Car-scrapping incentives

Publication date: 24 March 2009

Car-scrapping incentives

Germany does it, France does it, the US is edging towards doing it – and Britain is under pressure to follow. State-run, car-scrapping incentive schemes seem to work. German consumers receive €2,500 towards a new car if they scrap one above nine years old: car sales there rose 21 per cent year on year last month. In France, which offers only €1,000-€2,000 scrapping subsidies, sales still fell 13 per cent but less than the 22 per cent drop seen in the UK or the 49 per cent in Spain. Such schemes have helped prompt Renault to start building more small Clios at a French plant (not, despite initial confusion, at the expense of a Slovenian factory).

These incentives can do what chucking money at manufacturers cannot: persuade consumers to spend. They claim environmental benefits, too, since consumers generally buy small, lower-emission cars. But they are double-edged. Incentives pull forward demand, creating a nasty fall-off when incentives end. And eco benefits must be weighed against the impact of building new cars while crushing still-viable old vehicles. They also, potentially, distort competition. The US dumped a “cash for clunkers” plan last year amid grouching it would help importers. A new bill last week has a protectionist whiff, restricting a proposed incentive to cars assembled in North America.

Industry lobbying for a UK scheme has met similar carping. Since four-fifths of new cars sold in the UK are imports, mostly overseas manufacturers would benefit. Though nearly 80 per cent of British made cars are exported, these are medium-sized, so helped little by scrapping schemes elsewhere. One way to defuse criticisms would be to widen a scheme beyond new cars to more environmentally friendly used cars, say, a few years old. That would bolster residual values and support the dealer and maintenance network that employs hundreds of thousands. Compared with last December’s costly but irrelevant value added tax cut, it could be money well spent.

BACKGROUND NEWS

Fears that France’s €7.8bn state aid package for its car industry is protectionist resurfaced on Friday when Renault announced that it was relocating production of one its small cars from Slovenia to a plant in France.

Luc Chatel, the industry minister, told Europe 1 radio that Renault was to ”announce the repatriation of the production of one of its vehicles” to an assembly plant in Flins, west of Paris. Renault said the Slovenian plant was at full capacity and would not lose out.

Renault said the move to build more small cars in France resulted from the success of car scrapping incentive schemes in France and Germany in boosting demand. The UK government, which has no similar scheme, is being lobbied hard by the car industry to introduce one.

Source: Financial Times