Car industry budget boost: pros and cons

Looking at this issue from the environmental, political and economic points of view
Nick Watt, David Adam and Heather Stewart
The Guardian, Tuesday 7 April 2009

The green argument
Will scrapping older cars and encouraging people to buy a new replacement help the environment? It can sound a seductive idea, but the picture is mixed.
It is certainly true that newer cars are, on average, cleaner than older models. More efficient engines and other changes have helped to reduce average carbon emissions by 17% since 1997. The claimed environmental benefits of a scrappage scheme demand that drivers replace like-for-like, and do not take the opportunity to buy a bigger and more powerful model.
The Society of Motor Manufacturers and Traders says motorists who take advantage of the scheme would probably go for greener cars. Encouraged by a similar cash-for-scrap initiative in Germany, 80% of buyers opted to spend less than £10,000, which is at the smaller, less polluting end of the scale. The society believes a similar picture would emerge in Britain. "The majority of people with cars over nine years old are not likely to buy something for more than £10,000. They won't have the budget," a spokesperson says.
Mile for mile, new cars may be less polluting, but what about the carbon emissions produced in their manufacture? The SMMT quotes reports that show pollution produced in making a car contributes 5% of its overall carbon emissions; critics argue the figure is closer to 25% and some suggest that the greenest moment to get rid of a car is when it reaches 18 years old.
Whichever is true, eco-friendly drivers with a new car face a paradox: the per-mile carbon savings turn into a genuine environmental benefit only after the car has been driven for tens of thousands of carbon-heavy miles.David Adam
The political argument
The "scrappage" scheme offers political attractions for Lord Mandelson because it acts as quick and simple stimulus for a beleaguered industry. There is also the benefit for the government of subsidising new cars for consumers who are being hit by the recession.
Mandelson could also argue that the scheme, in which motorists would only receive help if they buy fuel efficient cars, would help promote a vital new green sector of the economy. Mandelson repeatedly says that Britain will only navigate its way out of the recession if it develops new green sectors.
Other advantages are:
• The number of safer cars on the road would be increased because new cars incorporate the latest developments on safety.
• The German scheme is almost self-financing because it is expected to boost VAT yields by €1.3bn (£1.18bn). This is only €200,000 short of the gross cost to the German government.
But no decisions have been made in Britain. The Treasury fears that the scheme would end up subsidising manufacturers outside Britain. Most new cars bought in Britain are imported. The car industry says there would be a boost for British manufacturers who make car parts in Britain.
Other drawbacks include:
• The scheme has a short shelf life because old cars are scrapped. There would be little stimulus for the secondhand market.
• British car manufacturers tend to make bigger cars. These will be more fuel efficient than older cars but the government may be wary of encouraging an increase in bigger cars.
David Cameron told the Guardian in January that the Tories were looking at the idea but he has yet to be convinced.Nick Watt
The economic argument
Car scrappage schemes have a simple logic: the government uses a subsidy to tempt drivers to trade in their clapped-out cars for a new, preferably greener, model and Britain's silent garage forecourts spring to life, helping to safeguard thousands of jobs.
However, the practical implications are much less simple. One of the problems is that part of the benefit may "leak" abroad. This looks highly likely in the car market: the SMMT's latest figures show that 78% of the cars produced here in February were destined for foreign markets, and 22% for home consumption; the proportions have hovered around that level for a couple of years. So kick-starting demand at home will not necessarily help British car workers; though, of course, it could help the staff who distribute and sell vehicles.
Secondly, there is what economists call "deadweight loss". This is the risk that much of the benefit will go to those who were going to buy a car anyway.
Thirdly, it's not clear that an additional discount would necessarily help boost demand. Many manufacturers already offer hefty price cuts on new models, but it doesn't appear to have tempted buyers on to the forecourts.
Finally, there is the much broader question of whether the government should be trying to skew consumer spending to particular sectors of the economy, when it could simply give the lowest-paid workers tax handouts, and let them spend the extra money on whatever they choose.Heather Stewart