The gang that couldn’t shoot straight: dosh-for-bangers, courtesy of the UK Treasury

In an earlier post I questioned the green credentials of ‘cash-for-clunkers’/'dosh-for-bangers’ schemes that provide financial incentives to scrap old, energy-inefficient cars early and purchase greener jalopies instead. The argument is simple. The total environmental impact of a car is the sum of the impact caused by its production and the impact of operating the vehicle over its lifetime. Scrapping my old hooptie earlier and replacing it with a more energy-efficient model will undoubtedly reduce the environmental operating impact of the vehicle. However, the subsidy is also likely to increase the cumulative production of vehicles. The net environmental impact depends on the balance of these two effects. I haven’t done the eco-engineering analysis that would enable me to give a convincing opinion on the net environmental impact of the scheme, but neither, as far as I can tell, has anyone else.

But at least as regards the impact on the demand for automobiles, the effect of the ‘dosh-for-bangers’ scheme is unambiguous. While the financial incentive is in effect, it will stimulate the demand for cars. If the incentive is credibly announced today but does not take effect until some time in the future (January 1, 2011, say), the demand for new cars will fall between the announcement date (today) and the implementation date (January 1, 2011). The reason is obvious: there is a strong incentive to delay the scrapping of your current clunker until you can take advantage of the financial incentive. If the ‘dosh-for-bangers’ scheme is temporary, it will also be followed, after it expires, by a period during which the demand for new cars is lower than it would have been without the scheme.

The UK Chancellor apparently is planning to introduce a subsidy of up to £5000 per car for purchasing an electric or hybrid car. There is no volume production of electric or hybrid cars in the UK. Electric or hybrid cars are not expected in the showrooms in any numbers before 2011. We will probably be waiting even longer for electric or hybrid cars that are mass-produced in the UK rather than imported. So I will postpone replacing my Rover 216 (1991 vintage) until Alistair Darling (or, more likely, his successor from among the current opposition parties) sends me a cheque for £5000 sometime in 2011. A most efficient measure indeed for reducing the demand today for cars , and especially for reducing the demand today for British-made cars .

All this is standard stuff.  Economists have for decades studied  the effects on the timing and magnitude of investment expenditure of the announcement and implementation of immediate or future temporary or permanent investment subsidies and investment tax credits.  There must be many bears of very little brain in the UK Treasury. The UK car manufacturers ought to be livid.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website