bJCA A D' THE WORLD BANK Lt~~~~~~~~~~~~~~~~~~. 1 :- -.1l . iai Air Quality Management Briefing Note No. 8 Can Vehicle Scrappage Programs Be Successful? In inanv cities a smallfracttion of vehicles have beenjound to contribute disproportionately to total vehicular emissions. Repairing, upgrading or else scrapping gross polluters in uirban centers with serious vehicular air pollution can improve air quality at relatively low cost to society compared to other air pollution conttrol measures. Experientce suggests, however, that it is difficult to design a cost-effective scrappage scheme. The guiding principle is to contcentrate on high usage, high emission urbant vehicles that still have a significant residual liJc. in the absence of a scrappage scheme. For the scheme to be effcctive, an understaincding of the local vehicle market, including the impact of the scrappage scheme on it, is important. Essentlial elements Of a schemne include ca reliable and up-to-date vehicle registration system, a good emissions inspection system, efJŽ?ctive enf6rcement of scrappage, and appropriate vehicle import an?d registration policies. liminating gross polluters can be an important Once gross polluters are identified in some fashion, the E instrument for reducing transport-generated air next question is whether they should be repaired or pollution because of their disproportionately high scrapped. If the cost of repairing the vehicle to reduce contributions to pollution. In practice, however, emissionis to a reasonably low level exceeds the market cnvironmentally motivated scrappage schemes have not value of the vehicle, then the vehicle should be scrapped. always been cost-effective. This note discusses the role In the case of repairing, rather than simply repairing to the and design of government initiatives to accelerate vehicle scrappin in the ight ofthat exprience,original vehicle specifications, retrofitting with more recent technology engines and parts is of'ten aii effective strategy. Scrap or Upgrade? Such retrofitting can be mandatory or driven by tighter emission .standards. Fitting catalytic converters is the most In targeting gross polluters, a reasonably accurate obvious retrofit for whichl incenitives have been offer-ed in method of identifying gross polluters is needed. The identification of'gross polluters poses a challenge. Some Germany and Hungary lor many years. Eniginie r-etrofitting vehicles visibly pollute ioi-e thaer others bait sohlle pollute is especially suitable for buses and heavy goods vehicles. vethicleshowing visibly e soge. than othrs bte pollue An examilple is the Urban Bus Retrofit/lRebuild Plrogram in withoutshowing visiblesin.Evenamongthevisibl the United States which targets buses in major cities for polluters, which ones actually pollute the most caninot ti be determined by visuIal inspection alone. Moreover, the e treatment systemsb(certifie o reicenpartica method~~~~ ~ fo'dniyiggos oltr ed ob exhaust treatiiient systemis (certified to redLuce particulate emissions) at the time of engine rebuild or replacement. inexpensive and simple to carry out. In principle, the cost of identification plus the market value of the vehicle The remainder ol this note discusses three main types of beiig scrapped (or the repair cost, as appropriate) should scrappage schemes: (1) incentives to scrap without not exceed the environmental benefit of removing or replacement (caIsh ft)r scrappage); (2) incentives to repairing the vehicle. While environmental benefits are replace with new, or less polluting, vehicles (cash fir difficult to calculate precisely, some estimiiate is logically replacement); and (3) other fiscal and administrative necessary in deciding how much it is worth paying to devices which, although not ofleriiig direct fiianicial get a vehicle replaced. A good emissions inspection incentives to scrap, operate through their impact on the system that accurately measures emissions is an scrapping decision (indirect scrappage incentives). important pre-requisite for selecting highly emitting vehicles for scrappage. In practice, in the absenice of Designing a Scrappage Policy adequate infrastructure for measurinig emissions, or The total cost of a scheme is the cost per vehicle simply to save costs, vehicle age is often used as a proxy: (C) multiplied by the nulimber- of vehicles scrapped (N). otily vchicles older than a certain age are considered. 'I'he environmental benef-it is the dil-fference between ( I ) the product of the emission rates per kilometer (km) Even where a scrappage grant is not in cash (for example traveled (ER) and the number of vehicle kilometers in Canada, one option offered was a free family public traveled (VKT) for the old vehicles, and (2) the same transport pass rather than a cash grant), experience with calculation for their replacements, all multiplied by schemes throughout the world has shown that few owners (3) the number of vehicles replaced and the length of choose not to replace theirscrapped vehicles. The critical periodoverwhichbenefitscontinue(L).I Inprinciplethe questions then are (I) what they replace the scrapped distance driven may not be the same for the old and vehicle with, and (2) what other effects the process might replacement vehicles: replacements may be more have on vehicle usage. comfortable and consume less fuel than the originals and For car and motorcycle replacement, the market appears hence attract greater use. But the empirical evidence is C. . to be segregated into two categories. The first, consisting that this effect is likely to be very small. of individual or business users of relatively high income, Based on the above, benefits per dollar spent increase as tend to replace existing vehicles with new vehicles every the following variables increase: few years. The second, normally purchasers of second * The emission levels of vehicles scrapped vehicles or lower income households, buy used vehicles V The cleanness of the replacement vehicles and replace them with younger, but still used vehicles. * The number of replacement vehicles attracted perdeonumbearofincentivement vehicles attracted Even the bus and truck markets are often effectively per dollar of incentive * The residual life of the vehicles scrapped segregated into large fleet operators at the top end of the Thaulmredere . market using newer vehicles, and smaller operators Tha ak redl re supplying parts of the market demilanding lower quality of This leads to a number ol important guidelines for the design service with older, secondhand vehicles. For example, the of scrappage schemes. It is sensible to concentrate on high bus industry in Bangkok is segmented by vehicle quality: usage, highemission urban vehiclesthatstill haveasignificant private sector sub-contractors to the publicly owned residual life in the absence of a scrappage scheme. In practice Bangkok Mass Transit Authority (BMTA) supply basic, these criteria are not independent of each other and hence it low-fare service with old vehicles-often very polluting- is necessary to understand the complexity of the vehicle and sold on to them by BMTA. service supply markets in ordler to ensure the cost- effectiveness of a scrappage scheme. Considerations in Designing The cost-effectiveness of vehicle scrappage policies should Scrappage Schemes be compared with that of other options for reducing air Ideally, qualiticition for a scrappage incentive should be pollution. The cost efficiency indicator defined above gives based on the actual emissions of vehicles scrapped (and ameasureofcostperunitofpollutionreduced,andisdirectly those replacing them). This approach, however, creates comparabic with the cost-effectiveness of other air quality the moral hazard of owners increasing their vehicle manag,ement alternatives-whether enforcing tighter emissions in order to qualify. It is common, therefore, for emissions standards across all vehicles, mandating cleaner scrappage schemes to use vehicle age as the qualifying fuels or new vehicle technologies, or some other measure criterion, even though this can have perverse results if affecting other, non-vehicular sources of pollution such as the minimum age is relatively low (say 10 years) and the industry or refuse burning. Estimating the comparable cost premium relatively high. The reason for that is that the of available alternatives is important to ensure that the scrappage premium effectively sets the minimum price proposed way forward is, in fact, cost eflective. of a secondhand vehicle. Insofar as there remains a group of consumers that demands, and can only afford, a very The Market for Vehicles cheap old vehicle, this may actually encourage them to Vehicle owners and operaters, whether individual or hold on to their old vehicles even longer, because commercial, are motivated by private financial costs and replacement vehicles now cost more than before the benefits. Their response to financial incentives in turn introduction of the scrappage scheme. It also invites affects the entire vehicle market and hence even the imports of cheap old vehicles from other areas or decisions of those who do not directly respond to the initial countries. This may have the perverse result of vehicles financial inducements. being replaced by those that are older or dirtier than would A cost cff icicncy indicator can thus be simply written as: C N (ER,1 *VKT ,,,-ER VKT) L LN More sophisticated indicators would discouLit benef its and costs appearing at differellt points in time to a comimion base date. and/or sum across different vehicle types associated with diffcrcnt values of the various parameters. U have been the case without the scheme. To prevent such Cash for Replacement an outcome, the government may thus need to accompany If cash is to be offered for replacing scrapped vehicles, a scrappage scheme with strong emissions testing as well it may seem reasonable to insist that a new vehicle Lis an age limit on vehicle imports. be bought. New vehicles Offering incentives also introduces the danger that cars embody cleaner technology no longer in use will be presented as qualifying for a than those of older vintage, fo PPag scrappage incentive. This can be countered at the very and moreover the cleaner schemes may have least by requiring that vehicles must be driven to the technology is likely to be the perverse effect scrappage center in order to qualify [1I]. Another danger longer-lasting. of increasing is that vehicles not operating in polluted urban areas However, any attempt to polluoion unless migrate in order to take advantage of the incentive. The force replacement by a new coordinated with chances of such migrationi may be reduced by limiting vehicle will tend to be other vehicle schemes to vehicles registered in specific targeted area, attractive to those who are market policies. Lastly, unless vehicles traded in for cash or replacemcnt replacing relatively young are actually scrapped, the scheme merely increases the vehicles, such as high income households and users of total vehicle population. In the extreme case, "scrapped" cars for business. Experience in Denmark, France and vehicles can be sold outside the targeted area, only to Italy shows that only 10 percent of annual replacements migrate back and "scrapped" again. collecting cash involves replacing a car more than ten years old by a several times over. new one. It will require a very large inducement indeed All this points to the importance of having a reliable and to bring about the direct replacement of a significant up-to-date vehicle registration system, effective number of very old vehicles. A scheme in Hungary which enforcement of scrappage and vehicle import and targeted old, highly polluting, two-stroke engine models registration policy. All these requirements present a serious and required their replacement by new models failed to challenge in South Asia. In the process of strengthening attract many replacements. the registration and enforcement systems, environmental Cash for replacement schemes may attract a higher take- non-govemmentalorganizationsandindustrialassociations up rate if replacement by secondhand vehicles also can play an important role in monitoring the execution of qualifies for grant. But this would be of environmental scrappage schemes. value only if the emissions of the replacement vehicle were also tested and shown to be significantly lower than Cash for Scrappage those of the vehicle being scrapped. In Greece the bonus In cash for scrappage, the size of the incentive is an was paid only if the replacement vehicle had a catalytic important variable. The larger the bonus, the more vehicles converter. that are likely to be scrapped. However, if the oldest and Despite these caveats, scrappage schemes can be most polluting vehicles are the first to respond, there will effective in stimulating replacement technology for be diminishing returns as the scrappage bonus increases, A .S ttd t 21 asdonapio scrapgsuyi commercial operators, many of whom respond to economic A U.S. study [21. based on a pilot scrappage study in signals and replace old vehicles (with deteriorating fuel Delaware, concluded that a scheme with a verv low economy and rea ce costs) with new 3 - ~~~~~~~~~~econonmy anid increasing maintenance costs) with newer, incentive by U.S. standards ($250) would be more cost- cleaner and more efficient vehicles. Large fleet operators effective than schemes with higher bonuses designed to of buses and trucks may be especiall responsive, as they have higher take-up rates. The cost-effectivetness of keep their vehicles for a long time, but are accustomed to vehicle scrappage schemes may also fall sharply as the buying new replacement vehicles. average environmental quality of vehicles improves. Scrappage schemes must therefore be carefully designed Indirect Incentives and coordinated with other public policies affecting the A number of incentives other than direct scrappagegrants workings of the vehicle market. A scheme implemented in can be used to affect vehicle life. Norwayin 1996gaveabonusoftheequivalentofUS$880 Vehicle taxes are the most obvious. For example, the ( 1997) for the scrapping of any vehicle over 10 years of German and Hungarian governments give tax advantages age and secured a net increase of 150,000 in scrapping for the purchase of lower pollution vehicles. A variation (above those that would have becn scrapped without the is a reduction in import duties for cleaner vehicles and scheme). The schemne, however, did not impose any limits engines. Nepal reduced import duties on component parts on the replacement vehicle, and an ex-post analysis showed for electric mini-buses to replace diesel equivalents which a poor benefit-to-cost ratio of 0.5 [1]. were banned in the Kathmandu Valley. Box 1. Bus replacement in Bogota, Colombia In preparation for implementing Transmilenio (see Briefing Note No. 3, [3]), Bogota's bus rapid transit system, the government of Bogota took a series of measures that included the replacement of old buses by new. More specifically, the government * Required that operators bringing in new buses licensed to operate in Transmilenio demonstrate that the equivalent number of old buses had been scrapped and their licenses canceled. For each new articulated bus operating in Transmilenio, 3.6 executive buses, 2.7 regular buses, 5.3 medium-size buses or 10.7 microbuses. had to be scrapped. The operators were required to produce a document certified by an international auditor proving that old buses had been scrapped. * Suspended in the early 1 990s registration of additional public transport vehicles for two and a half years, later extended to 31 December 2000 when Transmilenio became operational. However, the bus population continued to increase rapidly due to illegal entry. Source: World Bank staff The introduction of environmental and safety standards schemes should be compared with that of other fiscal and strict enforcement through an inspection and and administrative instruments. maintenance program has a similar effect. Not only does . Scrappage schemes will be successful only if this encourage owners to keep their vehicles in good introduced in the context of a strong enforcement of condition, it also encourages replacement of vehicles for operational emission standards. which it becomes increasingly expensive to meet the standards. ~~~~~~~* Scrappage without replacement schemes may be effective for private cars, but replacement schemes Public transport franchisinig policies can also be for private cars are recommended only if carried out very important, particularly where buses are a on a relatively small scale, with careful policy measures significant part of the urban air pollution problem. Both in place to screen the vehicles for replacement Santiago, Chile and Bogota, Colombia have adequately. incorporated environment objectives in their public Scrappage with replacement schemes are most transport policies (see Box 1). The important element of both schemes was that they recognized the need to theronrtext fo srice franchii g.i the context of service franchising. maintain affordable public transport service. Environmentally oriented vehicle replacement References requirements were therefore incorporated in a broader I-.Report to the European Conference ol Ministers of scheme which ensured the continued financial viability Transport Comtnmittee ofonDeputies. 1999. Improving of the operating agencies. The Bogota case illustrates the Environmental Performance of Vehicles: Fleet that forced scrappage of public transport vehicles can Renzewal anid Scrappage Schemies. CEMT/ be effective in the context of well regulated franchise CS(99)13, May. systems, but can be very damaging outside such a context because of lack of financial sustainability. 2. R. Hahn. 1995. "An Economic Analysis of Scrappage", Rand Journial of Economics, 26(2), 222. Conclusions 3. South Asia Urban Air Quality Management Briefing * Scrappage schemes need to be very carefully Note No. 3. 2001. "How Can Urban Bus Policy targeted at proven high polluters. Reduce Air Pollution?", December. Available at * The cost-effectiveness of scrappage incentive . This briefing note was prepared in August 2002 as part of the South Asia program on urban air quality management, funded in part by the joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP). The objective of the program is to support the region-wide process of developing and adopting cost-effective and viable policies and efficient enforcement mechanisms to reverse the deteriorating trend in urban air. A full set of briefs and other materials are available at . Forfurther information, contact Sameer Akbar (sakbar@worldbank.org) or Masami Kojima (mkojima@worldbank.org) about this program, and Ken Gwilliam (kengwilliam@yahoo.com) about this note.