Vehicle Scrappage and Gasoline Policy

We estimate the sensitivity of scrap decisions to changes in used car values - the "scrap elasticity" - and show how it influences used car fleets under policies aimed at reducing gasoline use. Large scrap elasticities produce emissions leakage under effciency standards as the longevity of used vehicles is increased, a process known as the Gruenspecht effect. To explore the magnitude of this leakage we assemble a novel dataset of U.S. used vehicle registrations and prices, which we relate through time via differential effects in gasoline cost: A gasoline price increase or decrease of $1 changes used vehicle prices and alters the number of fuel-efficient vs. fuel-inefficient vehicles scrapped by 18%. These relationships allow us to provide what we believe are the first estimates of the scrap elasticity itself, which we find to be about -0.7. When applied in a model of fuel economy standards, the central elasticities we estimate suggest that 12-17% of the expected fuel savings will leak away through the used vehicle market. This considerably reduces the cost-effectiveness of the standard, rivaling or exceeding the importance of the often-cited mileage "rebound" effect.

Speaker: Mark Jacobsen, UC San Diego