What is a scrappage subsidy?
A scrappage subsidy is a "pay-to-scrap" scheme where a government offers a financial
incentive to car buyers if they scrap a car that has reached a specified age and in its place
they are offered a payment towards the cost of a new vehicle.
Germany and France both offer scrappage subsidies to consumers and there is a growing
number of voices from inside the UK business community and motor vehicle industry
clamouring for one to be launched in the UK. The Retail Motor Industry Federation and
the Society of Motor Manufacturers and Traders (SMMT) are at the head of the queue
lobbying for a scrappage scheme to be introduced as soon as possible.
Scrappage subsidies have certainly become more popular. Germany offers a Euro 2,500
payment for cars more than nine years old and France offers a Euro 1,000 payment. In the
United States, a ''Cash for clunkers' bill is being introduced which offers up to £3600 for
US consumers to buy new, more fuel-efficient vehicle assembled in the US and up to
£5400 for 100mpg or more plug-in hybrids. Customers buying cars built outside of the
country will only receive a maximum of £2900. And in Slovakia where there has been
huge foreign direct investment into their fledgling motor industry, incentives worth Euro
1,000 to Euro 1,500 are available.
Annual growth in new car registrations
Percent
Annual percentage change
20
20
10
10
0
0
-10
-10
-20
-20
-30
-30
-40
-40
03
04
05
06
07
08
09
Source: Reuters EcoWin
Arguments for a scrappage subsidy
1. It is a direct incentive for consumers to buy a new vehicle - a targeted subsidy
rather than the (ineffective) cut in VAT announced in December 2008
2. Stimulating demand will help keep car plants open and producing vehicles at a
time when the credit crunch and rising unemployment has caused a collapse in
new vehicle demand and production
3. There are environmental benefits if consumers swap older for newer - more fuel
efficiency vehicles that emit less c02 per km travelled
4. Crushing (and recycling) used cars reduces the risk of a sharp fall in second hand
car prices caused by vast over-supply
Arguments against a scrappage subsidy
1. Distortion of free market competition - why should the car industry be in receipt
of a subsidy and other sectors miss out? If cars can be scrapped for a payment
why not old televisions, or second hand books?
2. The payment brings forward demand that might have occurred anyway and risks a
sharp fall-off when incentives end.
3. There are extra costs of crushing / disposing of vehicles that was still roadworthy
and usable
4. There is an opportunity cost to financing a scrappage scheme - the money might
be better spent developing greener public transport alternatives
5. Subsidies might be a catalyst for protectionism i.e. only giving subsidies for new
vehicles produced within the domestic economy and not for importers. For
example the Malaysian government finances 50% of their scrappage scheme,
which pays owners of older vehicles to turn them in and purchase new cars from
Malaysian produced Protons and Peroduas. In the UK, nearly 90 per cent of new
cars are imported. UK made vehicles are exported to countries that may not have
a similar pay to scrap scheme in place.
6. If the scheme is applied to the smaller most fuel efficient vehicles, only the Nissan
Micra and the Mini would fit into the programme - they account for only 4% of
cars sold in the UK.
United Kingdom Passenger Car Production
Number of
Monthly output figures, non-seasonally adjusted
130000
130000
120000
120000
110000
110000
100000
100000
90000
90000
80000
80000
70000
70000
60000
60000
50000
50000
40000
40000
30000
30000
20000
20000
10000
10000
0
0
95
96
97
98
99
00
01
02
Passenger cars, for home market
03
04
05
06
07
08
09
Passenger cars, for export
Source: Society of Motor Manufacturers and Traders
Consumers respond to incentives – usually!
The effectiveness of any scheme depends on the responsiveness of consumers to an
incentive. Some estimates claim that a £2,000 subsidy might stimulate demand by as
much as a quarter of a million year within twelve months, providing a major shot in the
arm for a distressed UK vehicle manufacturing industry. But with motor credit
increasingly difficult to come by and unemployment rising at a rapid rate, will there be
sufficient consumer confidence for such a measure to work?
A scrappage scheme would be great news for recycling plants and car dealerships and
perhaps just the fillip that our motor industry needs. But for many people such a scheme
is an ill-disguised scheme for a failing industry that already suffers from over-capacity.