Budget comments - car makers to share the £2k car scrappage payment?

In a lead up to today’s budget report, the Telegraph reports that “the SMMT is bracing itself for an announcement on cash-for-bangers scheme, which it believes is crucial for the future of UK vehicle manufacturing.”

The FT reports: “Britain’s car industry is to be forced to share the costs of a £2,000 “cash for bangers” scheme in Wednesday’s Budget, a move dismissed in advance by manufacturers as a disaster for the sector. Alistair Darling, chancellor, has reluctantly agreed to fund the scheme to boost demand for new cars, following France, Germany and Italy in introducing a so-called scrappage plan to persuade motorists to trade in their old cars vehicles.”

The industry believes this would be a disaster. Paul Everitt, the SMMT chief executive, said last week: “Bluntly, I don’t want to be standing up and saying: ‘It’s sort of all right’. I want to say: ‘This is fantastic, this is the best possible time for you to buy a car’.”

Scrappage scheme + green car incentive = success!!

A lot has been written this week about the proposal to introduce a scrappage payment for old cars in the UK. Car industry interest in this is unsurprising given the perilous state of the international car industry; car production is down this month by 59% compared to last year. Manufacturers have a clear interest in scrappage schemes, since they can “pull-through” new demand at a time when new car sales are falling off a cliff. In theory at least, Government makes its money back through VAT receipts, which could make the whole policy cost-neutral.

Environmentalists distrust scrappage schemes because the industry supports them. However, as I put it at one meeting recently, just because the car industry supports a particular policy doesn’t necessarily make it a bad thing!

The serious question is whether this is an environmentally friendly policy. On the face of it, trading in an old banger for a nice new motor has benefits, particularly from an Air Quality point of view. Old cars (pre-2000) were built before air-quality restrictions (so-called Euro Standards) came into force. Therefore from an air-quality point of view, trading in your old clunker for a new model is usually going to be a good thing, even if you’re swapping an old petrol for a new diesel car (air quality regulations on diesels are tighter these days than the old “pre-Euro” petrol cars).

The tougher issue is whether scrappage schemes do anything for CO2 emissions. On their own, scrappage schemes don’t help, simply because there is no way to tell whether people will ditch old fuel-efficient models for new gas guzzlers. They may trade in their SUV for a Prius; or they may swap their Clio for a Hummer. There’s no way to tell, or control this.

That’s why we need another tool in the toolbox – a genuine incentive for people to buy a low carbon car. If we had this in place alongside a scrappage scheme, then we could really see people ditching old gas-guzzlers for shiny new low-carbon cars, and transform the market practically overnight.

There are various purchase incentive options. The easiest for the Government is to reform VED even further, making it more expensive to own a gas-guzzler than a gas-sipper. The Government has made useful reforms here, but the drawback is it doesn’t send a clear message at the point-of-sale.

Another option would be to cut VAT for fuel-efficient, low-CO2 cars, in the way that VAT is reduced for energy-efficient household products like lightbulbs. Even better, the Government could go the whole hog and introduce a car-purchase tax weighted by CO2 emissions. However this might be politically tricky (to put it mildly).

I think the easiest option is to reform VED further to give a clearer signal that gas-guzzlers cost a fortune to own, and combine this with a big customer campaign to make sure people are aware of this when choosing their new vehicle. Doing this alongside a scrappage scheme could get people trading in their old gas-guzzlers for climate friendly models in huge numbers, creating a win-win for the climate and the carmakers.

Alex Veitch, for We Are Futureproof