Synthesizing Cash for Clunkers: Stabilizing the Car Market, Hurting the Environment

Research Seminars

We examine the impact of car scrappage programs on new vehicle registrations and respective CO2 emissions with a particular focus on Germany. To construct proper counterfactuals, we develop MSCM-T, the multivariate synthetic control method using time series of economic predictors. Applying MSCM-T to a rich data set covering 23 European countries, we find that the German program had an immensely positive effect of about 1.3 million program-induced new car registrations. Almost one million of those purchases were not pulled forward from future periods, worth more than three times the program’s EUR 5 billion budget. However, with a conservative net estimate of about 2.4 million tons of program-induced CO2 emissions, we find that the subsidy did severely hurt the environment. For other European countries with a comparable car retirement program we show further positive results regarding vehicle registrations. What is more, we also demonstrate that all of the observed non-scrapping countries could have considerably stabilized their respective vehicle market by adopting a scrappage subsidy.