Now that the German government seems set on increasing the cash pool from which the “Abwrackprämie”, a 2500 Euro subsidy paid to anyone who decides to send their car to the scrap yard and replace it with a shiny new one, is paid by another 3.5 billion is probably a good time to remind ourselves not just why this is a terrible way to stimulate the demand for cars (there’s a story about broken windows that comes to mind), but also why the rationale that replacing old cars with new ones is good for the environment (the German government prefers to the subsidy as “Umweltprämie”) is probably bunk in most cases. The ever eloquent Willem Buiter explains:
The most disingenuous argument for subsidising the early scrapping of cars and their replacement with new cars is the environmental one: new cars are likely to be less environmentally damaging than old cars. Save the environment – buy a shiny new energy-efficient car.
Even if the new cars that are subsidised were just the most environment-friendly ones hybrids, 80 miles per gallon marvels etc. – which is not always the case – the production of these new vehicles is, when you put it through the appropriate global input-output matrix, an environmentally damaging affair, requiring lots of metals, plastics and energy. You have to weigh the environmental benefits from running a new car a lower flow production of greenhouse gases, say against the one-off environmental cost of a higher volume of car production.
If the replacement incentive is sufficiently short-lived, there need not be any long run effect on the level of car production, and even little if any effect on the undiscounted cumumulative volume of car production. A given cumulative volume of current and future car production would simply have its time-profile shifted from the future to the present. But if the scrapping subsidy were longer-lasting, cumulative car production would increase, resulting in greater environmental damage. The net balance of environmental benefits and costs is by no means obvious.