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US considers adopting German-style car-scrapping subsidy

As US lawmakers discuss the creation of their own system of auto trade-in subsidies, critics of the scheme here in Germany are questioning the motivations of decision-makers in Berlin.

Wrecked cars stacked up in a scrapyard in Hamburg

The German government is investing five billion euros in car wrecking subsidies

For many Germans the government's car scrapping incentive program is a dream come true. They simply drop their old rust-bucket off at the junkyard and receive 2,500 euros from the state to help buy a shiny, new car.

With more than a million applications received so far, the German government extended the scheme this week and boosted its funding from 1.5 to five billion euros.

German Transport Minister Wolfgang Tiefensee says the unexpected popularity of the trade-in program is good news for the nation’s ailing economy.

"Our efforts to strengthen the automobile industry have been so successful that other EU member states have become envious of the scheme," Tiefensee said.

A total of 11 European countries have introduced car-scrapping programs to stimulate demand and help counter the recession, according to the European Automobile Manufacturer's Association.

Now leaders in United States appear to have warmed to the idea of launching their own scheme as well, reviving plans shot down by congress earlier this year.

Cash for clunkers

German Chancellor Angela Merkel points into the distance as she speaks with US President Barack Obama

US President Barack Obama appears keen to follow Chancellor Angela Merkel's lead

US lawmakers are examining two proposals for their own 'cash for clunkers' scheme.

The first, put forward by a Democrat representative, would pay consumers up to $5,000 (3,800 euros) if they trade in models from 2001 or earlier and buy a new vehicle assembled in the US, Canada or Mexico.

While that might be good for the US car industry, critics say it would harm international trade and do little to help cut the nation’s greenhouse gas emissions.

The second proposal, drafted by a team of Democrat and Republican senators, would involve payments of $2,500 to $4,000 linked to tight efficiency controls. The plan would not discriminate against foreign car manufacturers, and is therefore likely to face tough opposition from union leaders.

As lawmakers debate the pros and cons, US President Barack Obama has stressed that he wants to achieve the same goals German Chancellor Angela Merkel listed when she introduced her subsidy program; to support the domestic car industry, secure jobs, and protect the environment.

But just how effective has the German experience really been?

Green grievances

While most Germans refer to the trade-in subsidy scheme as a 'wrecking bonus,' the federal government prefers to call it the 'environmental premium' program. But critics aren't convinced that the scheme is as green as Berlin would have voters believe.

"The wrecking subsidy scheme offers no real ecological benefits because it doesn't dictate what kind of new car the recipient should buy," Gerd Lottsiepen, a spokesman fromGermany's VCD traffic association, told Deutsche Welle.

"It could have fuel consumption of three, five or 10 liters per 100 kilometers, and it wouldn't make a difference. You get the money as long as you buy a new car and scrap one that's at least nine years old."

The Brussels-based European Federation for Transport and Environment says the German scheme is flawed because it does nothing to stop a motorist from scrapping a tiny Volkswagen Lupo (with fuel consumption of three liters per 100km) and using the government bonus to buy a gas-guzzling Porsche Cayenne Turbo SUV (14.7 liters per 100 km).

A welder works on a car production line

Environmentalists say the construction of so many new cars is damaging the environment

"It is being dressed up as an environmental measure, despite evidence that it can do more harm than good," the federation wrote in its monthly bulletin.

It quoted an OECD study from 10 years ago that said such schemes "have a high average cost per ton of pollution avoided" and "do not compare favorably with other alternative policy tools on purely environmental grounds".

The VCD says although most Germans making use of the wrecking subsidies are choosing smaller, more fuel efficient vehicles, they may still be doing more harm than good.

Lottsiepen says that considering that the production process accounts for about half the damage a car inflicts on the environment over its entire lifespan, a policy that encourages certain older cars to stay on the road longer would inflict less environmental damage than the current scheme.

Windfall effect

While the trade-in subsidy has proven a hit with German motorists, boosting car sales by 40 percent in March, economic experts say the long term effects of the program are questionable.

Professor Willi Diez, director of Germany's renowned IFA institute for automotive economics, told Deutsche Welle he predicts demand for new cars will fall dramatically once funding for the bonus payments dries up.

"Schemes like these always create a so-called windfall effect. That is, half of the cars sold under the premium scheme this year are cars that won't be sold next year," Diez says.

"The government is, of course, hoping that other economic sectors will have recovered by then, and can compensate for this effect."

The wrecking premium is just one component of the German government's broader economic stimulus package, which aims to boost consumption and protect jobs in the face of the global economic downturn.

But many critics argue that the car subsidies do little to help struggling German carmakers because most consumers are using the taxpayer-funded bonus to buy small cars made by foreign manufacturers.

Foreign beneficiaries

A new Mercedes-Benz E-350-CGI

The bonus scheme has done little to boost sales at the high end of the German auto market

According to a Federal Motor Vehicle Office report from early April, German sales at Daimler's Mercedes-Benz brand plunged 7.6 percent last month and fell 1.1 percent at BMW.

In contrast, registrations tripled for cheaper vehicles made by Japan's Suzuki and Italy's Fiat, and doubled for cars made by South Korean manufacturers Kia and Hyundai.

While Volkswagen did manage to lift domestic sales by 36 percent in March, it lost market share to French rival Peugeot Citroen, which enjoyed a 63 percent gain, and Japanese auto giant Toyota, whose sales surged by 55 percent.

Meanwhile, General Motors' troubled German unit, Opel, saw sales jump 27 percent, mainly due to increased demand for its Corsa compact.

German critics of the scrapping incentive say that while bonus payments may be a boon to customers and some dealers, they're hurting other parts of the wider industry, such as used-car showrooms, parts suppliers and workshops that service older models.

"Economic nonsense"

Portrait of Professor Wolfgang Franz

Wolfgang Franz says the expansion of the subsidy program is politically motivated

Some of the harshest criticism of Berlin's decision to prolong the bonus program has come from the chairman of Merkel's council of independent economic advisors, Wolfgang Franz, who says the program is aimed primarily aimed at winning votes in September's national election.

"Every decent economist would agree that this decision is economic nonsense," Franz told a Bloomberg reporter in an interview published on Friday.

Franz, a professor at the ZEW Center for European Economic Research, said Berlin was guided by a "perception that voters would be angry when the money is gone" and was therefore "too afraid to bury a project as popular as the scrapping program".

Author: Insa Wrede/Sam Edmonds

Editor: Chuck Penfold

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