However you look at it, subsidies for new cars do more harm than good

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When people rush into things, there are normally unforeseen consequences. When politicians and officials are faced with a crisis, they feel the need to rush to take some action. It is a recipe for long-term chaos, and it’s happening right now with Europe’s car industry.

EU member states are falling over each other to support the car industry. Barely a week goes by without some form of aid being doled out. The most popular idea over the past weeks has been the ‘scrappage scheme‘, ‘environmental premium’, or, in proper English, a subsidy to buy a new car.

All the scientists and economists who have studied such schemes come to an unequivocal conclusion – they do more harm than good in the long run. They are one of the most expensive ways thinkable to cut emissions. We have been all too painfully aware that over the past decade there has hardly been any progress in improving the fuel efficiency of cars – so exchanging an old one for a new one does not help the climate, contrary to popular belief, especially if the climate impacts of additional car production are taken into account. What’s more, pouring masses of public money into sustaining car dependency is the last thing we need in these times of climate crisis, particularly if, like in Germany, you get just as much subsidy for buying a gas guzzler as for buying a fuel sipper.

But these subsidies also send out wrong signals. The main one is that it’s OK for this cyclical industry not to use the good times to save cash, but instead to offer unsustainably cheap loans and lease contracts to customers to prop up sales, knowing that when the bad times come, governments will bail them out. Such subsidies also send a signal to other industries to start begging. Oil industry profits are falling too – why not offer them some cash? (just kidding).

The subsidies also make ordinary taxpayers pay for a luxury only the happy few can afford: buying a new car. (This is always assuming the industry doesn’t just pocket the money and increase the prices of new cars – it has been reported that this might happen.) And when the subsidy stops, a slump in sales will inevitably follow, which will doubtless lead to ferocious lobbying to keep the subsidy in place.

Instead of Europe copying the German subsidy (arguably and unsurprisingly the most egregious one so far) as the German car industry wants, the EU should put very clear limits on these schemes, and at the very least make them applicable only to low-consuming cars. Failure to do so will lead to a series of mindless subsidies, and soon Europe’s states will be involved in a nationalistic ‘race to the bottom’, in which governments in every country are pressurised not to be less generous than others, and even healthy companies feel pressed to lobby for government assistance because their competitors are getting it too.

The current rush of badly thought-through actions sends far too many wrong signals. European limits to these practices is long overdue if we don’t want this crisis to cause permanent damage to the climate and public trust.

However you look at it, subsidies for new cars do more harm than good

Editorial by Jos Dings

© European Federation for Transport and Environment – 2009

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