An economic evaluation of the Wreckage Premium

Table of Contents

List of Abbreviations

List of Figures

1 Introduction/Problem Definition

2 Objectives

3 Methodology

4 Main Part
4.1 Wreckage premium: economic-political background
4.2 Wreckage premium: Facts and figures
4.3 Wreckage premium: An economical evaluation
4.4 Wreckage premium: An ecological evaluation
4.5 Wreckage premium: Other collateral effects

5 Conclusion

6 ITM Checklist

7 Bibliography

List of Abbreviations

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List of Figures

Figure 1: German GDP development -not seasonally adjusted- from 2006-2010. Source: Statistisches Bundesamt Deutschland

Figure 2: Fleet Renewal Schemes in the EU. Source: ACEA 2010

Figure 3: Top 20 new vehicles (brands). Source: BAFA(b) 2010, p.16

Figure 4: Top 10 old vehicles (models). Source: BAFA(b) 2010, p.17

Figure 5: Old vehicles (left) and new vehicles (right) structured in segments. Source: BAFA(b) 2010, p.18 ff

1 Introduction/Problem Definition

While economists generally come to the conclusion that the wreckage premium was not giving the right direction (e.g. Sinn 2009) others celebrate its success. More than 2 years after introducing the wreckage premium in January 2009 there is still a controversial debate if scrapping incentives can be regarded as an adequate politico-economic reaction towards an upcoming economic crisis.

“Abwrackprämie” was elected to be the word of the year 2009 in Germany. What a lot of people don’t know: Officially the wreckage premium was called “Umweltprämie” or “environmental bonus” (BAFA(a) 2010). In general a wreckage premium is a monetary incentive for consumers to scrap a used car or product. If the consumers are obligated to replace the scrapped product this is called a “cash for replacement scheme” (Spengler 2011). When the IFEU (Institut für Energie und Umweltforschung) published first conclusions on the ecological effects they still didn´t use the term “Umweltprämie” but called their report “Abwrackprämie und Umwelt - eine erste Bilanz” (IFEU 2009).

2 Objectives

The following text should give answers to a number of elementary questions concerning an evaluation of the wreckage premium in Germany:

1. What was the background for deciding the wreckage premium?
2. What were the main facts and figures of the wreckage premium?
3. Who were the winners and the losers of the wreckage premium?
4. How can the so called “Umweltprämie” be evaluated from an economical and from an ecological point of view?

3 Methodology

The following text is based on an intensive literature research regarding the topic of the German wreckage premium. A lot of data and information in the surrounding field seem to be influenced by personal/institutional interests or based on popular scientific pretenses. On the other side a lot of detailed calculations are difficult to interpret since model assumptions are imprecise and disputed among experts. Therefore it is not astonishing that different people and institutions come to different conclusions.

4 Main Part

4.1 Wreckage premium: economic-political background

In the course of 2008 the financial crisis originating from the U.S. developed to a worldwide economic crisis. From the perspective of companies the crash of highly reputed credit institutions led to a drastic deterioration of conditions in terms of financing. The restrictive granting of funds caused retention in capital investment and consumption. Especially export-dependent nations like Germany were affected severely. Beginning from the 4th quarter in 2008 the GDP in Germany declined significantly (see Figure 1).

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Figure 1: German GDP development -not seasonally adjusted- from 2006-2010. Source: Statistisches Bundesamt Deutschland^[1].

Germany was not the only country introducing a monetary incentive for fleet renewal. While the wrecking premium ended in Germany in September 2009 other European countries still invested in vehicle scrapping schemes in 2010 (see Figure 2).

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Figure 2: Fleet Renewal Schemes in the EU. Source: ACEA 2010.

After the financial sector was hit by the crisis the automotive industry was affected seriously. A lot of car manufactures suffered from drops in orders from 20 to 30 %. In 2009 total German car exports decreased by 17,1%; production decreased by 10,3%^[2]. The automotive sector with approx. 770.000 directly employed and up to 5 million indirectly employed people is a key industry in Germany. Additionally the imminent election of the German Bundestag in September 2009 might have induced both parties of the grand coalition (CDU and SPD) to demonstrate a strong capacity to act.

On 01/14/2009 the German Government decided the wreckage premium within the scope of the so called “Konjunkturpaket II” (BMWi 2011). The support program was initially fixed to 1,5 B€ and later in March 2009 extended to 5 B€.

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^[1] Statistisches Bundesamt Deutschland 2011. Available from: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Statistiken/Zeitreihen/WirtschaftAktuell/Schluesselindikatoren/Bruttoinlandsprodukt/ [Accessed April 2011]

^[2] Source: VDA (Verband der Automobilindustrie). Available from: http://www.vda.de/de/zahlen/index.html [Accessed April 2011]. Both numbers indicate a significant overproduction due to a reduced flexibility of workforce.