkers probably would have been scrapped within the next few years anyway. Because those vehicles had few remaining miles (and emissions), the environmental benefits of scrapping them slightly earlier were modest. Or to put it another way, most of the subsidy money went to people who would have scrapped their vehicles soon regardless—akin to what economists refer to as “adverse selection.” This adverse selection also harmed the stimulus effects of the program (Li et al. 2013).This paper evaluates hypothetical scrappage schemes and assesses whether linking subsidies to vehicle attributes such as age and emissions rates—which I refer to as “targeting the subsidies”—can reduce adverse selection and improve the efficacy of the subsidies at changing behavior and reducing emissions. Incentivizing scrappage is most effective when the scrapped vehicles have high emissions rates and would have otherwise been driven many miles in the future. The renewed interest in subsidizing scrappage raises the following question: how should scrappage subsidies be designed? While research on scrappage programs provides some general insights, I am not aware of quantitative analysis that answers this question.Recent proposals have linked the purchase and scrappage subsidy—that is, a person receives the subsidy only if the scrapped vehicle meets certain criteria (such as a minimum age) and the new vehicle meets other criteria (such as being an all-electric vehicle). In this paper, I consider a scrappage subsidy that depends only on the attributes on the vehicle being scrapped and does not impose any requirements that the recipient purchase a new vehicle. I do this because considering an unlinked scrappage subsidy allows me to assess whether carefully selecting the eligibility criteria can improve emissions outcomes, without worrying about confounding influences of the new vehicle purchase decision. Also, although some recent proposals link scrappage and purchase, the ultimate policy may not do so, and it is worthwhile to consider each subsidy in isolation. Finally, because new vehicle prices are typically several times higher than used vehicle prices, the level of a scrappage subsidy needed to affect behavior is much lower than the level of a new vehicle subsidy needed to affect behavior.Using a simple computational model of vehicle emissions, I reach two main conclusions:Providing a single subsidy amount to all older vehicles is a costly way to reduce emissions. Cash for Clunkers and recent proposals provide a fixed subsidy amount if the vehicle is drivable and exceeds a minimum age. A hypothetical scrappage program with these attributes would cost the government roughly $600 per metric ton of carbon dioxide reduced (2019$), which is probably substantially higher than the societal benefits from the lower emissions.Tying the subsidy amount to the scrapped vehicle’s estimated future emissions could reduce the cost by half, to roughly $300 per metric ton of carbon dioxide. The program could be implemented by estimating future emissions from the vehicle’s make, model, age, and odometer reading at the time of scrappage.Adverse selection explains these results; targeting the subsidy based on vehicle age, class, and emissions rate—or, even better, age, class, emissions rate, and odometer reading—can dramatically reduce (but not eliminate) the amount of adverse selection that occurs in response to the subsidy, improving environmental outcomes. Although the scenarios consider a national subsidy, similar conclusions would apply to any state that subsidizes scrappage. Section 4 at the end of this paper discusses a few caveats to these conclusions.