Promoting vehicle efficiency and electrification through stimulus packages

• Like much of the economy, the automotive sector has suffered a downturn owing to the Covid‑19 pandemic. As part of economic recovery packages, governments are exploring the possibility of implementing vehicle scrappage and purchase bonuses to support sales and jobs in the automotive sector.
• The vehicle replacement schemes implemented as part of 2008‑10 stimulus programmes can offer multiple lessons. These schemes helped to maintain car sales that would have been deferred otherwise. They protected jobs and brought forward GHG emissions reductions and air pollution improvements. However, there is room for improvement: without tying incentives to fuel efficiency conditions, these schemes had a higher GHG emissions abatement cost and a higher cost per job retained than other stimulus schemes of the 2008‑10 era. 
• Everyday vehicle scrappage and replacement programmes aim to drive additional vehicle purchases beyond planned sales that would have occurred anyway. In the context of stimulus, these interventions aim to encourage vehicle sales and preserve jobs in a key manufacturing value chain.
• In designing automotive-sector stimulus policies, an important consideration is whether jobs at risk are transferrable, and if so, whether training programmes could facilitate sectoral transition to the post-lockdown phase.
• The global car fleet looks different today than it did in 2009 after a decline in diesel engines, a growing market share of SUVs and exponential growth in the sales of electric vehicles. Reflecting these differences in today’s stimulus packages can accelerate progress towards transport decarbonisation goals. Connecting incentives to fuel efficiency standards sets a clear and ambitious policy direction that supports the transformation of the automotive sector through a larger uptake of electric vehicles.
• Scrappage and purchase incentives can be designed leveraging good practices on incentive size and design (fixed versus tiered), bonus modulation according to fuel efficiency, bringing in car manufacturers for bonus financing, and adding conditions for eligibility to maximise their impact.
• A careful balance can be struck between the stringency and complexity of eligibility conditions, which help to target the worst‑performing vehicles and lower‑income households, and sharp and simple policy design and delivery, which ensures stimulus reaches the market as quickly as possible. Where possible, stimulus packages should build on and expand funding for existing programmes supporting vehicle efficiency and electrification, and leverage existing programme administration set-up.
• Stimulus measures can boost investment in alternative powertrain manufacturing, charging infrastructure and battery manufacturing as well as in the associated workforce training. These are essential investments for economies to support economic recovery and to succeed in the transition to low-carbon transport while improving long-term local employment prospects. Alignment between stimulus measures and long-term goals for the transport sector (fuel economy, tailpipe CO₂ emissions and zero-emission vehicles deployment) can ensure that these goals are actually met. 

The Covid‑19 crisis has brought the automotive sector to a halt

Over the past decade, yearly passenger car sales have grown by around 5% on average, although a contracting car market has been observed since 2018. The Covid‑19 crisis has significantly worsened this situation: in Europe, automotive factory shutdowns due to the first wave of the Covid‑19 pandemic in the first half of 2020 lasted around 30 days on average, leading to estimated production losses of 2.4 million vehicles.

Global car sales in 2020 are expected to fall by around 15% relative to 2019 levels. A prolonged slump in sales is likely to have substantial implications in terms of employment in the automotive sector – the IEA Sustainable Recovery report estimates that around 2 million jobs in automotive industry are at risk globally, representing 15% of the manufacturing workforce in this sector.

Fears of Covid‑19 contagion have led to reduced public transport use in urban environments. The speedy roll-out of temporary bike lanes has encouraged the uptake of cycling. At the same time, car use has also been slowly increasing since lockdowns ended, as former public transport users shifted to their private vehicles.

While they are not back to pre‑pandemic levels, car sales have been picking up again after hitting a low during lockdown: in June 2020, sales in the European Union were 22% lower than in June 2019, while in May 2020 they were 52% lower than in May 2019. In the United States, vehicle sales in August 2020 were 19% lower than a year before. However, in the People’s Republic of China (hereafter, “China”), car sales had already rebounded beyond 2019 levels in June 2020.

Governments are implementing stimulus programmes to support the automotive sector, with an eye to the clean transition

In this context, several governments have been considering the implementation of a new generation of incentives and scrappage programmes to boost the local automotive value chain through vehicle sales, while increasing fuel efficiency and reducing GHG and air pollution emissions from road transport:

• Germany recently earmarked EUR 8 billion to specifically support sales of electric vehicles: the German support package for the automotive sector does not include subsidies for conventional vehicles (i.e. vehicles with internal combustion engines). Incentives for electric and hybrid cars have been doubled.
• France also increased subsidies for the purchase of electric vehicles, as well as scrappage bonuses for low- to middle-income households. A new subsidy for the purchase of plug-in hybrids has been introduced. Eligibility for the scrappage bonus is conditional on CO₂ emissions of the vehicle to be scrapped, on the list price and on household income.1
• Italy has approved an additional bonus for the purchase of electric vehicles, hybrids and Euro 6 vehicles, coming on top of existing bonuses for the purchase of low-emissions vehicles. While scrapping an existing vehicle is not mandatory, it is incentivised with an additional bonus.
• Spain has approved a scrappage scheme involving more generous bonuses for replacing one’s vehicle with a low-carbon option (electric and hydrogen vehicles) rather than a conventional one, and supplementary bonuses for more vulnerable households and for replacing older vehicles.
• While it was scheduled to end in 2020, China has extended its subsidy programme for battery electric vehicles and plug-in hybrid electric vehicles to 2022, in order to support the automotive sector through the Covid‑19 crisis.2 The extension of the timeline of subsidies has been accompanied by a downward revision of their amounts, and by the introduction of a maximum pre‑subsidy vehicle price to qualify for subsidies.

These are just a few of the examples of stimulus programmes announced thus far targeting passenger cars; further details are provided in the table summarising vehicle purchase incentive programmes implemented in 2020. These programmes are different from those implemented in reaction to the 2008‑09 recession in two important ways.

First, these programmes have a clear focus on boosting the uptake of electric and hybrid vehicles: while in France, Italy and Spain this has translated into higher purchase incentives for these vehicles, in Germany conventional vehicles are entirely excluded from incentive programmes.

Second, an integrated transport sector approach is reflected in some stimulus programmes, which have not only included measures addressing car purchases, but also included support for public transport and the development of recharging networks for electric vehicles, as has been the case in Germany, for example.

The automotive sector is also in a different place today than it was in 2009 in many ways: today’s vehicle fleet is less diesel-heavy and includes more SUVs. At the same time, electric vehicles are on the rise. In designing support schemes for the transport sector today, policy makers need to consider how the market has evolved. These three aspects are discussed next.

Today’s fleet is less diesel-heavy and more SUV-heavy

While the average fuel economy of vehicles continues to improve, the rate of progress has slowed in recent years. The slowdown in fuel efficiency improvements is due to two major factors: the decline in sales of diesel vehicles – by 5-15% in the largest EU markets – and the increase in sales of SUVs – growing by 11% since 2014 and, in 2017, representing nearly 40% of the global light-duty-vehicle market.

Both trends point to the need to modulate scrappage and purchase incentives to account for fuel efficiency, which varies both by powertrain technology and by vehicle size.

Sales of electric vehicles are on the rise

Conversely, a trend that has contributed to improving fleet fuel efficiency is the surge in electric car sales. While they were virtually non‑existent in 2010, global electric car sales reached almost 2.1 million in 2019, achieving a 2.6% market share. This exponential growth pattern has been supported by fiscal and regulatory policy measures, including zero-emission vehicle mandates and fuel efficiency standards.

Prospects for electric vehicles might look rosier than for the automotive sector as a whole, with their sales in key EU countries almost doubling in the first four months of 2020 compared with 2019. While the recent slump in fuel costs has somewhat tamed this trend, the total cost of owning electric vehicles, including fuel expenses and purchase costs, has been decreasing in certain countries, improving their cost‑competitiveness with respect to conventional vehicles with internal combustion engines.

Embedding incentives for the deployment of low-carbon vehicles in stimulus packages can provide short-term support to the automotive sector and prepare the value chain for the next decade.

In spite of these important evolutions in the automotive sector, mobility patterns and the broader economy, past stimulus programmes can still provide useful lessons. In response to the 2008‑09 recession, numerous countries launched purchase incentives and vehicle scrappage schemes with varying design features and scope:

• Fixed versus modulated bonuses: China, Italy and the United States provided tiered subsidies according to features of new vehicles being purchased, including vehicle type (car, light commercial vehicle), purchase type (new or used vehicle), fuel efficiency and GHG emissions. Fixed subsidies were provided instead in France, Germany, Spain and the United Kingdom.
• Environmental conditions: China, Germany, the Russian Federation (hereafter, “Russia”) and the United Kingdom did not include environmental conditions in their incentive programmes. Countries including environmental conditions for incentives designed them as upper limits on CO₂ emissions per kilometre (e.g. Spain, France) or as fuel efficiency conditions. Fuel efficiency criteria were alternatively expressed in absolute terms (e.g. in Japan, 2010 fuel efficiency standards for gasoline cars) or in relative terms (e.g. in the United States, fuel efficiency improvement with respect to scrapped vehicle).3
• Scrappage requirements: Most incentive schemes (China, France, Germany, Russia, Spain, the United Kingdom, the United States) required scrapping a vehicle to be eligible for a bonus to purchase a new one. Italy and Japan provide two exceptions, as they delivered lower but still substantial purchase bonuses even without requiring consumers to scrap their existing vehicle.
• Budget and reach: The most generous subsidies for car replacement were given in the United States, ranging between USD 3 500 and USD 4 500 according to the vehicle type and the difference in fuel efficiency achieved through its replacement. Germany devoted the highest budget to scrappage schemes, allocating EUR 5 billion, while Japan supported the highest number of sales, at 2.9 million vehicles.

What did past stimulus programmes achieve?

The impacts of past stimulus programmes on car sales, on jobs in the automotive sector, and on road transport GHG and air pollution emissions varied according to their design features:

• Vehicle sales: Vehicle replacement programmes have been found to successfully maintain sales during the 2008‑09 crisis, preventing a 30% reduction in sales. However, evidence from the United States indicates that 45% of incentives went to consumers who were already intending to replace their vehicle, thus bringing forward a purchase that would have taken place in the near future. While this means subsidies did not drive substantial additional vehicle sales, stimulus programmes aimed at supporting the automotive sector during the crisis had the primary goals of preserving of sales and jobs.
•  Employment: These programmes contributed to preserving jobs in the automotive and related sectors that otherwise might have been shed. For example, in the United States, the 2009 Car Allowance Rebate System (CARS, or “Cash for Clunkers”) contributed to creating or retaining 40 000‑120 000 local jobs. At the same time, the cost of such programmes is much higher than other job creation policies implemented in contemporary stimulus programmes outside of the automotive sector.4
• Fleet composition: Programmes including fuel efficiency or GHG emissions conditions on new purchases successfully crowded out purchases from vehicle segments that benefited from no or relatively lower bonuses: in Spain and France, sales of non‑eligible, less efficient cars were reduced. Comparing vehicle types across scrapped and new vehicles in the United States, the number of medium-sized vehicles decreased by 80% to the benefit of smaller ones, thanks to incentives tied to fuel efficiency. Conversely, the absence of conditions on the fuel efficiency of new cars led to opposite developments in fleet composition in Germany, where more lighter-sized vehicles were traded in for medium-sized ones, whose number increased by 200%.
• GHG emissions: The vehicle fleet transformation induced by scrappage schemes has been estimated to reduce CO₂ emissions by 100 000 tonnes in the United States, 200 000 tonnes in Germany and 265 000 tonnes in France over the 2010-25 period. The average reduction in GHG emissions per vehicle replaced very much depends on whether fuel efficiency and emissions requirements are tied to bonus eligibility: in Germany, for example, average GHG emissions per kilometre of new cars supported under the programme were just 3% lower than for the average scrapped car. Design features of vehicle replacement schemes also affect the cost of GHG emissions abatement.5
• Air pollution emissions: Reductions in air pollution emissions proved much larger than those in GHG emissions as newer vehicle models were introduced. In Germany, new gasoline cars tended to emit 82% less nitrogen oxides (NOx) than scrapped cars on average, thanks to substantial improvements driven by stringent pollutant emissions regulations. Benefits in terms of air pollution reduction were, however, minimal for diesel cars, as newer models emitted about as much as older ones.
• Scrappage: Data from most EU countries, Australia, Canada, Japan, Korea and the United States suggest that over 5.8 million vehicles were scrapped as part of scrappage programmes implemented in 2008‑10.

The car sector was very different ten years ago, with the market for electric vehicles at an embryonic stage. Further, the past ten years have brought important learnings in the design and impact of policies supporting the clean energy transition – and these policies are now better established in government portfolios and priorities. Stimulus packages in 2020 can be designed considering these learnings and developments, to achieve both short-term benefits and longer-term market transformations.

Connecting eligibility for vehicle purchase incentives to fuel efficiency standards can drive a step change in vehicle fuel efficiency. In the longer term, this can pave the way for market transformation by enabling a faster ramping-up of vehicle fuel economy standards and transition towards electrification of the automotive sector.

Alongside short-term stimulus objectives and long-term decarbonisation efforts in the transport sector, connecting stimulus measures to fuel efficiency standards and electrification policies is critical for a third reason. Because of lingering concerns for Covid‑19 and persistent social distancing regulation, mobility patterns are still below 60% of pre‑lockdown levels in most urban centres tracked in the CityMapper Mobility Index, with important reductions in public transport use. If this trend translates into purchases of new motorised vehicles, ensuring that they are as fuel efficient as possible is necessary to mitigate a likely rebound in air pollution. This is critical at a time when the public scrutiny over air pollution has been heightened, given that higher air pollution exposure increases Covid‑19 mortality.

Policy measures to incentivise the purchase of low- and zero-emission vehicles

Policy packages aimed at incentivising fuel-efficient vehicle purchases can build upon a range of measures:

• fiscal measures such as tax incentives and penalties for consumers, both on vehicle purchase (differentiated vehicle taxation and feebates favouring revenue neutrality) and usage (fuel taxes, distance-based taxes), and removal of counterproductive incentives (fossil fuel subsidies)
• economic incentives for distributors and sales staff to increase sales efforts for low- and zero-emission vehicles
• regulatory measures such as fuel efficiency and carbon emissions standards at national level, and low-emission zones in urban areas
• information and awareness campaigns, including through fuel efficiency labels.

In order to support car sales and preserve jobs in the automotive sector as quickly as possible, stimulus programmes for the automotive sector are generally based upon economic incentives such as grants for the purchase of new vehicles, bonuses for the scrappage of old vehicles, and interest-free or low-interest loans.

Grants for new vehicle purchases (without scrappage obligations) can incentivise purchases from first-time vehicle owners and other additional purchases which are not replacing existing vehicles. In certain cases, they are conditional on choosing a specific type of vehicle (e.g. electric), with the aim to boost adoption of a specific fuel-efficient technology. They can also be paired with scrappage bonuses.

Scrappage bonuses require old vehicles to be turned in and scrapped in an environmentally sound way in order to benefit from a bonus for the purchase of a new vehicle. These are particularly pertinent where much of the current vehicle fleet is outdated and characterised by low average fuel efficiency, causing high GHG and air pollution emissions.

Interest-free or low-interest loans, such as those implemented in Spain in 2008, provide a further incentive to support consumers to choose fuel-efficient vehicles through the incentive of low- or no-cost finance. They can strike a balance between overcoming consumer cash constraints and limiting the budget impact for government.

Key design features of incentives for vehicle scrappage and replacement

Alongside the choice of policy measures at the core of stimulus packages, a number of additional aspects need to be considered:

The level of incentives can be set based on evidence of consumer willingness to pay for vehicles with different fuel efficiency, powertrain technologies and technical characteristics, and the price sensitivity of vehicle demand. 

When it comes to bonus design, fixed bonuses are likely to further incentivise the purchase of smaller vehicles (which tend to be more price-sensitive) if they translate into a larger discount off the list price, as opposed to subsidies designed as a percentage of the list price.

Bonus modulation by the fuel efficiency of the new vehicle (or limiting their allocation to high-fuel-efficiency vehicles) ensures that purchase incentives improve fuel efficiency of the fleet. Bonuses could also be modulated according to the difference in fuel efficiency between the scrapped vehicle and the new one.

Concerning financing, purchase bonuses can be financed entirely through the public budget, or can additionally leverage equal or partial contributions by car manufacturers (e.g. as implemented in 2009 schemes in Spain and the United Kingdom, and in 2020 schemes in Germany).

Conditions for eligibility can be combined: the age of the vehicle to be replaced can have an upper limit, to avoid replacement of vehicles no longer in use, or a lower limit, so to avoid premature scrappage. Vehicle annual mileage and therefore the vehicle’s effective contribution to transport emissions tend to reduce with age. Further, specifying the type of powertrain or a minimum fuel efficiency level for eligibility for bonuses can ensure that bonuses are geared towards the purchase of top-efficiency vehicles only (e.g. electric vehicles).

Some vehicle categories could be excluded from 2020 scrappage bonuses. While not many electric and hybrid vehicles currently in circulation are likely to have already reached the milestone of ten years of age,6 it is worth excluding them from scrappage benefits, as they might deliver substantial improvements in fuel efficiency by replacing old conventional vehicles if sold on the second-hand market.7

Addressing the criticisms and risks of vehicle scrappage and replacement schemes

Drawbacks of vehicle scrappage and replacement schemes include programme complexity risks making them vulnerable to fraud, distributional issues and supply chain constraints.

When associated with multiple eligibility conditions, incentives for new vehicle purchases and scrappage, as well as facilitated loans, can quickly become complicated both for applicants and for administrators. There is a delicate balance between adding more conditions on bonus eligibility and amounts and increasing scheme complexity: on one hand, these conditions are aimed at ensuring that the programme does not fund only the purchase of luxury vehicles for high-income consumers, and that the oldest vehicles are replaced with the most fuel efficient. On the other hand, complex incentive design can discourage consumers from taking advantage of bonuses and slow down the rate at which schemes can be deployed and more effectively prop up the automotive sector.

Online application systems can more effectively replace paperwork and simplify monitoring and tracking of applications, integrating applicant and vehicle information. For example, as of September 2020, consumers in Germany can apply for bonuses online simply by indicating the vehicle identification number, which allows the Federal Office of Economics and Export Control to automatically retrieve additional data from the Federal Motor Transport Authority, speeding up the verification and reimbursement procedures.

More generally, temporary stimulus incentive schemes can be most effective when building upon existing policies as opposed to ad hoc new programmes, so as to exploit well-established administrative infrastructure. For example, in France, stimulus-related bonuses have directly built upon the existing feebate system of vehicle registration taxes, with the difference that bonuses have been increased to further boost sales.

Leveraging existing programmes also has the added benefit of avoiding additional red tape and ensuring that programmes are shovel-ready; holding off implementation after policy announcement is best avoided, as it would freeze purchases.

As with any government programme, good compliance systems and administrative processes are needed to minimise risks of fraud. In general, complex schemes including multiple conditions need careful monitoring to ensure that bonuses are not misplaced and reach only eligible consumers. Additionally, administering schemes with scrappage requirements requires checking that replaced vehicles are actually scrapped in an environmentally sound way, and not resold or exported – thus involving an additional set of actors, vehicle recyclers.

Allocating subsidies can raise concerns of equity among the different categories of households benefiting from them: only households with stable and higher income may afford to purchase a new car during an economic downturn, thus making incentives potentially regressive. In order to ensure bonuses reach first and foremost households that would otherwise not be in a position to easily purchase a new vehicle, income restrictions on subsidy eligibility can be introduced so as to exclude high-income households, as done e.g. in France. Alternatively, rather than making applicant income an eligibility criterion, bonuses could be modulated according to it, to maximise participation in the scheme. An indirect way to consider income constraints in the design of these schemes is to provide more generous incentives for more affordable segments of the car market (based on higher sales categories) and taper off incentives in segments with smaller volumes and higher prices.

Finally, while car manufacturers have been accumulating large unsold stocks during the lockdown period, generous bonuses for high-fuel-efficiency vehicles and particularly for electric vehicles might lead to demand overshooting existing stocks, clashing with supply chain constraints. Electric vehicle production might need time to ramp up: bonuses could include the option for consumers to place orders for future delivery. Bonuses for electric vehicles could contribute to boosting the entire supply chain, providing incentives for the expansion of battery manufacturing and the conversion of manufacturing facilities from combustion engines to electric vehicles.

Develop complementary stimulus policies

Alongside incentives for vehicle scrappage and replacement, national and local governments are currently considering other transport-related stimulus packages to support public transport and boost investment in transport infrastructure. 

Bonuses for car scrappage could be designed to be used in combination with the purchase of bikes and other micromobility options, favouring a shift in transport modes, as well as public transport passes. Both options could support modal shift to low-emission transport options.

Investing in large-scale infrastructure networks such as charging stations for electric vehicles can enable larger uptake of such vehicles, alongside purchase bonuses. For example, the recently approved German stimulus package involves the obligation for service stations to provide charging space for electric vehicles. Supporting manufacturing and R&D for inputs to electric‑vehicle manufacturing (e.g. batteries) can strengthen the value chain and prepare it for reaching larger market shares, while creating manufacturing jobs in a critical input sector.

Specialised scrappage bonuses could also be designed for heavy-duty trucks, small delivery vans, corporate cars, and taxis and buses, involving the opportunity to retrofit and upgrade engines whenever possible. Retrofitting and repowering could be more cost-effective than replacement for large, specialised vehicles such as trucks and buses. More generally, designing specific incentives for the renovation of fleets of corporate vehicles, commercial trucks and heavy-duty trucks can be particularly effective, accelerating the transition of entire fleets to low- and zero-emission vehicles.

Where appropriate, vehicle replacement schemes could incentivise reuse of vehicle parts instead of mere scrappage. This would allow value retention for well-preserved, usable parts, provided a policy framework is in place to incentivise their use and not countered by car manufacturers.

Boosting parts reuse and recycling can have a twofold beneficial effect: job creation and more energy efficient manufacturing. For example, steel and aluminium recycling can generate 17 jobs per million USD invested. Further, the environmental footprint of secondary metal production is considerably lower than that of primary metals: cumulative energy demand for production of secondary metals is 6% of the primary counterpart for aluminium and 22% for iron.

Scrappage schemes can generate a substantial increase in the retrieval of scrap materials, thus feeding into secondary material production. For example, in 2017, the total number of end-of-life vehicles scrapped in the European Union reached 5.3 million, for a total weight of 5.7 million tonnes, with 88% of parts and materials reused and recycled. In 2009, the wave of scrappage schemes resulted in the highest number of scrapped vehicles, 7.7 million.

Connect with long-term objectives to decarbonise transport and enhance fuel efficiency

It’s important that stimulus packages implemented to address the urgency of today’s recession and Covid‑19 public health emergency are aligned with long-term objectives to decarbonise and enhance fuel and material efficiency in the transport sector. For this reason, stimulus packages should refer to and be consistent with fuel efficiency and vehicle emissions standards.

Currently, none of the 14 major auto manufacturers’ production plans for 2019‑24 are entirely aligned with 2°C climate scenarios, leading to an overproduction of 43 million conventional vehicles, and underproduction of electric vehicles and hybrids. Vehicle scrappage and replacement incentives included in stimulus packages can contribute to steering the automotive sector in the right direction, supporting the purchase of electric vehicles and locking out of the fleet fuel inefficient vehicles – much as stimulus packages in 2008‑10 were instrumental in boosting investment in renewables.

This article benefited from helpful comments from IEA colleagues Marine Gorner, Kevin Lane, Yannick Monschauer, Brian Motherway, Leonardo Paoli and Alison Pridmore.