U.S Votes to Extend Funds to Subsidize Rebates for Older Cars — A Plan Pioneered in France and Other EU Countries     Print Email
Thursday, 06 August 2009

This blog post is based on two articles that appeared in Le Monde on August 4th, 2009.

Paris is priding itself on inventing an economic incentive to revive car sales while cutting carbon emissions. This economic-stimulus plan – called “cash for clunkers” – has now been copied in other European countries and in the United States.

It has sparked a wave of new car sales in all these countries where car-owners can get a government rebate if they trade in their vehicles for new, more fuel-efficient models.

The concept has aroused some controversy. On the economic side, critics say that customers would have eventually bought new cars any way and some environmentalists argue that the benefits are largely illusory: the carbon emissions triggered by manufacturing new cars can only be offset by several years on the road for the new cars. It would have been better, these critics say, for governments to demand even higher standards of miles-per-gallon efficiency for the new cars that qualify to bring rebates to their purchasers.

In practice, these objections are being over-ridden by the popularity of the program, which incites consumers to spend on new cars now, brings business to car-dealers who have been suffering in the economic slump and also triggers demand for a revival of output by car manufacturers.

The program started with a French government program that started in December last year and offers €1000 ($1440) cash premiums for the purchase of new fuel-efficient cars with a trade-in of vehicles that are over 10 years old. This measure has encountered an immediate success in France, where 1,319,950 vehicles were sold between January and July – a 2% increase over the previous year.

The French government is now considering a progressive decrease in the premiums, which are estimated to cost €390 million ($561 million), to prevent a sudden drop in sales. Meanwhile other countries – including the United States – have caught on and are now offering similar deals at home.

Since July, the United States has set up a “Cash-for-Clunkers” program, offering up to $4,500 discount for the purchase of a newer vehicle, if buyers trade their old car in. The initiative has been so successful that its $1 billion budget is almost depleted. The U.S. Senate voted today to extend the program by $3 billion, which would prolong it until September 2010, and make it the largest such program in the world. The “big 3” American auto manufacturers have done particularly well since the inception of this program even though there is no “buy American” provision.

Germany has cleared a €5 billion ($7.1 billion) budget to revive the German auto-industry, €2 billion ($2.8 billion) of which will be distributed as premiums. Berlin is offering every person owning a vehicle older than nine years €2,500 ($3,600) if they replace it with a new car. The results were spectacular – new car matriculation jumped 30% this July compared to July 2008.

Austria also implemented a similar program in April, offering a €1,500 ($2,160) discount to anyone exchanging a car older than 12 years against a less polluting one. After disastrous sales in March, purchases spiked in April, with a 12.8% increase compared to April 2008. However, Vienna announced beginning July that it would discontinue the program due to its high costs.

The United Kingdom is also offering a deal to consumers, who can receive a £2,000 ($3,400) premium, financed by both the government and the car manufacturers, if they buy a new car in exchange for one that is over 12 months old. This has enabled Britain to slow the decline of car sales in June.

Spain, whose plan also gets financed by a combination of government and car manufacturers’ money, has succeeded in slowing the drastic fall in sales. In July sales were only 10% lower than in July 2008 whereas before the stimulus plan, they were down 30 to 50% compared to the previous year.

Romania is the only country whose automobile industry was not stimulated by a premium. Although more cars have been sold since March when the 3,800 lei ($1,200) incentive was announced, purchases during the first quarter this year were still down 51.3% compared to the same time in 2008.

Despite the reservations of its critics, this stimulus measure has succeeded in boosting consumer confidence on both sides of the Atlantic, a positive effect that could spill over into other industries.