Subsidies for buying cars are an expensive way to reduce traffic emissions

Anna Sahari writes that subsidizing the price of fuel efficient cars increases their demand. Yet, the reduction in emissions is modest, as subsidies do not transfer preferences from large cars to smaller ones.

Tesla-autoja latauksessa. Kuva: Taina Sohlman / Shutterstock.comKuva: Taina Sohlman / Shutterstock.com

Domestic traffic produces one-fifth of Finland’s greenhouse gas (GHG) emissions. The government wants to reduce emissions from road traffic by encouraging car buyers to buy fuel efficient cars. At the beginning of 2018, a new subsidy for purchasing electric cars and a scrapping premium were introduced.

This means that anyone purchasing a new electric car will receive a EUR 2000 discount paid by the government. The scrapping premium is also a discount on the purchase price of a new car, but it is conditional on scrapping a car that is at least ten years old. The scrapping premium is EUR 1000, if the new car’s CO2 emissions are no more than 110 g/km. If you buy a plug-in hybrid or flex fuel car, you get EUR 2000.
 
Similar measures have been introduced in other countries to increase the number of hybrids and fuel efficient cars on the road. Studies have shown that subsidies can increase the demand for low emission cars significantly. For example, tax exemptions on hybrid cars in Canada and the USA have raised the sales figures for hybrid cars by tens of percentage points.

However, the increase in the amount of fuel efficient cars does not mean that emissions are reduced on the same scale. In terms of CO2 emissions, the crucial factor is what type of cars are taken off the road as the demand for fuel efficient cars increases. If the subsidy encourages car owners to give up their SUVs for small cars, the reduction in emissions could be substantial. However, the effect on emissions is small if the subsidy has no effect on the size of car being chosen. For example, a manual Toyota Auris is just above the emission level required to qualify for the scrapping premium (112 g/km), whereas if you buy the automatic version of the same car, you are eligible for a discount (with automatic transmission, emissions are 106 g/km).

Several studies have shown that reducing the purchase price of smaller cars does not diminish the demand for large cars. So, a consumer might change from one Auris to another, for example, but not from a family car to an Auris. It is difficult to influence purchasing decisions, because people’s needs and desires focus on a certain type of car. A driver who likes big cars will not buy a small car, even if it was enough to meet their needs. Likewise, a family of five cannot buy a small car, even if it came with a big discount.

One goal of the Finnish energy and climate strategy is that there will be at least 250,000 electric cars in Finland by 2030. Subsidising the purchase price of cars is not a cost-efficient way to promote such a huge change in the car fleet.

Therefore, the reductions in emissions gained with subsidies will inevitably remain modest compared to the amount of money used to finance the subsidy. According to research on scrapping premiums in the USA, a reduction of one tonne of CO2 emissions by subsidising car purchases cost at least USD 92, which is about EUR 76. In the European emissions trading scheme, the current price of one tonne of CO2 emissions is around EUR 11.  That is, with the EUR 8 million earmarked for scrapping premiums, it would be possible to buy around 700 000 tonnes of CO2  off the European market. In the form of scrapping premiums, the same sum results in much smaller emissions reductions.

One goal of the Finnish energy and climate strategy is that there will be at least 250,000 electric cars (including plug-in hybrids) in Finland by 2030. According to the Finnish Transport Safety Agency, Trafi, in summer 2017 there were a total of 4824 registered electric cars in Finland.  To reach the goal of a quarter of a million would mean a 50-fold increase in the number of electric cars in just over ten years.

Subsidising the purchase price of cars is not a cost-efficient way to promote such a huge change in the car fleet. A more effective way would be to influence the supply of cars, and also the demand for driving. The emissions standards set by the EU, as well as investments and advances in the battery industry, will have an effect on the supply of passenger cars in the long term. In Finland, we can use our own methods to encourage drivers to buy lower emitting cars and to use them less. Studies have shown that the most effective way to do this is to raise the fuel tax.

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