Greening vehicle fleets: A structural analysis of scrappage programs during the financial crisis

Abstract

Vehicle scrappage programs (SPs) are widely used policy tools aimed at replacing old and/or fuel-inefficient vehicles (i.e., clunkers) with eco-friendly alternatives for greening national vehicle fleets. This study employs a structural model of oligopolistic competition to explore SP designs that effectively induce such replacements by examining the Japanese passenger vehicle market during the financial crisis. To analyze the SP using market-level data, a straightforward method for estimating demand that incorporates data on aggregate program outcomes is proposed. Counterfactual simulations based on the model estimates yield the following insights for designing cost-effective SPs. First, attribute-based subsidies—where fuel economy thresholds for program eligibility of vehicle models for purchase decline with vehicle weight—can encourage infra-marginal clunker owners to choose more fuel-efficient vehicles, but are less effective at inducing replacements among marginal clunker owners than uniform threshold subsidies. Second, under a fixed government subsidy budget, mandating firms to share program costs can substantially increase replacements among marginal clunker owners, though at the cost of a lower average fuel economy for newly purchased vehicles.