Scrap Premium for the Economic Stimulus Package*

Posted by Hans-Werner Sinn on 25 February 2009

The scrap premium for old cars, approved by the Federal Government, yields no economic benefits. And it is ecological nonsense

John Maynard Keynes once greatly spoofed his audience. In times of recession, the state, so the famous economist, ought to put bills of money in bottles, bury them in a mine, fill the whole lot up with rubbish and leave it to private business to dig them up again. This would get the economy going again.
Few took this ironic advice as literally as the German government with its scrap premium. To pay people €2,500 for destroying an old car in order for them to go out and buy a new one, is about the same thing as the burying and digging up of Keynes’ bottles. Nine year old cars of German premium producers are far from being scrap heaps. An accident-free BMW or Mercedes may sometimes be driven for 20 years, a VW Golf frequently runs for 15 years. The motors of the premium producers last 300,000 kms and more, but after nine years and an annual average of 20,000 kms, have done only 180,000. In addition, the sheet metal used for their body has been galvanized since the 1980s so that rust is no longer an issue. Some automakers even give a 30-year guarantee against rusting. In short: scrapping nine year old cars just makes no economic sense.
In the past, Germany used to sell its used cars on a grand scale to Africa, Eastern Europe and Central Asia, where it teems with old German cars. Thanks to their robust construction, the German cars are well suited to the bumpy roads there. In 2006 Germany exported 517,000 used cars for which it received about € 6 billion. Now the government is willing to pay up to €1.5 billion to divert a good part of these exports to scrap yards. What an adventurous throw-away logic! 
But do not at least ecological reasons argue for the scrap premium of the government? The "Süddeutsche Zeitung" recently reported in big letters on its title page that experts had calculated that the scrap premium served to protect the environment because it would promote the replacement of old gas guzzlers by modern cars with low gas consumption. This would still be true if account were taken of the fact that the production of a VW Golf costs 25,000 kwh and the production of a premium model even 50,000 kwh of energy. 
Let’s redo the sums: A new Golf VI that has a gasoline engine with a displacement of 1.4 litres uses 6.4 litres of gasoline for 100 kms. Assuming 12,000 kms are travelled annually, this comes to 768 litres of gasoline per year, implying that 1,790 kg CO2 are pushed through the exhaust pipe. Given the 25,000 kwh of energy used in the production of the car, then a plausible division into electricity and fuel (50 percent electricity derived from the German generation mix with an efficiency of 40% and 50% fuel, that are produced with a 5% loss) we arrive at a CO2 emission for the production of 10,790 kg or 1,199 kg per year – assuming that the new car also runs for nine years.
Distributed to each year of its life, production results in an emission of 67 percent of the CO2 that the new motor emits in moving traffic. If an old car is now replaced by the new Golf, the environment benefits only if the gas consumption of the old car was more than 67 percent higher than that of the new Golf. This may be true in an individual case, if the new Golf replaces a gas-guzzling big car. If a car of similar size is replaced the savings cannot be realized, as nowhere there are or have been savings effects in gas consumption in the necessary magnitude.
For the Golf itself there has been no savings whatsoever. The Golf IV, which had been produced ten years ago, with a 1.4 litre engine, used the same 6.4 litres of gasoline per 100 kms as a brand new Golf VI with the same engine size.  The efficiency gain of the engine has been absorbed by additional weight instead of lower consumption. Hence, replacing the old Golf by a new one implies an increase of CO2 emissions of about two thirds.
This calculation may be varied at will, but the result will be the same. Even assuming 20,000 kms travelled per year and a 15-year life of the new car, the critical percentage for the additional gas consumption of the old car versus the Golf VI is still 24 percent. For cars of the same class even this percentage may only be reached in the rarest cases. Still more revealing is the calculation for luxury class cars. Here the replacement of an old car by a new one makes even less sense, because the energy consumed in production relative to the gas consumption is even higher there than for small vehicles.
No matter how you look at it: For all even halfway plausible constellations the CO2 emission rises when an old car is scrapped and replaced by a new one of similar size. Under environmental considerations, too, we should not scrap our old cars – but the corresponding part of the economic stimulus package.
Professor of Economics and Finance, University of Munich
President of the Ifo Institute
* Editors’ Note: This was first published as „Abenteuerliche Wegwerflogik“, WirtschaftsWoche, no. 6, 3 February 2009, p. 48.