Diesel exchange premium: burden or economic stimulus package?

The outcome could have been worse for the German car industry. The consequences for carmakers from the coalition’s new diesel programme will probably remain within bounds. The exchange premiums and retrofit solutions being demanded for older diesel vehicles that meet the Euro 4 and Euro 5 emission standards will be confined to the 14 German cities with the highest pollution levels. This means that Frankfurt, for example, where intensive discussion about driving bans has been taking place in recent weeks and which ranks fifth in Germany in terms of inhabitants and second in terms of commuters, is not even included in the list of affected cities.

The 14 cities named have a combined population of just under seven million, representing less than ten percent of the German population. Even if the surrounding districts are included as planned, significantly less than 20 percent of Germans with older diesel vehicles are likely to benefit from a premium or a cost-free conversion.

Nevertheless, the programme could have a significant impact on the economy as a whole. Assuming that at least one third of the eligible persons accept the offer of an exchange premium or retrofitting, around 500,000 vehicles are likely to be affected. In relation to the total number of new car registrations of around 3.5 million last year, this is already a considerable number.

In terms of gross domestic product, the programme could thus additionally boost growth by 0.3 to 0.4 percentage points. But this only applies on the assumption that the eligible persons make use of the exchange premium and not of the technical retrofitting possibilities. Until now, a number of carmakers seem to generally reject the option of retrofitting and are focusing entirely on exchange premiums and fleet renewal. It remains to be seen whether politicians plan to introduce a statutory retrofit obligation. Imported vehicles as well as the costs of the rebate or premium to be granted by the German carmakers would have to be deducted from this calculated growth effect. For this would reduce the carmaker’s profit and, by extension, the impact on growth.

The diesel exchange programme might therefore even help to boost the recently sluggish German car sales figures. The introduction of a new exhaust test procedure for passenger cars caused sales figures to spiral down noticeably in September 2018 and has been having a dampening effect on industrial production since July. However, whether the programme ultimately proves a welcome source of stimulus or a cost-increasing burden for the automotive sector depends both on the actual contents of the programme as well as on the extent to which owners of older diesel vehicles make use of it.

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