Scrapping subsidies during the financial crisis — Evidence from Europe

We study the effects of car scrapping subsidies in Europe during the financial crisis. We make use of a rich data set of all car models sold in eight European countries, observed at a monthly level during 1998–2011. We employ a difference-in-differences approach, exploiting the fact that different countries adopted their programs at different points in time. We find that the scrapping schemes played a strong role in stabilizing total car sales in 2009: they prevented a total car sales reduction of 30.5% in countries with schemes targeted to low emission vehicles, and a 29.0% sales reduction in countries with non-targeted schemes. We find evidence of crowding out due to substitution from non-eligible to eligible cars in France and Spain. Because eligible cars tend to be more fuel efficient, targeted scrapping schemes had significant environmental benefits in the form of improved fuel consumption: without the schemes, the average fuel consumption of new purchased cars would have been 3.6% higher. Those benefits did not materialize under non-targeted schemes, in which the fuel consumption would have been only 0.7% higher absent the scheme. Finally, we find some evidence that domestically produced cars benefited at the expense of foreign competitors especially in countries where the schemes were not targeted.