How Incentives to Scrap Old Cars Can Be More Cost-Effective

As policymakers demonstrate a renewed interest in programs to get old, gas-guzzling vehicles off the road, a new study from Resources for the Future (RFF) shows that these programs are often expensive ways to reduce emissions. However, the study provides a potential fix: give owners of carbon-intensive cars rewards linked to their cars’ future estimated emissions.

One reason vehicle scrappage programs like “Cash for Clunkers” have relatively high costs and low environmental benefits is that the cars people scrap often would have been scrapped soon regardless. In these cases, which economists call “adverse selection,” the government pays people to do something they would do for free, so the program does not cause any benefit.

In the new RFF issue brief, author Joshua Linn evaluates hypothetical vehicle scrappage incentive programs and assesses how they can be designed to reduce adverse selection to more effectively change behavior and reduce emissions.

Topline Findings

• Incentivizing scrappage is most effective when the scrapped vehicles have high emissions rates and would have otherwise been driven many miles in the future.
• Providing a single subsidy amount to all older vehicles is a costly way to reduce emissions, especially since many older vehicles would have been scrapped anyway.
• Targeting the subsidy based on factors such as vehicle age, class, emissions rate, and odometer reading can dramatically reduce—but not eliminate—adverse selection, which would improve environmental outcomes.
• Tying the subsidy amount to the scrapped vehicle’s estimated future emissions could reduce the cost by half, from approximately $600 to $300 per metric ton of carbon dioxide.

“In addition to providing economic stimulus by providing money to households, subsidizing scrappage may appeal to policymakers because the subsidies can complement other environmental policies for the transportation sector,” Linn remarked.

An effective scrappage program could be a boon for leaders from the federal to state level. Aside from inclusion in presidential candidate Joe Biden’s climate plan, Senator Chuck Schumer introduced a half-a-trillion-dollar scrappage and electric vehicles subsidy program to the US Senate last year. Various state governments have also considered creating programs of their own. The potential for an effective program to retire old and heavily-polluting vehicles has captured political interest and could help reduce transportation emissions and achieve long-term climate objectives.

To learn more, read “How Targeted Vehicle Scrappage Subsidies Can Reduce Pollution Effectively,” by RFF Senior Fellow and University of Maryland Professor Joshua Linn.