Premiums for new car sales as a response to COVID-19 – The case of Germany
Due to the economic impact of the COVID-19 crisis, in March 2020 there were about 38% fewer new cars registered in Germany compared to the same month of the previous year. In light of this reduction in sales, a number of politicians and industry lobbyists have proposed premiums to incentivize the purchase of new vehicles and to support the German car industry.
The last time the German government provided a similar premium for new car sales was during the economic crisis in 2009. At that time, buyers of new passenger cars received a bonus of €2,500 if in return they scrapped another car that was at least 9 years old. As a result of the €5 billion scrappage program the sales of new cars increased, at least temporarily, in 2009. In particular, customers interested in mini, small, and compact class passenger cars decided to purchase new vehicles. At the same time, those interested in premium segment vehicles were seemingly not impressed by the government bonus.
The 2009 scrappage program was not tied to any environmental criteria. As a result, the average CO2 emission level of new passenger cars under real-world driving conditions decreased by only 4% in 2009 but then stagnated in the following years. With respect to air pollutants such as nitrogen oxide (NOx), the new cars that benefitted from the scrappage program were cleaner than the old vehicles they replaced. However, as we know today, these low NOx emission levels in many cases were only true on paper, not in reality.
How would a purchase subsidy have to be designed today if it aims to help both the car industry as well as the environment?
Recent data on NOx emissions from about 100,000 vehicles demonstrate that the emission levels for diesel cars certified under Euro 3 to Euro 6 emission standards hardly differ under real driving conditions. The emission levels are also much higher than those of gasoline vehicles. New vehicles certified according to the Euro 6d-TEMP and Euro 6d standards, assuming they indeed meet the official emission limits also under real driving conditions, would be much cleaner than regular Euro 6 and older vehicles. Compared to a ten-year-old passenger car (registration year 2010), NOx emission levels vehicles certified under the latest standards would be 21%–33% lower for gasoline cars, and 76%–83% lower for diesel. However, robust measurement data for thousands of vehicles are not yet available for those new emission standards. The effects on emission reductions from replacing a ten-year-old vehicle by an electric vehicle, driving entirely NOx-free at least locally, would be even more pronounced.
For greenhouse gas (GHG) emissions, which have a global impact, it is important to not only consider CO2 emissions but also other pollutants, such as methane and nitrous oxide. The GHG emissions emitted during the production of the fuel or electricity also need to be taken into account. And finally, a proportion of the GHG emissions related to producing a new vehicle earlier than it would otherwise be the case (without a subsidy) will have to be included.
The average CO2 emission level of new passenger cars in Germany, according to manufacturer reported data, decreased in recent years. However, the emission level under real world driving conditions remained nearly constant. As a result, an average new gasoline or diesel car today emits about the same level of CO2 as a model year 2010 vehicle. Even with the introduction of the new WLTP, a notable discrepancy between type approval and real-world CO2 emission levels will remain (see forthcoming ICCT White Paper). Taking into account a proportionate amount of the emissions from vehicle production, the climate effect would even be negative if all new gasoline or diesel cars benefit from a bonus payment.
A notable CO2 fleet average reduction of about 30% could be achieved if the purchase premium is limited to vehicles with a maximum emission level of 110 g/km of CO2 under WLTP conditions. A CO2 reduction twice that much, about 60%, could be achieved by only incentivizing the purchase of battery electric vehicles. This holds true even if those vehicles are recharged over their entire lifetime with the (relatively CO2 intensive) current German electrical grid. It is difficult to make a similar estimate for plug-in hybrid electric vehicles, as the actual effect depends very strongly on the usage profile of the particular driver.
A notably positive effect of a purchase premium for new vehicles, with respect to GHG and NOx emissions, could, therefore, be expected if the incentive were limited to new Euro 6d vehicles with a maximum of 110 g/km CO2 (in WLTP). However, the Euro 6d standard will become mandatory for all new passenger cars from the 1st of January 2021 anyways. In addition, a CO2 emission level of 110-115 g/km will also have to be met, at the European average, by vehicle manufacturers in 2021. It would be more effective to provide an increased purchase premium only for electric vehicles in order to incentivize an early market penetration.
To leverage the positive effect on the GHG emissions of the existing vehicle stock, it would be sensible to incentivize scrapping those old vehicles that have a particularly high fuel consumption level. Similarly, providing a bonus for retrofitting older vehicles with the latest exhaust emission aftertreatment technology, instead of scrapping them, would help to reduce emissions and would also support local garages.
For the new car fleet, there is a danger that a purchase premium could create a “waterbed” effect. An increased incentive for electric vehicles within Germany would increase domestic sales and support vehicle manufacturers with meeting their European CO2 emission targets. In return, fewer electric and more high emitting vehicles than would otherwise be the case could be sold abroad. This is because from a manufacturer’s point of view, what counts for compliance with CO2 emission targets –and for avoiding penalties– are European-wide total sales of electric vehicles and European-wide average CO2 emission levels.
The benefit of a purchase premium remains questionable, not only in an environmental context but also from a social and economic perspective. With bonus payments, it is a relatively small and supposedly affluent group of citizens that benefits from subsidies financed by all taxpayers in return for a limited short-term stimulus for the auto industry. However, the European car industry struggled with surplus capacities already prior to the COVID-19 crisis and is in need of long-term support to manage an ongoing structural transformation.
Instead of offering a short-term bonus system to assist the auto industry in weathering the current crisis, it appears more sustainable to tackle a fundamental reform of the German vehicle taxation system. A higher tax for vehicles with high emissions could finance a bonus payment for vehicles with low emissions, without putting a strain on the national budget and the average taxpayer. Such a feebate system, which already exists in countries such as France or Sweden, would complement the European CO2 regulation and would assist vehicle manufacturers in the medium- and long-term with meeting their target values and successfully managing the industrial transition towards emission-free mobility.