Money talks in vehicle retirement: Ways to strengthen India’s scrappage program

The draft rules of India’s highly anticipated Voluntary Vehicle-Fleet Modernization Program finally came out in March. The goal of the program is to retire more than 2 crore (20 million) old, high-emitting vehicles out of the fleet on an accelerated schedule. This is important, well-intentioned policy, but the proposal falls short on a key element: incentives.

Yes, draft rules “advise” state governments and the auto industry to provide incentives for new purchases to those with scrappage certificates. It’s suggested that states discount road tax by up to 25% for private vehicles and 15% for commercial, and that the auto industry provide a 5% rebate. Additionally:

  • New vehicle registration fees may be waived for those with a scrappage certificate.
  • The scrapping center will offer a scrap value for the old vehicle of approximately 4%–6% of the ex-showroom price of a new vehicle.
  • A new green tax will be charged for vehicles more than 8 years old at the rate of 10%–25% of road tax.
  • Fees are suggested to be increased for the fitness certificate and fitness test for commercial vehicles more than 15 years old.

Even though the discounted road tax became a notification later, to enforce that some discount on road tax be provided by each state, the extent of the uptake is still subject to much speculation. For one, many states might only offer only a partial discount due to limited budgets. For another, so far no one in the automobile industry is promising to provide the rebate as advised.

The scrap value of an old vehicle is typically about 2%–3% of the price of a new vehicle, and that often doesn’t make a big difference for consumers. The new proposed registration fee of ₹600 (US$8.18) for cars (private vehicles) and ₹1,000–₹1,500 (US$13.64–$20.46) for medium and heavy buses and trucks (commercial vehicles) is negligible when compared with the costs of purchasing a new vehicle. And the proposed re-registration fee for older vehicles is less than the one proposed in 2019 and the disincentive for keeping older vehicles is on the smaller side. The new green tax adds a little bit more than 5% additional cost even with the highest road tax in India, which is about 20% of the new vehicle purchase price, and thus is still minor when compared with the cost of a new vehicle.

Based on the best practices learned from scrappage programs implemented elsewhere, direct fiscal incentives are most important for consumer participation. California has been funding the scrappage and replacement of old heavy commercial vehicles since 1998, with an average grant per vehicle of slightly more than $28,000. This helped replace more than 24,000 vehicles in the first 12 years. China provided an average subsidy of about ¥14,000 per vehicle (US$2,270) during 2009–2010 to retire so-called yellow-label vehicles, Euro 0 gasoline vehicles (pre-2000), and Euro 0, I, and II diesel vehicles (pre-2008). ICCT interviews with experts in China found that the participation rate for this type of program was low if the total subsidies were less than 10% of the price, especially for heavy commercial vehicles. Mexico replaced about 21,000 trucks over 10 years old with incentives ranging from $5,350 to $12,400 provided between 2004 and 2010. In all three jurisdictions, these incentives were either in the form of cash provided when the vehicle was scrapped or a reduction of the purchase price of a new vehicle equipped with the most advanced emission control technology available on the market.

A fleet modernization program is an ambitious policy that unavoidably requires major investment. The California Air Resources Board spends over $60 million on grant funding each year to clean up older polluting engines throughout California. China’s central government spent ¥6.41 billion (US$1.04 billion) on scrapping yellow-label vehicles in 2010 alone, and Mexico spent around ₱$2.207 billion (US$166 million) between 2004 and 2010 on its scrappage program.

Beyond simply advising state governments to provide financial support, India could set specific goals for each state. For example, even after China wrapped up its national scrappage program in 2010, many provincial-level programs continued, mostly because China set provincial targets to get rid of old vehicles and then encouraged provincial governments to roll out early retirement plans as part of the State Council’s air quality improvement plan. At the same time, provincial governments and even city governments also faced pressure to reduce tailpipe emissions from mobile sources to comply with national ambient air quality standards. In India, the central government could offer a matching fiscal incentive to states that incorporate vehicle scrappage as part of the Clean Air Action Plan for cities and offer fiscal incentives for vehicle retirement.

Some regions, including California and Beijing, have had success with offering fiscal subsidies that decrease over time. This encourages owners of high-emitting vehicles to replace them as early as possible and results in the largest possible environmental benefit. When the funding runs out, the program can then turn into a mandatory scrappage program that forces all private vehicles over 20 years old and commercial vehicles over 15 years old that do not pass fitness tests to retire. In India, this would match the current requirements on government and Public Sector Undertaking (PSU, state-owned enterprises) vehicles older than 15 years.

Complementary policies can further drive success with scrappage, and these are missing from India’s current draft. Non-fiscal measures including road access restriction, mandatory age limits for vehicles, and operation restrictions have proven effective in other regions and have their own distinct emissions benefits. Road access restriction is one of the most common approaches adopted in parallel with a scrappage program. Beijing was the pioneer and imposed limitations on the activity of yellow-label vehicles starting in 2003. Many other cities in China, including Shanghai and Guangzhou, subsequently also implemented yellow-label vehicle travel restrictions.

India could also consider the following complementary policies:

Prioritize the retirement of old, high-emitting heavy commercial vehicles. Although heavy commercial vehicles account for less than 3% of the vehicle market in India, they contribute more than 55% of the black carbon, 60% of fine particulate matter, and 70% of nitrogen oxides emissions from on-road vehicles, with most of that coming from vehicles more than 10 years old. A stricter timeline for retiring these vehicles earlier would maximize the emissions reductions from the program and thus the benefits of the funding invested.

Better utilize the fitness test, part of the inspection and certification scheme, as a supportive mechanism. As mentioned above, increased fees for the fitness certificate and fitness test are suggested in the proposal, but only for commercial vehicles more than 15 years old. India could request more frequent fitness testing for more vehicle types and even in some highly polluted regions. This is done in Mexico and in key regions in China, where multiple inspection and maintenance tests—two to four per year—are a requirement for older heavy commercial vehicles. Further, color-coded labels can be introduced in parallel, based on the results of fitness testing. This was widely adopted in China and vehicles that passed the test were issued a color-coded windshield sticker showing the vehicle’s emission standard. This type of label also indicates whether a vehicle qualifies for programs like registration and scrappage, subsidies, and complementary policies like low-emission zones.

Remote sensing is a cost-effective add-on for the scrappage program. It’s effective in screening the fleet for high-emitting vehicles, detecting individual tampering, and encouraging proper maintenance of vehicle emission control systems. Beijing has used remote sensing since 2013 to support the inspection and maintenance program and monitoring of vehicle tailpipe emissions. China also implemented the world’s first national regulation for using remote sensing in 2017.

Launch the scrappage program along with a zero-emission vehicle mandate. Scrappage is most effective in reducing emissions and improving air quality when replacement vehicles are as clean as possible. In the scrappage program my colleagues and I proposed 5 years ago, when this conversation first began in India, we suggested introducing it right before the implementation of a more stringent emission standard. At the time, that was Baharat Stage (BS) VI. But now, with BS VI in place for over a year, India could take a step forward by launching the scrappage program along with the zero-emission vehicle mandate to spur uptake of electric vehicles. The central government has already asked states to waive the road tax for electric vehicles, and about a dozen of states have done so. Some more incentives will likely be needed to eliminate the price gap between conventional and electric vehicles, but such a proposition could garner more financial support from the automobile industry.

All in all, the lack of incentives leaves a gap between the proposed scrappage program and something that’s likely to be a “win-win policy for all stakeholders,” as is hoped. Lessons learned in other markets show that success will almost certainly require the Indian government to pick up at least some of the tab to pay for vehicles that get scrapped.