Introduced as a seemingly small addition to make the Germany’s economic stimulus package seem more specific in helping consumers and the automotive industry, the wrecking bonus has become a breathtaking success. It’s formula is very simple: anyone who buys a new car which meets EURO IV exhaust limits gets 2500€ from the government as long as the old car is not sold on but destroyed. The initial 1,5 billion € (enough for 600.000 cars) was quickly used up, and under the pressure of car owners, many of whom had already bought a new car and now faced uncertainty about whether they would receive the bonus – was extended to 5 billion € and until the end of 2009.

The wrecking bonus was clearly successful in some ways: 1.4 million Germans put in claims for the wrecking bonus so far. In the days after the online system for claims went online 200.000 to 300.000 claims a day reached the agency in charge of administering the wrecking bonus, crashing their website and forcing them to employ extra staff to deal with the backlog. The association of automotive producers’ figures show that car sales from January to April 2009 in Germany exceeded those of the year before by nearly 20 percent. Yet despite stimulating car sales, the wrecking bonus is not environmentally friendly, and looking at the opportunity cost of the money spent – the side-effects, and the hang-over that might follow from it, show how.

The question of how ‘green’ the wrecking bonus is has been discussed here before. While Sigmar Gabriel, minister for the environment, likes to call it ‘Umweltprämie’ (environmental bonus), producing new cars and wrecking old ones is energy and ressource intensive. Furthermore, there is no clear incentive in the wrecking bonus to buy environmentally friendly cars, as EURO IV is mandatory anyway and cars don’t have to fulfil more. It also does not create a greater incentive for those wrecking especially polluting vehicles and exchanging them for especially clean ones. Nevertheless, the wrecking bonus has led to a shift towards buying cheaper and (therefore) cleaner cars, creating the political paradox of leading to domestic producers of large cars (Mercedes, Audi, Porsche, BMW) not benefiting to the extent of foreign producers like Fiat, Dacia, and Toyota.

From an climate change point of view, the positive impacts of the wrecking bonus have nevertheless be weighted against other ways to spend the money. Here the wrecking bonus quickly looks environmentally much less attractive. 5 billion € could have gone a long way in other fields. In energy efficiency, development of electric cars, increasing the pace of renewable energy deployment this kind of money could have given a crucial push to an industry which is becoming more significant and has a clear mandate for future growth – unlike the automotive industry. Furthermore, no-one can empirically validate how much of the extra-spending on cars is unblocking delayed demand, and how much of it is merely pulling forwards car purchases which will now not be conducted in the years to come.

With regards to electric cars, the fallacy of the wrecking bonus possibly becomes clearest. The German government supports some field trials of electric cars in selected cities, as well as subsidising technology needed to make these cars ready for the market. By increasing these subsidies as well as creating buying incentives similar to that of the wrecking bonus exclusively for electric cars – as China, among others is considering – German companies could have benefited and Germany could have had the crucial first-mover-advantage in a field that will clearly be crucial in the decades to come. But, the money is spent, both by consumers and the government. Some of the 1.4 million Germans that bought a car in the first four months of this year might have considered buying an electric, hybrid, or other environmentally-friendly car next year. More would have done so given a significant government support in doing so. But that money is spent, and an opportunity missed.

Sometimes, no news is good news. In a week in which Obama gave US states the ability to enforce tough new standards on car fuel efficiency and emissions, German policymakers managed a last minute turnaround to prevent doing the opposite. The audacity of claiming a shift to environmentally friendly car taxation, while preparing a tax model that would have more than halved taxation for the worst polluting SUVs, was breathtaking. Luckily some in Germany’s governing coalition, namely Sigmar Gabriel, minister for the environment, and Wolfgang Tiefensee, minister for transport, both SPD, must realised the impact this would have with voters, both those interested in climate change and those who questioned why they had to pay the same, while those driving 500hp SUV got a hefty discount. In the end a compromise was found, whose central characteristic is that it will mean every kind of car essentially paying what it is paying now. This was criticised by the LINKE party and environmental NGOs as a ‘wrong signal’ because it did not in fact raise taxation for more polluting vehicles. Yet, one could be forgiven, given recent experience with Germany’s Grand Coalition to give a sign of relief at the fact that things haven’t become even worse.

On a related note, this week brought out a few other interesting bits of information. DEKRA, an car testing association published a report showing that 92 percent of drivers are willing to change to an ‘Umweltauto’, even if it means a smaller range, worse driving performance, or shorter service intervals. Unfortunately, they didn’t ask how much more people were willing to pay…

Another report, this time written by Roland Berger, a consultancy, for the government of the state of Saxony, shows the economic potential of environmental technology. This industry grew by 17 percent in 2007, employs 18.000 people in Saxony alone, and already contributes 6 percent to the states GDP. And, encouragingly, even in the current economic climate the outlook of the companies asked remained positive. Adding to the good news, for the economy and the climate, was the association of energy and water utilities BDEW, stating that renewable energy covered more than 15 percent of total German electricity consumption. This means Germany is already fulfilling the EU renewable energy targets, and, given that much of the technology is produced in Germany, highlights the positive economic impacts courageous action on climate change can have.