The Cost of Greening Stimulus: A Dynamic Analysis of Vehicle Scrappage Programs

Abstract

During the Great Recession, many countries adopted stimulus programs designed to achieve two goals: to stimulate economic activity in lagging durable goods sectors, and to protect or enhance environmental quality. Advocates of such programs contend that the environmental benefits are co-benefits of economic stimulus. This paper investigates the potential tradeoff between the stimulus and environmental objectives in the context of the popular U.S. Cash-for-Clunkers (CFC) vehicle scrappage program. We develop and estimate a dynamic discrete choice model of vehicle ownership, and conduct counterfactual analysis comparing the implemented policy with alternative policy designs. Results show that design elements to achieve environmental benefits significantly limit the program's impact on demand stimulus. The cost of demand stimulus after netting out environmental benefits under the program could be 25 percent higher in terms of vehicle sales and 64 percent higher in terms of consumer spending than alternative policy designs without explicitly targeting the environmental objective. Our findings serve as a cautionary tale for green stimulus proposals that aim to address both the economic crisis from the COVID-19 pandemic and climate change.

Keywords: Stimulus, Dynamic Discrete Choice Model, Vehicle Scrappage

JEL Classification: E62, H23, H31, Q85