03 Juni 2010

» Home » The Jakarta Post » Cash for clunkers, the Indonesian style

Cash for clunkers, the Indonesian style

Many things in this country appear to have flawed incentive structures. Take for example the forthcoming tax hike for new automobiles.
In Indonesia, it’s a well-known fact that the increase in length of new roads has been far too slow to keep up with the growth in cars.
Naturally, the time has come for the government to impose some limitation or disincentive for car
usage, which is totally understandable.
What’s not understandable, however, is the way they’re doing it.
I remember being a University student in the West some years back. There, the air was clean and I noticed this was in part due to the many disincentives erected to discourage the use of old cars relative to new ones.
In the UK, for example, road taxes and insurance quotes are generally higher for aging cars.
And diesel fuel is priced higher than petrol due to the existence of a pollution tax.
Separately in the US, subsidies were offered last year for the purchase of fuel-efficient cars, as part of its so-called “cash for clunkers” program.

Obviously such incentive structures are created for a reason. Older cars are typically less fuel-efficient and higher in CO2 emissions.
They also tend to break down more easily and are therefore more of a hazard to other road users. The fewer there are on the streets, the better.
Furthermore, by discouraging the use of old cars, the government provides the domestic car industry with a source of demand. If consumers are given incentives to trade in their clunkers for new cars every few years, the auto industry would a have a good customer base.
It is therefore ironic that in this country the authorities are trying to do just the opposite.
As widely reported, the government of Jakarta will impose a 10 percentage point increase in fees
for ownership titles on new cars starting June 2010, from 10 to 20 percent.
Of course this tax increase will also apply to old cars, but it’s a well-known fact here that car ownership titles for used cars are seldom changed even if a vehicle has been sold and resold multiple times.
Therefore the immediate pinch from this new regulation will likely be felt most by the new car buyers.
We may also recall reports not long ago of the government considering plans to prohibit the sale of subsidized fuel to owners of new cars. Newer cars of less than 10 years old will be forced to use the more expensive unsubsidized fuel, which is currently priced 30-40 percent higher.
So essentially, folks who want to use new and presumably cleaner and more fuel efficient cars are being punished, whereas those that pollute the city with old gas-guzzlers and higher CO2 emissions are being protected and even subsidized (in relative terms).
And as a side effect, the auto industry is also being suffocated. New car prices could see a 9 percent increase according to some estimates, which could be a significant blow to sales.
This is unfortunate, since vehicle manufacturing is one of only a few “real sector” industries in this country that has seen robust growth.
In the face of higher new car taxes, the middle-class man who has Rp 100 million now to spend on a vehicle would probably be better off buying an 11-year-old aging sedan, as opposed to a brand new fuel
efficient mini-MPV that is similarly priced.
By buying an old car, at least he has a better chance of skipping ownership title fees and buying cheaper fuel in the future.
There is doubt the average age of cars in the city will lengthen, and this is no solution to an already chronic traffic and pollution problem.
Many argue that it’s not fair to penalize the lower middle classes (old car users) as long as the buses remain unfit and the city lacks a proper mass rapid transportation system.
But I think such definition of “fair” is obsolete. What’s really unfair is allowing everyone to burn
fuel in 4-hour traffic jams every single day, because that is an extravagance that will be paid for by future generations.
There’s a modern-day definition of fair and it goes like this: The more you pollute, the more you pay. And folks that want to commute in the city using their own car must provide jobs to society by buying a new car every several years.
I am not sure whether the emergence of poorly-designed populist policies is a natural consequence of democracy, whereby politicians must appear to be “pro-people” and accommodate the needs of the lesser privileged.
But what I am sure is that if the stated aim is to reduce traffic congestion and pollution, then the new vehicle tax regulation is the wrong way to do it.

Opini The Jakarta Pos 4 Juni 2010