Cost-benefit analysis of an accelerated vehicle-retirement programme

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Cost-benefit analysis of an accelerated vehicle-retirement programmeDoron Lavee a; Nir Becker a

a Department of Economics and Management, Tel-Hai College, Upper Galilee, Israel

Online Publication Date: 01 September 2009

To cite this Article Lavee, Doron and Becker, Nir(2009)'Cost-benefit analysis of an accelerated vehicle-retirement programme',Journalof Environmental Planning and Management,52:6,777 — 795

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Cost-benefit analysis of an accelerated vehicle-retirement programme

Doron Lavee and Nir Becker*

Department of Economics and Management, Tel-Hai College, Upper Galilee 12210, Israel

(Received 3 March 2008; final version received 15 September 2008)

High taxes on new cars in Israel provide an incentive for car owners to defer thepurchase of new vehicles. The result is a vehicle fleet of older, more pollutingvehicles, with air pollution costs estimated at up to $530 million annually. Thepurpose of this paper is to conduct a cost benefit analysis (CBA) of an acceleratedvehicle-retirement (AVR) programme. The analysis considers the private car fleetas well as trucks and buses. The study develops an economic model to identify theoptimal payment level that will maximise the net benefit of the programme, andthen apply the model to three different vehicle categories. It finds that an AVRprogramme for private cars may indeed yield significant net benefits, while asimilar programme for trucks and buses fails to meet the cost-benefit test. Forprivate cars, the study finds that even according to a conservative estimate, theprogramme will result in the voluntary retirement of approximately 98,000private cars, with a present value net benefit of more than $50 million. This isequal to a 17% reduction in total annual private car air pollution costs for thefive-year time span of the proposed programme.

Keywords: cost benefit analysis; accelerated car retirement; AVR programme; airpollution

1. Introduction

In recent years, air quality has become an issue of growing concern in Israel. Whilepollution from stationary sources is declining due to better monitoring andenforcement, increasing pollution from mobile sources is becoming a majorenvironmental problem. This is especially true in big cities; as the population inmany of these cities becomes more affluent, it is increasingly inclined to switch frompublic transportation to private car use, thus generating more air pollution. Recentresearch (the Israeli Ministry of Environmental Protection) has shown that in theTel-Aviv metropolitan area, vehicular pollution contributes to 293 deaths annually.This is mainly due to a combination of a high population density and thecomposition of the vehicle fleet, which includes a significant proportion of old,heavily polluting vehicles.

Policy efforts in response to the problem include both supply management anddemand management. Supply management may include, for example, investment inpublic transportation infrastructure, while demand management includes congestionfees and higher tariffs for parking. Accelerated vehicle retirement programmes

*Corresponding author. Email: [email protected]

Journal of Environmental Planning and Management

Vol. 52, No. 6, September 2009, 777–795

ISSN 0964-0568 print/ISSN 1360-0559 online

� 2009 University of Newcastle upon Tyne

DOI: 10.1080/09640560903083731

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(AVR’s) combine demand and supply management. A typical AVR programmeconsists of a payment made by the government to car owners who agree to retiretheir old cars. Thus, these programmes use economic mechanisms to change driverbehaviour on the demand side, and may induce a reduction in the number of cars, achange in the age profile of the car fleet, or both.

AVR programmes have become increasingly relevant worldwide. Enforcement ofmore stringent emissions limits and technical standards in new vehicle production,together with the problems associated with the physical wear of components such ascatalytic converters over a car’s lifetime, make newer, less polluting cars moreattractive, notwithstanding the considerable purchase costs involved; to put itsimply, the environmental advantages of new cars over older cars have becomeincreasingly significant. Most programmes aimed at reducing the number of older,more polluting vehicles on the roads are voluntary, as described above: a payment ofa given amount is made to car owners if they agree to retire their old cars.Mandatory programmes also exist, but as this study focuses on the role of economicincentives in changing demand behaviour, it will consider here only voluntaryprogrammes.

The purpose of this study is to perform a cost benefit analysis (CBA) of an AVRprogramme in Israel. The analysis considers the private car fleet as well as trucks andbuses. In order to perform the analysis, an economic model is developed to find theoptimal payment level that will maximise the net benefits of the programme. Thismodel is then applied to empirical data on the three different vehicle categories. TheCBA uses the willingness to accept (WTA) criterion as the main cost signal for policymakers. That is, the study looks at the minimal payment that a vehicle owner will bewilling to accept in exchange for retiring her vehicle as an indication for the level ofpayment required in order to achieve pollution reduction and economic objectives.However, in this study WTA is not determined by a survey of potential participantsin the programme, but by the value of the given vehicles in the used-car marketaccording to model type and model year.

The next section reviews the literature onAVR programmes. Section 3 presents thetheoretical model. Section 4 describes the data and the empirical methodology. Section5 presents the CBA results and section 6 summarises and concludes the paper.

2. Literature review

The early literature on AVR’s was concerned mostly with the private decisions ofvehicle owners. These studies are important mainly in the context of life-cycleanalyses of durables. In one of the earliest models, Walker (1968) found that thedecision to retire a car is based above all on the age of the vehicle, but also on itscondition, anticipated future repair costs, and its value in the used-car market.

Parks (1977) developed a model that focused on analysing the probability that anowner of a car will participate in an AVR programme. The model showed how age,appearance, condition and expected future repair costs of the vehicle affect thisprobability. The vehicle owner weighs the benefits of keeping the car on the roadagainst the expected costs of continuous repair. If the difference between the two isgreater than the scrap value of the car, it is worthwhile for her to keep the car. In hisreview of AVR programmes, Berkovec (1985) reached similar conclusions to those ofPark (1977). The probability of scrapping increases as the value of the vehicle on theroad (net of repairs cost) approaches its scrap value.

778 D. Lavee and N. Becker


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Since the early 1990s, the literature on the subject has concentrated on twoelements: the design of AVR programmes (including determination of eligibility forparticipation), and the social desirability of such programmes.

Analyses of the design of AVR programmes (e.g. US-EPA 1993) generally focuson how to best achieve reductions in emissions of various pollutants, as well as oneligibility criteria for participation. Eligibility is indeed a critical aspect of AVRprogrammes: for example, most programmes stipulate that the vehicle due forretirement must be in driving condition; otherwise, it does not qualify for theprogramme (as it does not constitute a source of pollution). Other conditions mayinclude a minimum registration period in the programme area (usually 1–2 years)and presentation of emission test results.

Two seminal works on the social desirability of AVR programmes are US-OTA(1992) and DRI/McGraw-Hill (1991). The US-OTA study (1992) estimated the costsand benefits of an AVR programme, evaluating both fuel efficiency and pollutionprevention, and assessing the effect of a retired old car being replaced with a newercar, all according to different model-year-based eligibility criteria. The studyanalysed the effect of offering either $700 or $1000 for retiring a 1970, 1975 or 1980model, and found that the cost per ton of pollutant reduction was in the range of$2800 to $7100 for HC; $500 to $900 for CO2; and $12,700 to $22,400 for NOx. Thestudy also found that if 1 million vehicles were to participate in the programme, theenvironmental benefit (avoided pollution damages) would be between $340 and $360million, in addition to savings of 140 to 210 million gallons of fuel.

DRI/MacGraw-Hill (1991) compared two alternative means of pollutionreduction: the accelerated-retirement programme, and the CAFE1 programme inwhich car makers were required to produce cars with an average fuel consumption of32 miles per gallon. The results show that given an offer of $700 per target vehicle,and assuming the participation of 9 million cars, the accelerated-retirementprogramme is more cost-effective than CAFE in terms of both fuel consumptionand pollution reduction. Furthermore, accelerated retirement may produce apositive net benefit to society, while CAFE cannot. The study also found the costof the accelerated-retirement programme to be lower and more evenly distributedbetween the different agents.

Alberini et al. (1995, 1996) developed an econometric model to identify thefactors that influence a vehicle owner’s decision to participate in AVR programmes.The study was based on an actual experiment in the state of Delaware, in which asum of $500 was offered for each of 125 car models manufactured before 1980. Theparticipation rate was 3%. When the payments offered were higher, such as $700 and$1000, participation rates increased to 12% and 30%, respectively. In addition to thebenefits already mentioned, the authors cite further benefits that should beconsidered: the greater safety provided by new cars, reduction of traffic jams dueto a reduced number of accidents, increased demand for labour and a rise in thenational GDP. This last component is due to a reduction in the supply of used carsand the consequent rise in used-car prices, which works to increase demand for newcars, thereby generating jobs and raising the GDP.

Hahn (1995) also assessed the likely benefits and costs of an AVR programme.He used a simpler approach to estimate equilibrium prices in the new and used carmarkets. He first constructed a vehicle supply curve. The costs of the AVRprogramme were then measured in two steps: (1) the area under the supply curve upto the level of the incentive payment offered by the programme; and (2) multiplying

Journal of Environmental Planning and Management 779


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https://www.researchgate.net/publication/24048911_Determinants_of_Participation_in_Accelerated_Vehicle-Retirement_Programs?el=1_x_8&enrichId=rgreq-1a50695a-baed-4364-be7c-4c1fe248b1ab&enrichSource=Y292ZXJQYWdlOzQ2NTI4OTEwO0FTOjEzOTQ2MzczMjc2NDY3M0AxNDEwMjYyMTUzMjg3

the incentive payment by the number of vehicles. He then estimated the net reductionin emissions and calculated cost-effectiveness, adjusting emissions’ benefits toaccount for vehicles that would have been scrapped anyway, using natural retirementrates for each model year (the ‘natural’ retirement rate is the percent of vehicles thatwould be scrapped without an AVR programme incentive). Key assumptions in theanalysis included: (1) all scrapped vehicles were replaced by a ‘typical’ vehicle in thefleet, calculated by a weighted average; (2) scrapped vehicles had a remaininglifespan of three years; and (3) the replacement vehicle was driven the same numberof miles as the retired vehicle. Like Alberini et al. (1995, 1996), Hahn concluded thatit is possible to design an AVR programme to achieve cost-effective emissionreductions. However, Hahn also questioned how a retirement programme wouldperform over time, speculating that cleaner cars and lower deterioration rates couldreduce future cost-effectiveness.

Kavalec and Setiawan (1997) used a vehicle choice-demand-usage model forCalifornia to estimate the costs and benefits of a large-scale scrap programme.Estimates were arrived at using both stated and revealed preference data from asurvey of 5000 households. A major advantage of the model employed in this studyis that it predicted what car owners would do after scrapping their old cars. It wasestimated that approximately 85% of the vehicles retired in each year of theprogramme would be replaced. The welfare effects of an AVR programme were alsoestimated. Since the scrap offer price effectively sets a price floor for a particularcategory of vehicles, some prospective buyers pay a higher price or buy a lesspreferred option, leading to welfare loss. The authors attempted to measure this lossby the change in consumer surplus between the baseline scenario and the AVRprogramme scenario.

Other AVR programmes for old vehicles have also been the focus of academicattention (e.g. Baltas and Xepapadeas 1999, Moretto 2000, Dill 2001, 2004,Yamamoto et al. 2004, Szwarcfiter et al. 2005). These papers and others examinewillingness to participate in such programmes and the resulting reductions in airpollution. For example, Szwarcfiter et al. (2005) compared AVR programmes tostringent inspection policies and demonstrated the potential role of AVRprogrammes. However, the authors did not quantify the benefits of the programmenor test it according to cost benefit criteria. Dill (2004) asked how modifying theassumptions underlying California’s AVR programme may change the desirability ofthe programme, and concluded that AVR’s are probably not as attractive as theymight seem at first sight. In particular, it was claimed that older cars are driven lessthan their newer counterparts. The paper also questioned the assumptionsconcerning the number of years a car owner would continue to drive an old car inthe absence of an AVR programme. If he or she were to retire the car in three years,this too would reduce the benefits associated with the programme.

Concluding, it may be said that voluntary AVR programmes suffer from asignificant problem of uncertainty: it is difficult to forecast the results of theprogramme, in terms of both costs and effectiveness (pollution reduction). Thisuncertainty is a source of concern for policy makers. While mandatory programmesand other types of command-and-control regulation also do not provide perfectcertainty, there seems to be a greater reluctance on the part of policy makers toadopt voluntary, economic-incentive based programmes. The academic literature onthe subject has tried to alleviate this concern through theoretical modelling andempirical analysis of AVR programmes.



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https://www.researchgate.net/publication/248319842_Enhancing_the_effects_of_the_Brazilian_program_to_reduce_atmospheric_pollutant_emissions_from_vehicles?el=1_x_8&enrichId=rgreq-1a50695a-baed-4364-be7c-4c1fe248b1ab&enrichSource=Y292ZXJQYWdlOzQ2NTI4OTEwO0FTOjEzOTQ2MzczMjc2NDY3M0AxNDEwMjYyMTUzMjg3

https://www.researchgate.net/publication/223441448_Estimating_emissions_reductions_from_accelerated_vehicle_retirement_programs?el=1_x_8&enrichId=rgreq-1a50695a-baed-4364-be7c-4c1fe248b1ab&enrichSource=Y292ZXJQYWdlOzQ2NTI4OTEwO0FTOjEzOTQ2MzczMjc2NDY3M0AxNDEwMjYyMTUzMjg3

https://www.researchgate.net/publication/24048911_Determinants_of_Participation_in_Accelerated_Vehicle-Retirement_Programs?el=1_x_8&enrichId=rgreq-1a50695a-baed-4364-be7c-4c1fe248b1ab&enrichSource=Y292ZXJQYWdlOzQ2NTI4OTEwO0FTOjEzOTQ2MzczMjc2NDY3M0AxNDEwMjYyMTUzMjg3

This paper contributes to this growing body of literature, in particular addingtwo new features. First, the transportation fleet is divided into three categories –private cars, trucks and buses – and the cost-effectiveness of an AVR programme isexamined separately for each category. As will be shown, the results obtained for thethree categories are quite different, and the study demonstrates, among other things,the relative importance of the natural retirement rate, vehicle owners’ choice as towhether to replace the retired vehicle with a new one, and the difference in pollutionlevels between old and new vehicles. Second, an economic analysis is provided thatfocuses on identifying the optimal incentive payment – the incentive payment levelthat maximises the net benefit to the economy.

3. The theoretical model

This section presents the underlying theoretical model of the study. This model isused to try to identify the level of payment to vehicle owners (in exchange forretirement of their vehicles) that will maximise the net benefit to the economy. Thefocus is on the benefits gained by reduced air pollution. Costs are analysed in twoversions: budgetary cost (payment to the owners of the scrapped vehicles) and realcost (value of the scrapped vehicle).2

The net benefit for each type of vehicle (private cars, trucks and buses) isdetermined by:

MaxNBjðpjÞ ¼XqjðpjÞi¼1

TBiðpjÞ � TCiðpjÞ� �

ð1Þ

where: TBi(pj) ¼ Total benefit of retiring qj vehicles (taking them off the road) whenthe payment is p. TCi(pj) ¼ Total cost of retiring qj vehicles when the payment is p.qj(pj) ¼ The number of vehicles that will be retired at incentive payment level pj.

The number of vehicles that will be retired in a given programme depends on theincentive payment paid by the government, denoted p. For each model type j therewill be one incentive payment, pj, which is independent of the age of the vehicle.Maximisation of (1) results in Popt, that is, the optimal level of the governmentincentive payment.

If indeed there is an interior solution to the maximisation problem, it must be thecase that the difference between marginal benefit and marginal cost is a decreasingfunction of the payment level. That is:

ðMB�MCÞ0ðpjÞ < 0: ð2Þ

If this is not the case, two failures might occur: (1) owners of vehicles for which themarginal benefit of retirement is lower than the marginal cost might find itworthwhile to participate in the programme; and, (2) owners of vehicles for whichthe marginal benefit of retirement is higher than the marginal cost might not find itworthwhile to participate in the programme.

In order to understand this claim, it is sufficient to see that the marginal benefit isa decreasing function of payment level (first to retire their vehicles will be owners ofvehicles for which the marginal benefit of retiring their vehicles will be highest3) whilethe marginal cost is an increasing function of payment level (following the same



reasoning as with marginal benefit). Under such circumstances the differencefunction is decreasing.

MB0ðpjÞ < 0; MC0ðpjÞ > 0: ð3Þ

3.1. Estimation of the supply function of vehicles for retirement

It is assumed that if the value of the vehicle in the used-car market is lower thanthe incentive payment offered by the government, the owner will prefer to retirethe vehicle and buy a newer model, or switch to public transportation. There will,of course, be exceptions to this rule. On the one hand, there will be owners whowill prefer to hold on to their vehicle even if the payment offered for itsretirement will be higher than its market price, due to psychological reasons andtransaction costs. On the other hand, there will be owners who will retire theircar even for payment levels lower than the car’s market value, either because theybelieve their car is a ‘lemon’ or in order to save on the transaction costs involvedin selling the car. However, there is no a priori reason to assume that one ofthese exceptions will dominate the other, so it may be assumed that the numberof cars retired through the programme will be fundamentally determined by themarket prices of used cars.

The time trend effect can be characterised for the price of every vehicle typein the used-car market. In order to do so, first the relationship between theprice of an old and new car for a given vehicle model j will be expressed. This isgiven by:

C jX ¼ aje�b�X � Cj

new ð4Þ

where: Cjnew ¼ Price of a new car of the given vehicle model j. C j

X ¼ Price of a car atage X of vehicle model j. aj ¼ Coefficient of price change of vehicle model j.b ¼ Coefficient of the age of the vehicle. If C j

X 5 p the owner will choose to retireher car. That is:

p > aje�b�X � C jnew ð5Þ

X � ln

�pj

aj Cjnew

�� 1bj j

" #: ð6Þ

X jage(pj) is defined as the youngest age of a vehicle that validates Equation (6) for a

given payment of p. Hence, every vehicle older than X jage, will be retired.

At this point, the supply of vehicles of a given model j can be presented by:

QjðpÞ ¼XXj

X¼XjageðpjÞ

qXj for every Xj � ln p

Cjnew�aj

�� 1bj

#"ð7Þ

where

Qj0ðpÞ > 0

and �Xj is the oldest age of a (running) vehicle of the given model.



3.2. Supply function of vehicles for retirement for the entire fleet

Now the supply function of vehicles for retirement can be constructed for the entirevehicle fleet. Assuming j denotes vehicle model and there are J models, the car vectorcan be expressed as:

j ¼ 1; 2 . . . JÞ:ð ð8Þ

Hence, the supply of vehicles for retirement as a function of the government paymentP may be written as:

QðpÞ ¼XJj¼1

XXj

X¼XjageðpjÞ

qxj where p ¼ ðp1 . . . pjÞ: ð9Þ

3.3. Social benefits

The benefits of the AVR programme depend on the behaviour of the participants.After the first decision, whether to retire the car or not, the potential participantneeds to decide whether to buy another car in its place or to switch to publictransportation. If she decides to buy a replacement car it is quite reasonable toassume that it will be of a newer model than the retired car, although not necessarilybrand new. However, even if the replacement car bought will not be brand new, achain effect in which each seller of a used-car buys a newer car in its place willeventually result in a brand new car being bought, effectively replacing theretired car. This exchange between the retired old car and the new car is the sourceof the potential benefit to the economy.4 On the other hand, if the owner of theretired car decides to switch to public transportation, the benefit will be even higher:no exchange of cars will take place and the net result will be one less old car on theroad.

The benefits associated with an AVR programme are:

. Reduction in air pollution.

. Reduction in the number of traffic accidents.

. Reduction in the number of severe injuries and death cases due to theimproved safety features of new cars.

. Increase in the amount of scrapped parts that can be recycled (although thisbenefit should be taken into account together with the added cost of increasedlandfill space required for parts which cannot be recycled).

. Reduction in traffic congestion.

. An increase in tax revenue, generated by an increase in new car sales (althoughthis can be thought of as a transfer payment). Newer cars are usually boughtby higher-income families. Therefore, tax revenue generated by the increase innew car sales may replace existing taxes imposed on families with an averageincome lower than that of the average new car buyer.5

As a general rule, there is a positive correlation between the age of the carand the benefits associated with its retirement. This is due both to the everincreasing quality of newly manufactured cars and to the continuous physicaldeterioration (affecting many different quality parameters) of any given car.



Therefore, the marginal benefit of retirement as a function of age can be expressedaccordingly:

MB0ðXÞ > 0: ð10Þ

The different benefits can be presented as a vector: M ¼ (m1, m2 . . . �M).Thus, the marginal benefit of retirement of an X year old car of model j is

given by:

MBjX ¼

X�M

m¼1VX

j;m ð11Þ

where VXj;m represents the value of one of the above-mentioned types of benefits.

It is now possible to find the optimal solution where the net benefit to the AVRprogramme is given by:

NBðpÞ ¼XJj¼1

XXj

x¼Xjage

qxj

X�M

m¼1Vx

j;m � aje�b�x � Cjnew

" #: ð12Þ

That is, the net benefit equals the difference between benefits and cost for eachmodel type and model year in which the benefit of retirement is higher than thecost, multiplied by the number of cars retired of that model type and model year.

4. Data and methodology of the empirical cost-benefit analysis

The benefits and costs of a potential AVR programme are estimated for threedifferent vehicle fleets – private cars, trucks and buses. This distinction derives fromthe different characteristics of each category of vehicles, and in fact producessurprising results that offer new insights for AVR programmes.

4.1. Characteristics of the different vehicle models in the three categories

In the empirical CBA the economic feasibility of an AVR programme was analysedfor all major models in each vehicle category, examining separately every model witha 5% share or larger of the entire vehicle category fleet. Thus this coveredapproximately 90% of the total fleet in each category.

4.2. Estimation of the used car market price

As explained in the theoretical model (Equation 4), it was possible to characterise thetime trend effect for the price of every vehicle type in the used-car market. In order todo so the relationship between the price of an old and new vehicle was examined forevery major model in each category. The parameters of Equation 4 were estimatedby running the following regression on empirical used-car market data:

ln CX=Cnewð Þ ¼ ln a� b Xð Þ: ð13Þ

Table 1 presents the results for each vehicle category.



4.3. Estimating the benefits of the AVR programme

When the theoretical model was presented, the different types of potential benefits ofthe proposed AVR programme were described. The empirical analysis focuses on thebenefits of reduced air pollution.

4.3.1. Reduced air pollution

The benefits measured in this study are those of air pollution damages avoided by theimplementation of the proposed programme. In order to estimate the damagescaused by a representative car it is necessary to look at the following factors:

(a) Distance travelled per year.(b) Year of production (model year).(c) Pollution coefficient.(d) Cost per ton of pollution.

Parameters (a) and (b) were taken from the Israeli Central Bureau of Statistics (CBS2004). The pollution coefficient (parameter (c)) for each type of vehicle was obtainedfrom engineering experiments conducted in Israel by Tartakovsky et al. (1997). Forthe cost per ton of pollution (parameter (d)) the damage estimate method of theIsraeli Ministry of Transportation Guidelines for Appraisal of Transportation Projects(IMT 2006) was used. This is the official standard in Israel for assessing the damagesof air pollution. These estimates were based on benefit transfer from studies in theUSA and Europe, adjusted to conditions in Israel.

Private cars. Table 2 describes the pollution data for an average private car.6

Table 1. Price ratio coefficients: used vs. new vehicles.

Coefficients Private cars Light trucks Heavy trucks Buses

a 1.3361 (3.35) 1.004 (4.02) 1.0337 (4.63) 0.998 (2.85)b 70.152 (4.47) 70.3337 (2.10) 70.3335 (3.23) 70.3211 (4.37)Adjusted R2 0.518 0.788 0.649 0.852

Note: t-statistics are given in the parentheses.

Table 2. Pollution data: average private car.

Pollution coefficient(g/km)

Average kilometres Number of

Total annualpollution costsfor average

Model year CO CO2 HC NOX travelled per year vehicles vehicle (NIS)

Before 1976 66.0 158.0 2.80 2.20 14,900 1600 35741977–1984 37.0 174.0 2.30 2.40 14,900 95,268 26361985–1988 28.0 172.0 2.00 2.50 15,200 74,947 23641989–1992 21.0 175.0 1.90 2.65 15,200 81,193 21761993– 6.4 192.0 0.35 0.26 15,200 234,013 440



As can be seen in Table 2, after 1992, when new cars were mandated by law toinclude catalytic converters, average air pollution costs were reduced to less than20% of pollution costs of vehicles manufactured prior to 1992. It is due to thisdramatic difference in pollution costs between old cars (manufactured prior to 1992)and newer cars (manufactured after 1992) that an effective AVR programme may beable to provide significant economic benefits. Accordingly, an AVR programmetargeted at private cars manufactured before 1992 will be considered.

As explained in the theoretical section of this paper, if a car owner decides toparticipate in an AVR programme (that is, to retire her old car), she can chooseeither to switch to public transportation (or get by with one family car, if herfamily originally owned two cars), or to buy a newer car. In the first case, a fullreduction of the damage that was caused by the retired car is assumed.7 In thesecond case, where the car owner replaces the retired car with a newer one, theassessed reduction in pollution costs is the difference in pollution costs betweenold and new cars.

However, in reality it is unreasonable to assume that many perfect cases of eitherof the two baseline scenarios will indeed take place, and so benefits from reducedpollution will usually fall between the two extreme values. For example, the benefitof pollution reduction due to accelerated retirement of a private car manufacturedprior to 1976 is between 3134 NIS8 (if the owner purchases a newer car), and 3574NIS (if the owner switches to public transportation).

The overall benefit from an AVR programme is also a function of the naturalretirement rate relative to the one induced by the programme (Dill 2004). In otherwords, it is necessary to determine how many years earlier, on average, the owner ofan old car will retire her vehicle because of the programme. This, in turn, willdetermine the overall benefit of the programme – the benefit per year multiplied bythe number of years of old vehicle use ‘saved’ by the programme. According to CBSdata (2004), approximately 12% of old cars (of all model years prior to 1992) areretired naturally each year. This means that without the programme the average carwill be retired after five years (some of the vehicles will be retired immediately whileothers will be retired only after 10 years; by five years, it may be expected that 48%will be retired9).

The programme induces the car owner to retire her car immediately. This willlead to old cars being retired five years earlier than without the programme. Thebenefits are five years of pollution reduction. Using a discount factor of 5%, the totalbenefit ranges from 13,570 NIS to 15,470 NIS in present value terms.

Trucks. Trucks are used for business, so it is reasonable to assume that almostevery vehicle retired due to the programme will be immediately replaced by a newervehicle. Based on data about average distance travelled per year and the pollutioncoefficients, the benefit of reduced pollution due to early retirement of a truckmanufactured before 1989 is estimated at 6568 NIS for light trucks (trucks weighingunder 16 tons) and 13,863 NIS for heavy trucks (over 16 tons), annually (seeTable 3).

Old trucks (trucks of all model years prior to 1989) are retired at a natural rate ofapproximately 33% a year. Therefore, on average, the programme will bring forwardretirement by 1.7 years (CBS 2004).10 Accordingly, the overall benefit of pollutionreduction stemming from the accelerated retirement of an old truck is 9852 NIS forlight trucks and 20,794 NIS for heavy trucks.



https://www.researchgate.net/publication/223441448_Estimating_emissions_reductions_from_accelerated_vehicle_retirement_programs?el=1_x_8&enrichId=rgreq-1a50695a-baed-4364-be7c-4c1fe248b1ab&enrichSource=Y292ZXJQYWdlOzQ2NTI4OTEwO0FTOjEzOTQ2MzczMjc2NDY3M0AxNDEwMjYyMTUzMjg3

Buses. In the case of buses, based on distance travelled and pollution coefficients,the benefit from pollution reduction due to bringing forward the retirement of a busmanufactured prior to 1993 is 8312 NIS per year (see Table 4).

Old buses (buses of all model years prior to 1993) are retired at a natural rate ofapproximately 33% a year. Therefore, like trucks, on average, the programme willbring forward retirement by 1.7 years (CBS 2004). The overall benefit of pollutionreduction due to accelerated retirement of buses is 12,468 NIS per bus.

4.3.2. Other external benefits

Besides air pollution reduction, AVR programmes have other positive effects, sobenefit-estimates based solely on air pollution reduction constitute a lower bound fortrue overall benefits. These effects include:

. Positive external effects of reducing the number of vehicles. If an old vehicle isnot replaced by a new one, the number of vehicles on the road declines. Thisrepresents a positive external effect, as fewer vehicles on the road mean reducedcongestion, fewer traffic accidents and less road wear. Estimating the dollarvalue of these benefits is beyond the scope of this paper.

. Positive external effects of transition from old to new vehicles. New vehicles aretypically safer and are therefore involved in fewer accidents. The dollar valueof this effect is also not estimated in this paper.

. Growth in employment, GDP and recycling plants’ profit margins. Theprogramme will increase the availability of metal scrap and other salvagedmaterial and therefore the activity of recycling plants. This, in turn, will lead tolarger profit margins, the creation of new jobs, increased production andgreater tax revenue. These effects are also not evaluated.

Table 3. Pollution data: average truck.

Averagekilometrestravelled

Pollution coefficient (g/km)

Total annualpollution costsfor the average

Type of truck Model year per year NOx HC CO2 CO vehicle (NIS)

Light 1989 or before 42,000 8.24 1.44 576.6 8.55 11,788New truck 42,000 4.28 0.32 684.54 0.73 5220

Heavy 1989 or before 56,000 17.91 1.88 1268.06 3.18 29,451New truck 56,000 9.20 0.86 1801.26 1.95 15,588

Table 4. Pollution data: average bus.

Averagekilometrestravelled

Pollution coefficient (g/km)

Total annualpollution costsfor the average

Type of bus Model year per year NOx HC CO2 CO vehicle (NIS)

Large 1993 or before 61,000 20.0 4.9 576.6 3.83 17,120New bus 61,000 9.6 1.2 684.54 3.14 8808



. Value of recycled scraps. Previous research indicates that 80% of retired vehiclematerial is recycled (e.g. DRI/McGraw-Hill 1991). An average vehicle weighsabout 1 ton; salvage value is estimated at approximately 600 NIS per ton or480 NIS per vehicle.

AVR programmes also have one significant negative effect:

. Negative effect of increased volume of landfill. 20% of retired vehicle materialsare disposed of in landfills. The cost of waste burial is taken into account in theamount paid by recycling plants (that buy the scrapped vehicle and dispose ofthose parts and materials which cannot be resold or recycled). Because thelandfill fees paid by the recycling plants do not incorporate the negativeexternal effects of landfill, the AVR programme may be said to have a negativeexternality of 10 NIS per vehicle (Enosh Ltd 1996).

Finally, AVR programmes are associated with one other externality, which maybe considered either positive or negative, depending upon context:

. Progressive income redistribution. The programme brings about progressiveincome redistribution, as the owners of older cars (who thus receive thegovernment payment) are typically of the lower economic classes. But thisissue is outside the scope of this paper.

4.4. The costs of the AVR programme

When analysing the cost of an AVR programme it is possible to look at two differentcost parameters: the forgone market value of the retired vehicles and the costof payments to vehicle owners for the retirement of their vehicles. The marketvalue of the vehicle represents the benefit the owner derives from it, which isthe value forgone when the vehicle is retired. The government payment mayactually be considered a transfer payment, representing only budgetary cost, not realcost.

The difference between the two types of cost parameters may be clarified by thefollowing example. If, for instance, the government incentive payment is 2000 NIS, itis assumed, according to the model here, that all cars valued in the used-car marketat 2000 NIS or less will be retired through the programme. According to thegovernment payment cost parameter, the per car cost will be 2000 NIS, regardless ofthe car’s value in the used-car market (that is, even for cars valued at less than 2000NIS, the programme cost assessed will be 2000 NIS). On the other hand, accordingto the market value cost parameter, the cost per car will be calculated for eachmodel type and model year separately, according to the market value of the car.That is, the cost of retiring a car worth 1500 NIS in the used-car market will beassessed as 1500 NIS.

It should be noted that the cost of the programme is actually the value of thescrapped vehicle (for the vehicle’s owner). However, direct estimation of this value iscomplicated. Instead, the government payment can be used as an upper bound forthis value: as the owner is willing to accept the offered payment, it is clear that hederives positive utility from the deal. If the government payment constitutes anupper bound for the cost of the programme, then the estimated net benefit is of



course only a lower bound estimate. However, using the budgetary cost as a proxyfor the true cost is advantageous in a policy-making context.

The market value is used to estimate the number of cars that will participate inthe programme, but not as a proxy for the cost of an AVR programme.

In addition, there are the administrative costs of running the programme.However, while at times administrative costs may be quite significant, it is assumedthat in the case of a large-scale national programme involving the retirement ofthousands of vehicles, the administrative costs will be negligible in comparison to theaggregate sum of incentive payments, or the total forgone market value of retiredvehicles.

In order to calculate the cost of incentive payments, the price that vehicleowners will demand for the retirement of their old vehicles is examined. LikeBerkovec (1985) and Walker (1968), it is assumed that the decision to retire a car isbased on its value in the used-car market: if the payment is equal to or greaterthan the vehicle’s value in the used-car market, the owner will participate in theprogramme.

The natural retirement rate should also be taken into consideration whenassessing programme costs. Even without an accelerated-retirement programme,old vehicles are gradually retired. Some are scrapped due to accidents and othersdue to wear. While scrapping due to accidents is irrelevant for the appraisal of anAVR programme, scrapping due to wear is relevant, since the programme mayeffectively offer a payment to vehicle owners who would have retired theirvehicles even in its absence (and it is assumed it is essentially impossible for theprogramme to identify such cases). Consequently, some of the payments forvehicle retirement will not produce any benefit to the economy. An alternativeway of looking at this issue is to say that each payment will achieve only partialretirement.

In the analysis there is an attempt to identify the most efficient payment level –that is, the level of payment that will achieve the maximum net benefit. This is doneseparately for each of the three vehicle categories.

5. Results

5.1. Private cars

Table 5 summarises the main results for private cars manufactured in six selectedperiods. Columns 4 and 5 show the annual per vehicle total benefit from the AVRprogramme. This is done both under the assumption that the owner of the oldvehicle does not buy a newer vehicle in place of the old one (fourth column from theleft) and under the assumption that she does (fifth column from the left). Totalbenefits include reduction in air pollution costs as well as the salvage value of the oldcar.

In order to analyse the total net benefit of the programme, it is necessary toconsider the effect on the entire Israeli fleet. Costs and benefits were analysed in fourdifferent versions: owner buys/does not buy a new car,11,12 the programme cost foreach retired car is the market price of the car/the government payment. In eachversion the total net benefit was calculated by using Equation (12) of the theoreticalmodel. For example, in column 5 it is assumed that all car owners participating in theprogramme replace their retired car with a new one, and cost is assessed according tothe market price of the retired vehicle.



The supply function was estimated by:

Q ¼ �153; 030þ 50:8P

ð3:46Þ ð4:81Þ:ð14Þ

R2 ¼ 0.93 and t-statistics are given in the parenthesis.This was, in turn, plugged into Equation (12) to find the net benefit according to

each of the different scenarios. Figure 1 shows the four scenarios and how theassumptions underlying each scenario affect the net benefit of the AVR programme.

Table 6 presents the total net benefit of the programme by payment levelscorresponding to five different levels of used-car prices that match the model yeargroups shown in Table 5. That is, for example, a payment of 2000 NIS is expected toinduce owners of cars manufactured prior to 1977 to retire their cars, but will notinduce owners of cars produced in later yeas to do so; a payment of 6275 NIS isexpected to induce owners of all cars manufactured up to 1984 to retire their cars,

Table 5. Results for a single private car.

Model year

Number ofvehicles

per category

Averageprice of a

used vehicle(NIS)

Total benefitsfrom retirementprogrammeper vehicle -if owner

does not buya new car

Total benefitsfrom retirementprogramme pervehicle - if ownerbuys a new car

1976 or before 1600 Up to 2000 15,475 13,5701977–1984 95,268 2300 to 6275 11,414 95091985–1986 74,947 7800 to 9100 10,236 83311987–1988 81,193 10,600 to 12,300 10,236 83311989–1992 234,013 14,400 to 22,100 9422 75171993–2003 1,636,937 25,500 to 140,000 1905 –

Figure 1. Total net benefit as a function of payment (in million NIS per year).



and so forth. The table also displays total net benefit as generated by the optimalpayment level in each scenario.

As can be seen, the optimal level depends on the decision of the owners. First, dothey buy a new car or use alternative transportation options instead? Second, itdepends on the benefit they derive from the car. The lower bound estimate for totalnet benefit is found in the case where it is assumed that owners replace their retiredcars with new ones, and programme costs are computed according to governmentpayment. This result is expected since, as has been discussed, at least part of thegovernment payment does not constitute real cost and should not actually beconsidered as such. In addition, newer cars do not eliminate pollution by 100%, andso this also contributes to the low net benefit compared to the other scenarios. Thenet benefit of the programme ranges from 238 up to 785 million NIS. The number ofcars retired due to the programme (that is, above the number that would have beenretired in the programme’s absence) ranges from 97,000 to 173,000.

As can be seen, even according to the lower bound estimate, the programme isexpected to induce approximately 98,000 owners to retire their old cars. This willresult in a reduction of about 17% in total air pollution from vehicles every year, fora five-year period.

5.2. Trucks and buses

As can be seen in Table 7, the total benefit is higher than the cost of the programmefor all categories except for buses manufactured after 1990.

In order to analyse the total net benefit of the programme, it is necessary toanalyse the effect on the entire fleet. As mentioned previously, approximately 33% ofthese vehicles are naturally retired each year, so the benefit applies to only 66% ofthe vehicle numbers shown in Table 7. Table 8 shows the net benefit of theprogramme for the different vehicle subcategories.

Table 6. Private cars: net benefit for the entire fleet.

IncentivePayment Number

Total net benefitof the programme

assumingowners buy a

new car(thousandsof NIS)

Total netbenefit of theprogrammeassuming

owners do notbuy a new car(thousandsof NIS)

Total net benefitof the programmeassuming ownersbuy a new car(thousandsof NIS)

Total netbenefit of theprogrammeassumingowners do

not buy a newcar (thousands

of NIS)

(NIS) of vehicles Gov. payment Market price

2000 1600 16,341 19,085 17,941 20,6856275 96,868 237,473 406,314 624,123 626,8666309 97,108 237,9746569 97,770 627,5959100 171,815 737,805 425,644 486,298 783,6499171 172,099 426,2129436 172,629 784,90912,300 253,008 71,438,155 7540,879 71,692,053 7960,87422,100 447,986 711,338,646 79,673,217 79,419,811 77,920,480



As can be seen in Table 8, taking into account the natural retirement rate, mostof the categories have a negative net benefit. Adding administrative costs to thecalculation would probably cause the remaining two categories to turn negative aswell. It should also be noted that the number of vehicles expected to be retired is verylow – a maximum of 3284. Retirement of these vehicles would result in only a rathermarginal reduction in air pollution – approximately 4% the total air pollution fromvehicles. The conclusion is that an AVR programme for trucks and buses is neithereconomical nor environmentally effective.

This finding naturally raises the following question: as individual trucks andbuses generate significantly more air pollution than do private cars, how is it that theAVR programme is found to be so effective for private cars, and not effective at allfor trucks and buses? Several possible explanations were identified:

(1) Old private cars generate dramatically more air pollution than do new privatecars: up to eight times as much in air pollution costs. For trucks and buses,the difference in air pollution generation between old and new vehicles is of amuch smaller magnitude, with old trucks and buses generating only twice tothree times as much air pollution as equivalent new vehicles.

(2) Trucks and buses are used for business, so each vehicle retired due to theprogramme will most probably be immediately replaced by a new vehicle.

(3) The natural retirement rate for cars is only 10% per year, compared to 33%for trucks and buses, so the programme has a much more significant effect(when compared to the business-as-usual scenario) for private cars.

(4) The ratio between the price of a used truck or bus and the attained benefit ofreduced air pollution (due to the replacement of an old truck or bus by a new

Table 8. Trucks and buses: net benefit for the entire fleet.

Vehicle type Model year

Number ofvehicles incategory

Total net benefitof the programme –(thousands of NIS)

Light trucks Before 1986 1362 5304Light trucks 1987 2098 773Heavy trucks 1986 1922 3110Heavy trucks 1987–1988 3448 723,353Buses 1989 3289 7276,696Buses 1990–1993 5687 7569,426

Table 7. Benefit for a single truck and bus.

Vehicle type Model year

Number ofvehicles incategory

Average priceof a used

vehicle (NIS)

Total benefitsof the programme

(per vehicle)

Light trucks Until 1986 1362 11,282 22,765Light trucks 1987 736 15,211 22,765Heavy trucks 1986 1922 Up to 24,025 38,465Heavy trucks 1987–1988 1526 32,416 to 41,264 38,465Buses 1989 3289 10,224 16,308Buses 1990–1993 2398 111,000 to 169,000 16,308



one) is much higher than the equivalent ratio for private cars. Accordingly,the ratio between the incentive payment required to induce owners to retiretheir old vehicles and the attained benefit is also much higher for trucks andbuses than for private cars.

6. Summary and conclusions

This paper analyses a potential AVR programme in Israel for three differentcategories of vehicles: private cars, trucks and buses. Surprisingly, the category forwhich highest potential benefits are found is that of private cars. This is despite thefact that trucks and buses generate significantly more air pollution than do privatecars (the air pollution costs of an old heavy truck are about eight times the airpollution costs of the average private car).

For private cars, it was found that even according to the most conservativeestimate, the net benefit of a retirement programme is highly significant. Under themost restrictive assumption, an incentive payment of 6309 NIS maximises the netbenefit of accelerated retirement in the private car sector. It will bring to retirementapproximately 98,000 private cars, leading to a net benefit of about 238 million NISover the life span of the programme. In terms of pollution reduction, the programmewill lower air pollution by approximately 17% compared to a business-as-usualscenario, for a period of 5 years.

Contrary to expectations, the programme was found to be inefficient for trucksand buses. The main explanation for this finding is the difference in pollutionreduction rates between old and new vehicles. When the owner of an older privatecar replaces it with a new one, air pollution is reduced by up to 88%. For trucks andbuses, the reduction in pollution is no larger than 50%. Other differences betweenthe categories include the lower natural retirement rate of private cars compared tothat of trucks and buses (10% annually for private cars as compared to 33% fortrucks and buses) and the high resale value of old trucks and buses.

Programmes such as the one discussed in this paper should be compared to otherpossible air pollution reduction programmes based on cost-effectiveness criteria.However, it is thought there is a window of opportunity to act now. This study andothers indicate that an AVR programme could help accelerate the pace of retirementof old cars, significantly reducing pollution damages in a cost-effective manner.

Notes

1. Corporate Average Fuel Economy (CAFE) is a US regulation first enacted in 1975. Thepurpose was to improve the average fuel economy of cars and light trucks in the wake ofthe 1973 Arab oil embargo.

2. As one referee correctly pointed out, for a cost benefit analysis budgetary costs areirrelevant (besides the deadweight loss with which they are associated). However, it isoften precisely budgetary costs that determine whether such a programme will beimplemented or not.

3. This is true for the vast majority of cases. However, there are a few specific old modelswhose price is higher than that of newer models, such that the social benefit gained byinducing their retirement is lower. However, based on the empirical data here, it is safe tosay that these cases do not have a significant effect upon the results.

4. Throughout the analysis it is assumed there is a perfectly elastic supply of new cars. Thisis true for a small country like Israel where all new cars are imported, but may not be truefor a larger country with local car production. In such a case, the results of the analysis



may turn out different from this one. It is also assumed that the price schedule of usedvehicles will not be affected by the AVR programme.

5. Of course, it may serve as a budgetary funding source for the programme.6. Money values are stated throughout the paper in terms of NIS in 2003.7. In the case of a two-car family (where the participant in the programme chooses to get by

with one family car), the benefit is actually lower, because the remaining car willpresumably be used more often than before. However, this possibility is still better froman environmental perspective than the possibility that the retired car will be replaced by anew one. Therefore, the benefits of this scenario fall somewhere between the benefits ofthe two baseline scenarios.

8. $1 equals approximately 4.2 NIS.9. Calculated according to 1-(0.88)5 ¼ 0.48.10. The explanation is the same as for private cars – a 33% natural retirement rate means

that without the programme, in 1.7 years approximately 50% of the trucks will beretired.

11. If the owner buys a new car in place of the old one, benefits equal the difference betweenpollution costs of an old and new car. If he does not buy a new car the benefits are higher.

12. A new car refers here to a 2003 model.

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Cost-benefit analysis of an accelerated vehicle-retirement programme

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