JOINT TRANSPORT RESEARCH CENTRE

Discussion Paper No. 2008-3
January 2008

Full Account of the Costs
and Benefits of Reducing
CO2 Emissions in Transport
Stef PROOST
Center for Economic Studies
Catholic University of Leuven, Belgium

The views expressed in this paper are those of the authors and do not necessarily
represent positions of the Catholic University of Leuven, the OECDor the International Transport Forum.

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TABLE OF CONTENTS

1. INTRODUCTION ..................................................................................................................................... 5
2. WHERE DOES EUROPE GO IN TERMS OF PRICING AND REGULATING EMISSIONS:
MOVING FROM FUEL TAXES TO KM CHARGES ............................................................................ 6
3. THE CONTRIBUTION OF THE TRANSPORT SECTOR IN REACHING THE NATIONALEMISSION CAP: AN ENERGY TECHNOLOGY APPROACH .......................................................... 10
4. ROLE OF CO2 EMISSION REGULATION IN THE TRANSPORT SECTOR: A WORLD VIEW ... 14
4.1.
4.2.
4.3.

International climate negotiations and its impact on transport emission reduction strategy .......... 14International agreements on fuel efficiency standards ................................................................... 16
Spillovers of national fuel efficiency standards.............................................................................. 17

5. CONCLUSIONS AND CAVEATS ........................................................................................................ 17
REFERENCES ............................................................................................................................................. 19
Leuven, 2008

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1. INTRODUCTION

Among economists and policy makers more general, the fuel efficiency standard for cars and the fueltax have been the subject of extensive debate. The major benefits of stricter fuel efficiency standards andhigher fuel taxes are the reduction of Greenhouse gas emissions and the reduced oil dependence. The major
costs are the increased production cost, the reduced comfort and the negative impact on mileage related
externalities (congestion, accidents) due to the rebound effect.
In this contribution we use a wider framework than Harrington (2008), Plotkin (2008) and Raux
(2008) to discuss the CO21 emission reduction in transport. In section 2 we analyze, for the EU, the effects
on welfare and CO2 emissions of pricing all transport activities according to their full social costs. In
section 3, we go beyond the transport sector and compare the options to reduce emissions in the transport
sector with the possibilities and costs to reduce emissions in other sectors of the economy. In section 4 wetake a world view and analyze the impact of two types of international climate negotiations on the emission
reduction strategy in the transport sector.
The GHG reduction ambitions differ strongly in the world. It is normal that this translates into
different CO2 reduction policies in the transport sector. This is the first reason why this contribution
focuses more on EU policies than on American policies. A second reason is that the EU has been aforerunner on high fuel taxes for cars and ambitious CO2 reduction targets.
The EU has high fuel taxes and considers strong fuel efficiency standards. The EU has very ambitious
overall GHG emission targets (up to -50% in 2030) but considers at the same time a strong reform of its
transport policies, possibly moving away from fuel taxes. This raises several policy questions. First, what
are the impacts of a strong reform of the transport pricing policy on overall welfare and how will this affectthe overall CO2 emission reductions? Second, if one gives up the principle of high fuel taxes in thetransport sector, how will one be able to meet ambitious GHG emission targets in the economy? The firstquestion will be dealt with by considering the transport sector globally, trading off the different modes andthe different types of externalities. For the second question we put the emissions of all sectors in a country
on the same basis and assess the role of the transport sector in reaching the national GHG emission target
in the most efficient way.
In the second part of this contribution, we take an international cooperation view to the policies toreduce CO2 emissions. As climate change is a world issue, the costs and benefits for any region to reduce
emissions in the transport sector or in other sectors, depend in the end on whether one’s effort is part of aninternational agreement or not. At present the EU developed a double strategy of cooperation (“tit for tat “:deep cuts in emissions if the world joins them, small efforts if they are the only ones). We look at the
implications of the two scenarios for the costs and benefits of CO2 emission reductions in the transport
sector. In the same section we also pay attention to the potential of technological cooperation.

1

We use CO2 and GHG (Greenhouse gasses) as synonyms in this text. In the transport sector, CO2 is by far the mostimportant greenhouse gas.

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In this contribution we use three types of numerical model analysis that are very different. In order
not to confuse the reader, we define them briefly in Table I. The three types of modeling exercises areinternally consistent. First they all use similar exogenous assumptions on economic growth and oil prices.
Second, the carbon values that result from the exercise at world level and the exercise at energy sector
level are of the same order of magnitude as the exogenous carbon value used in the model for the transport
sector.
Table 1. Frameworks of analysis used in this contribution

Research Question

Scope

Model used

Effect on CO2 emissions ofpricing all modes of transport
in function of their externalcosts.
What is the potential
contribution of the transport
sector to a cost efficient
reduction of CO2 emissions
in a country
What is the expected price ofCO2 emissions in different
types of international
agreements

Transport sector with its
different modes in 2020

TREMOVE-II
Partial equilibrium model ofthe transport sector applied to
EU-27+ 4 countries
MARKAL-TIMES
Partial equilibrium model ofthe energy sector , applied to
Belgium

Carbon price is exogenous
All energy use in a country
2005 – 2050
Carbon price is endogenous
World economy 2005-2050
Carbon price is endogenous

GEM-E3General equilibrium model of
the world economy

2. WHERE DOES EUROPE GO IN TERMS OF PRICING AND REGULATING EMISSIONS:
MOVING FROM FUEL TAXES TO KM CHARGES

There is a long standing debate in Europe on the need to introduce new policy instruments in thetransport domain. Starting with the Fair and Efficient transport pricing doctrine launched in 1998, there has
been an emphasis on pricing reform that makes all modes pay their full external costs. External costs
include here climate change damage, other air pollution and noise damage, accidents and external
congestion costs.
This is exactly what many economists have been advocating for years and also what has been at thecore of the fuel efficiency standard debate. In the fuel efficiency debate, the effects of stronger standards
on the CO2 emissions but also on the mileage related externalities (accidents, congestion) were an
important consideration. An important drawback of a stricter fuel efficiency standard is the rebound effectthat increases congestion costs and accident costs and this is an economic efficiency loss when transporttaxes do not internalize these mileage related externalities. Abolishing the fuel efficiency standard and thehigh fuel price and replacing them with better targeted instruments looks like the obvious way forward.
What can we expect in the larger EU, if there is a full internalization of all the external effects as
economics prescribes? A recent exercise by the GRACE research consortium is probably one of the most
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complete analyses of the effects of such a policy change2. For 2020, the TREMOVE model was used to
examine what the effects would be on emissions (CO2 and conventional) of a drastic change in pricing
policy. The alternative pricing scenario is defined in Table II. The analysis is done for 31 countries (the EU– 27 + Switzerland, Norway, Turkey and Croatia).
The TREMOVE model represents the transport activities in a country as an aggregate of the activities
in three types of zones: metropolitan, urban and non urban. For each zone, one represents all modes ofpassenger transport and freight transport. Road freight and passenger transport interact via congestion anda distinction is made between peak and off peak traffic. The preferences of passengers differ in function of
the motive (professional, commuting, leisure) and choices are made taking into account preferences,money and time costs. For freight, different types of transport (unitized, bulk..) are distinguished andmodal choice is a function of the time and money cost of the different alternatives. The private cost oftransport consists of the price set by the suppliers (equal to the marginal resource cost if not subsidized)
plus all the taxes, charges and tolls. Urban public transport supply is characterized by a Mohring effect: anincrease in demand allows to improve frequencies and to reduce waiting times. The capacity of theinfrastructure is represented via aggregated speed flow functions.
The model computes equilibrium on each transport market (this means for each zone) via iterations on
the time costs and the demand levels. The model is calibrated such as to match an exogenous unchanged
policy or “reference” scenario. Of interest is that the model computes, for a given transport equilibrium, all
the external costs and all tax and charge revenues. Welfare is defined as the sum of consumer surplus,
producer surplus minus total external costs plus the value of tax revenue3. In our case the model is used forcounterfactual analysis: what is the effect on welfare of modifying taxes, charges or regulations such thatthey better match the different external costs?
Table 2. Scenario Description

Cars

TrucksOther modes

reference

Current tax system+
regulation forconventionalemissions

Unchanged policies

CO2 tax + km charge

Fuel tax= CO2 tax +flat km tax thatcovers all otherexternalities and thatis differentiated bycountry and type of
vehicleCurrent fuel taxes +regulation forconventionalemissions +Eurovignet
CO2 tax on fuel +flat km tax thatcovers all otherexternalities and thatis differentiated bycountry and type of
vehiclePrices cover variable
costs

2

Earlier exercises of this nature can be found in Proost, Van Dender et al. (2001) and ECMT –OECD (2004).

3

The value of extra tax revenue is parameterised and depends on who pays taxes and how it is used.

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In the reference scenario the main instruments to price transport are all kind of vehicle taxes, a highfuel tax plus a km charge for trucks. The investment and operation costs of public transport are heavily
subsidized in some of the countries. Conventional emissions are controlled by the different EUROregulations for cars and trucks. The CO2 emissions are controlled by a “voluntary” fuel efficiency standard
and it is assumed that technological progress continues to reduce average fuel consumption slightly. Mostof the taxes are not connected at all to the different types of external costs. There is one exception: the fueltax (in fact a CO2 tax) is twice as large as the climate change damage (by assumption equal to 80 Euro/ tonof CO2). Overall user prices for most modes are too low, even the variable public transport prices areheavily subsidized.
Figures 1 and 2 show the mismatch between current taxes and external costs for passengers and for
freight transport by mode. Both figures represent averages for the EU-27+4 in the reference scenario.
Figure 1 shows that air transport does not pay its marginal external costs (noise, air pollution): the left
column is larger than the right column (here 0). The high fuel tax and other car taxes are on average
insufficient to cover the marginal external costs of car use. Passenger rail generates also external costs but
its variable costs are subsidized so that the tax column becomes negative. Figure 2 gives a general pictureof the external costs and current taxes for different freight transport modes. On average the charges andtaxes for IWW (inland waterways), large trucks and rail freight do not cover their marginal external costs.
Figure 1. Marginal external costs compared to taxes for 2020 – passenger transportation in
Reference scenario

Marginal external costs versus taxes
pass km BAU 2020
0,07
0,06
0,05

euro/pkm

0,04
taxes

0,03

accident

0,02

congestion
0,01

air polution +climate change

0
-0,01
-0,02
-0,03

air

car

passenger rail

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Figure 2. Marginal external costs compared to taxes for 2020 –freight transportation in Reference scenario

Marginal external costs versus taxes
ton km BAU 2020
0,04
0,035
0,03
taxes

euro/tkm

0,025

accident

0,02

congestion
0,015

air polution +climate change

0,01
0,005
0

IWW

HDV +32t

Freight train

In the alternative scenario (CO2 tax+flat km charge), the effects of a combination of lower fuel taxes
and km charges (differentiated by type of vehicle and country) are simulated such that all modes pay
approximately their marginal social cost. This implies a fuel tax that is only half of that in the reference
scenario but a flat high km-charge that is differentiated by country and by type of vehicle4.
The results are summarized in Table III. A reform of the price system away from the current high fuelcharges to more targeted taxes per mile with country and vehicle differentiation generates important extra
revenues and an important gain in welfare. Fuel taxes decrease but the km charges for car use are strongly
increased to match the congestion, accident and air pollution costs. For public transport, subsidies on
operation costs are abolished and this leads to an overall price increase that can be strong in somecountries. The final result is a decrease of the volume of passenger transportation of 11.5% compared to
the reference. The decrease of the volume of car transport is even lower because public transport increases
in price. The type of car also changes: away from large and medium diesel cars who had an unjustified fuelcost advantage due to the high fuel prices in the reference to medium to large gasoline cars. For freighttransport, similar decreases are expected.
Tax revenues (including all subsidies to public transport) increase strongly (by 3.1% of GDP) andwelfare increases by some 1.2% of GDP5. The major benefits come from a reduction of accident
4

We presents here results for a flat km charge. A better policy would be to differentiate the km charge in somecountries by region, time of day and type of road. This gives higher welfare results but average tax levels
that are similar and CO2 emissions that are of the same order.

5

Welfare is here a simple sum of gains and losses for all groups in society. If one wants to pay attention to the
distribution of income aspects, it is best to do this via the use of revenues and not by interfering in theefficient pricing. See Proost &Van Regemorter (1995) and Mayeres & Proost (2001) for illustrations oncarbon policies and transport pricing.

Proost — © OECD/ITF, 20089

externalities and congestion. The total emissions of CO2 decrease by 12.2% and this despite the strong
reduction of the fuel excises. This is due to two effects. First there is the overall reduction in volume oftransportation. Second there is the small effect of lower fuel taxes on the types of cars that are bought. In
the model there is a strong technological lock-in and although people would buy larger cars, the European
car stock does not start to look like the US fleet. The model may underestimate this effect in purchasing
behavior.
Table 3. Effects of pricing the transport modes more correctly

2020 –
difference
withReference

Revenue

Overall
welfareTotal
GHG
Environmental emission
damagedamageDifference in %of GDP

+3.1%

+1.2%

-0.22%- 0.054%

Passenger
km on road

Total passkm

Ton km onroad

Total ton km-8.6%-11.5%-10.1%-11.0%% difference

In conclusion, pricing all externalities in the transport sector can be done more efficiently by using a
combination of low fuel taxes and km charges where the latter charges can be differentiated by vehicle
type and country. This allows important welfare gains and does lead to a small “no regret” reduction of
CO2 emissions compared to the reference.

3. THE CONTRIBUTION OF THE TRANSPORT SECTOR IN REACHING THE NATIONALEMISSION CAP: AN ENERGY TECHNOLOGY APPROACH

How far one should push the GHG reduction efforts in the transport sector can be analyzed in two
ways. One can take an exogenous national benchmark marginal cost level in Euro per ton of CO2 andcheck what policies have a lower cost per ton of CO2 reduction. This gives a potential of CO2 emissions
that can be reduced at a cost lower than the threshold value. In section 1 this procedure was used to judge
the effects of alternative pricing policies in the transport sector: all measures that generate CO2 emissions
at a cost below the threshold are in principle taken and increase the welfare level.
The national benchmark cost level is ideally the result of a broader analysis comparing thepossibilities to reduce the emissions in all sectors including transportation. The outcome is then an efficient
allocation of emissions over sectors like the transport sector, the residential sector, the electricity
generation sector etc.. In this section we take this broader view, analyzing all sources of CO2 emissions inan economy and comparing them on the same basis.

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We use the MARKAL-TIMES model6 for this analysis. This model describes all energy
transformation and use in an economy, from the import of fuel to the delivery of energy services (car km,
heated homes etc.). The demand functions for energy services are given by expected sector activity growth
rates (say steel production or passenger car km) and household incomes. The energy services (passenger
car km or process heat for steel making) are then produced in the most cost effective way, combining
demand side technologies (more energy efficient light bulbs, more efficient car engines etc.) and supply
side technologies (better power stations or refineries). In this way one is able to simulate the potential roleof new technologies in the energy supply and demand in a sector. This can be seen as a two step procedure.
In the first step one minimizes the total system cost of satisfying a given demand for energy services. In
the second step, one compares the marginal cost of satisfying this level of energy services with thewillingness to pay of the user (household or firm) for the energy services. When the marginal cost of
supplying a given level of energy services becomes very high, it is cheaper for the household or firm to
reduce their demand for services by foregoing the trip or by substituting the energy services by otherproduction factors.
One useful feature of the model is that one can add a national emission cap7. The model generates
then the most cost efficient way of satisfying the national emission cap. This means specifying what
combination of technologies and activity levels for energy use minimizes the overall system cost of
satisfying this absolute cap.
Important inputs in any model exercise of this type are the expected growth rate of economic
activities and their translation into energy service levels. A GDP growth rate of some 2% is used and crude
oil prices double between 2000 and 2020. Also transport demand is assumed to increase at some 2% per
year. Important assumptions for the transport sector are that fuel efficiency of new traditional gasoline anddiesel cars is assumed to improve by 15% in 2030 compared to 2005. Also all new technologies (hybrid,electric, hydrogen) can be chosen from 2010 onwards except the hydrogen fuel cell that is only madeavailable from 2030 onwards.
We consider national CO2 reduction scenarios for Belgium that aim to reduce emissions drastically inthe long term as shown in Table IV. Compared to emissions of 19908, a reduction of emissions with 20%(in 2020) up to 52.5% (in 2050) is required. These reductions are even more impressive when they arecompared with a reference case where, in the absence of climate policy, emissions would have grown bysome 15% in 2020 compared to 1990 and by some 50% in 2050. Moreover we assume that the nuclear
power stations (that still produce more than 50% of electricity production in Belgium in 2005) are allphased out in 2030 and that no international permit trade is possible. This is the most stringent scenario interms of CO2 reductions and it is chosen precisely to examine the role of the transport sector in overall
emission reductions in the most demanding case.

6

MARKAL-TIMES is a model that has initially been developed within an IEA implementing agreement since 1981.
The Belgian version has been developed by CES-KULeuven and VITO with funding of the Belgian
Science Policy Office. We use here the results of Nijs and Van Regemorter (2007).

7

This cap can be combined with an international emission price.

8

1990 is used as reference year in most Climate Change negotiations.

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Table 4. Cap on national CO2 emissions
2010%
reductionrequired - 7.5%
compared to 1990 emissions% reduction compared to -18%
reference scenario without
climate policy

2020
-20%

2030
-30%

2050
-52.5%

-30%

-59 %

-76%

The point of this modeling exercise is to know what is the cost effective use of different technologies
and activity reductions that achieves the CO2 emission objective at the lowest cost for the national
economy. More specifically what is the role of the transport sector in this cost effective strategy?
Table V reports on the role of the transport sector in the reduction of CO2 emissions given the climate
objectives of Table IV. The first line of Table V reports the marginal cost of CO2 reductions in thisambitious emission reduction scenario. The marginal cost is the shadow price of the maximum emission
constraint and tells us what is the marginal welfare cost9 for the Belgian energy system of having to reduce
emissions by one more ton. This marginal cost can be the basis to consider international trading ofemission rights. The marginal costs obtained are reasonable up to the period 2020–2030 but are clearly
very high in 2050 and this despite all new energy saving and renewable technologies foreseen beyond
2030. The main reason why this scenario is very demanding for Belgium is the simultaneous strong
reduction of total CO2 emission reductions and the nuclear phase out in the absence of carbon trading.
The second line reports the ideal reduction of the CO2 emissions in the transport sector that is
expected when all sectors are treated on the same least cost basis. The expected reduction from thetransport sector is very moderate (-1 % in 2010 to -17% in 2020) and much smaller than the overall
reduction needed for the country (-18% in 2010 to -59% in 2020). This shows that the same proportional
reduction of emissions over all sectors is not at all cost minimizing. In addition this scenario shows that astrong reduction of emissions is technologically and economically feasible without requiring large efforts
from the transport sector. In 2050 one attains a limiting case where the reduction of emissions is pushed toits extremes. In this case the emissions of the transport sector have to be reduced by 48% compared to an
overall effort of 76%. In the latter case one has to resort to really new technologies.
Emission reductions usually require a combination of a reduction of specific emissions by using better
technologies and a reduction of the level of activity (vkm, tkm in transport sector). The two last lines ofTable V show that the major reduction effort comes via adaptation of fuels and technologies rather than via
a reduction of activity. The volume of car traffic and truck traffic are hardly affected.

9

The avoided climate change damage is not counted in the welfare cost.
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Table 5. Role of transport sector in reduction of CO2 emissions in Belgium
Years
Marginal cost of CO2 reduction (Euro/ton)% reduction of emissions in transport
sector compared to reference scenario% reduction of emissions for the country% reduction of activity for car transport

2010
31
-1%

2020
68
-17%

2050
531
-48%

-18%
0%

-59%
0%

-76%
0%

% reduction of activity for truck transport

-2%

-5%

-5%

It is interesting to see what technologies are used in the transport sector to respond to very strong CO2
emission reductions targets. We find that, starting in 2020, the major change is the use of alternative fuelsin conventional engines: CNG (compressed natural gas) in conventional combustion engines, ethanol andbiodiesel. Many technologies are not cost effective when they are placed in a fair comparison withtraditional technologies. The gasoline and diesel parallel hybrid sytems are higher fuel efficient but thisfuel efficiency comes at a very high cost. The same holds for electric technologies: they never penetratebecause the electricity needs to be produced using conventional gas power stations because the nuclear
power option is excluded and renewables reach quickly their potential. Table VI reports the percentage
decrease in investment cost that is needed for the penetration of some of the new car technologies in thestrong emission reduction scenario that is simulated here. As an example, take the hydrogen combustion
car: its investment cost needs to decrease by 56 to 59% to make this technology viable as a carbon
emission saving technology.
Table 6. Reduction in investment costs needed to make a particular technology cost effective
in a CO2 reduction scenario.

Biodiesel
Hydrogen.Combustion
Diesel.EURO4
Electric.Battery
Hydrogen.FuelCell
Hydrogen.Hybrid.FuelCell
Gasoline.CNG
Gasoline.EURO4
Diesel .EURO4.parallelhybrid
Gasoline.CNG.parallelhybrid
Gasoline.EURO4.parallelhybrid
Hydrogen.Hybrid.Combustion

2020 2030 2040
21% 13%
0%56% 59% 45%1%1%
7%
41% 146% 163%
58% 29% 20%
59% 34% 25%
3%
0%
0%
0%
0%
7%
18% 17% 20%
13%
8%
4%
6%
3%
1%
57% 63% 49%

In conclusion we find that the share of the transport sector in reducing the CO2 emissions is small in acost effective reduction scenario. It is technologically feasible and cost effective to reach strong emission
reductions (-30 to -50%) by reducing emissions strongly in other sectors than transport. When one focuses

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really on CO2 emissions, technologies like CNG may be more promising than fuel efficiency standards,
hybrid cars or electric cars.

4. ROLE OF CO2 EMISSION REGULATION IN THE TRANSPORT SECTOR:
A WORLD VIEWAs climate change is a world issue, the costs and benefits for any region depend in the end on whether
one’s effort is part of an international agreement or not. CO2 emissions of one country generate climate
damage (or benefits) in the whole world. Whenever one considers the benefits of emission reductions, thebenefits for the EU or the USA are only a fraction (20 or 30%) of the world benefits of an emission
reduction.
The reduction of emissions in the transport sector in any country is motivated by the position thatcountry takes in the international climate negotiations. If the country only takes into account the damage
avoided in its own country (a non cooperative attitude) it will make a much smaller effort than when its
efforts are part of a larger international agreement (the cooperative attitude).
We know from economics that reaching a large stable coalition to reduce emissions is very difficult.
Barrett (1994) showed with a simple model that the equilibrium number of signatories of an international
agreement for a problem of the climate change category is small. In some of his stylized examples only 3
out of 100 equal countries would sign. The main problem is that international agreements have to be self
enforcing: a country signing a climate treaty should be as well as off as when it would not sign the treaty
because no international law can force a country to observe a signed international agreement. Morefavorable outcomes are possible when one takes into account that countries play this game repeatedly andwhen countries are of unequal size
Given our interest in the CO2 emissions in the transport sector, there are two international cooperation
issues that need our attention. The first is the possibility of an international agreement to reduce emissions
and the associated word wide trading of emissions that limits the costs of emission reductions. What are
the likely impacts on carbon prices and what implications does this have on carbon policies in the transport
sector? The second issue is the option to have international cooperation focusing on the development andadoption of breakthrough technologies in the car sector that limit drastically emissions and fuel use.
4.1. International climate negotiations and its impact on transport emission reduction strategy
The EU has decided to reduce emissions of GHG by 20% in 2020 and even by 30% in 2030
(compared to 1990) if the other big emitters of GHG join them. The EU starts with a cooperative attitude in
the hope that the other important players realize that this is also in their interest. It is difficult to assess the
chances of success for this strategy. It is important to also assess the fallback strategy of the EU. If other
big players do not follow, the EU wants to go, unilaterally, for smaller emission reductions.
The effects of both strategies on total emissions, economic costs, trade in emissions and price ofcarbon have been assessed using the GEM-E3 model (Capros et al, 1997,10 ). GEM-E3 is a world general
10

Model results of D.Van Regemorter obtained in May 2007.
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equilibrium model that represents the economic activity in the world using a disaggregation in 18 groups ofcountries and 18 sectors. There is trade in products but also trade in emission rights.
The “cooperative” scenario (with efforts by all important players) and the unilateral EU scenario (onlyefforts by the EU) are compared with the reference scenario where the world economy grows by some 2.5
to 3% per year and where there are no specific CO2 emission reduction efforts.
Table 7. Costs and emission reductions of two EU climate change negotiation strategies
Cooperative scenario
2020
2030
% changecompared tobaseline with no
reduction efforts
USA
EU27
BrezilIndia
China

Unilateral EU scenario
2020

Economic Emission Economic Emission Economic
cost
GHG
cost
GHG
cost
Emission GHG-1.4%-39.5%-3.4%-52.4%
0.0%
0.0%
-2.3%
-28.1%-5.7%-41.6%
-0.2%
-5.8%
-0.3%
-4,8%
-1.5%
-15.0%
0.0%
0.1%
-0.9%
-0.6%
-1.6%
-23.3%
0.0%
0.0%
+0.3%
-25.9%-0.8%-32.8%
0.1%-15.2%

World total
Price of carbon(US$/ton CO2eq)-1.2%-25.9%-3.4%

45-37.2%
93

0.0%

-3.6%
6

In the cooperative scenario it is assumed that the EU and the US promise each a reduction of 30% in2020 with respect to 1990, in 2030 the reduction effort would reach -55%. The emission reduction can also
be achieved by buying emission reductions in other countries that participate in the agreement. These othercountries are China, India and Latin-America. These countries commit themselves in this scenario to limit
the emissions per unit of output. Independently of the trade in emissions, China promises to limit its
emissions by 12.5% compared to the reference emission levels. Because China can reduce emissions morecheaply than the EU and the US, this is an important component of a cooperative agreement. It is mainly
China and India that sell emission rights to the US and EU. The EU27 reduce their emissions by only
41.6% in 2030 but buy the remaining emission reductions in China and India (13.6% = 55% total effort for
EU -41.6% effort internal in the EU). With efficient trading all over the world, this scenario will, in 2020,
only cost 1.2% of economic welfare for the world (before counting the benefits of reduced climatechange). Costs for the EU (-2.3%) are larger because they start from a lower level of emissions than the US
and the rest of the world (except Japan).
The climate change benefits of this scenario are more uncertain than the costs but the objective is tolimit global warming to 2 C° (CEC 2007, IPCC, Stern Report). This is achieved with the worldwide
reduction of emissions of 37.5% in 2030 (see last line of Table VII).
Important for the emission reduction strategy in the transport sector, is the marginal cost of CO2
reduction at world level. This carbon price would grow from 45 US$/ton of carbon in 2020 to 93 US$/ton
in 2030 (last line of Table VII). These are the orders of magnitude used in section 1 and section 2 (TableVI) to assess the cost efficiency of emission reduction efforts in the transport sector. Given the results of

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the TREMOVE modeling exercise, this suggests that, taking a world point of view, there is no need to push
the saving of CO2 emissions in the transport sector.
Whenever the rest of the world does not follow the initiative of the EU to join them in an agreementthat reduces emissions strongly, we end up in the unilateral EU scenario11. In this scenario, the EU is the
only one to make strong reduction commitments. It promises a reduction at 20% in 2020. Because the other
big players do not commit to any effort, it is in the interest of the EU to make an agreement with China tobuy cheap emission reductions. The result is that the 20% reduction of emissions is mainly achieved byefforts in China. Table VII (last column), shows how the -20% reduction in the EU means a reduction ofemissions at home of 5.8% compared to the baseline and a reduction in China of 15.2%. The overall
emission reduction in the world is limited to 3.6% only - a tiny result compared to the 25.9% reduction
achieved in 2020 in the cooperative scenario. In this case the carbon price drops to 6 $/ ton of CO2 because
the required emission reduction is low.
The implication for transport emission reductions of this unilateral scenario is that despite the cut inemissions proposed by the EU, the efforts expected from the transport sector in the EU are almost nil.
Only the future can tell whether the world will ever cooperate seriously to reduce CO2 emissions.
Even if it goes for very ambitious reductions, the role for the transport sector in achieving cost-effective
emission reduction will be very limited in the next 20 to 30 years, certainly if international trading ofemissions is in place.
Theoretically the EU is faced with an emission reduction target that is uncertain: the value of anemission reduction varies between 6 $ and 45 $ (2020) to 93 $ (2030) per ton of CO2. Only when the EU
learns more about the attitude of the other players can it determine definitely its policy. The general
information about the climate change puzzle will also be updated regularly. This type of uncertainty
together with the rather flat shape of the damage function for CO2 emissions pleads for the use of aflexible price instrument rather than for a more rigid quantity based instrument: CO2 taxes under the formof fuel taxes would therefore be preferred to fuel efficiency standards.
4.2. International agreements on fuel efficiency standards
One alternative approach to an international agreement that puts caps on the emissions of different
countries is an agreement where a number of countries promise to cooperate in the development of a newvery carbon efficient sectoral technology and promise to use it once it is there. This could be a car
technology (hydrogen, breakthrough in traditional engine technology).
Can this type of agreement work and what are the implications for current policy? Barrett (2006) useda small theoretical model with identical countries to give some intuition for this problem. Because thebenefit of R&D funding depends on the number of adopters, one needs to solve first the question of the
adopters before the R&D funding problem.
Countries would only adopt a breakthrough technology if the country’s own extra benefit of adopting
the new technology outweighs the extra operation and investment cost of the new technology. The
development costs are considered as sunk costs once the technology is there. The net benefit is mainly the
reduction in climate change damage for the country itself and this depends on the number of adopters. The
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In fact, in a non-cooperative scenario, every country will make small efforts until its marginal costs equal the
marginal damage in their own country. This gives rise to emission reductions that are anyway small (lessthan 20% of the cooperative level). See Eyckmans et al (1993).
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final result is that the equilibrium number of adopters will be limited when the gains of cooperation arelargest. There is one exception however. If there are increasing returns of adoption (learning by doing), theequilibrium number of signatories may be much higher.
Let us turn to the R&D funding part of the international agreement. The benefit for a country ofinvesting in R&D equals the expected avoided climate change damage. This avoided climate damage
increases with the number of adopters. As long as the number of adopters is small, the national gains of an
R&D funding agreement will be small. Only when there are important economics of scale in adoption canthese technological treaties be successful.
Returning to the transport sector, is international R&D cooperation on the development of super fuelefficient vehicles a priority? Two reasons mitigating our entousiasm are that first, present car companies
are already integrated world wide and make use of possible returns to scale and second, carbon is alreadyhighly taxed in the case of car fuel. A reason in favour of this cooperation is the existence of importanteconomics of scale in adoption.
4.3. Spillovers of national fuel efficiency standards
Harrington et al.(1998) explored the economics of emission standards in a federal setting where
California would set stricter standards for conventional pollutants than the rest of the US. They find that
extending the stricter standard to the rest of the US would clearly benefit California via economies of scalein car production. The benefits in terms of pollution reduction outside California would probably be too
small to make this generalization cost efficient. In the case of CO2, it is in the interest of a single country
or region to lobby even more for a national adoption because every region benefits from the reduced
climate damage.
More limited spillovers of national fuel efficiency standards are possible in the absence ofinternational agreements. Barla & Proost (2007) show that fuel efficiency standards can have a role inparallel with fuel taxes when the car producing country (or dominant consuming country) is concernedwith the damage of fuel use and when there is only one type of car on the market. The car producing
country can control emissions at home via a fuel tax but can only control emissions abroad via the car
design. This type of indirect policy to limit emissions abroad will only give rise to an important reductionof emissions abroad if the production country is relatively large because then it will reap a large share of
the benefits.

5. CONCLUSIONS AND CAVEATSThis paper has analyzed the role of emission reductions in the transport sector sing a wider
framework. First, it was shown how a global reform of transport pricing geared to internalizing all externalcosts of transport leads to lower fuel taxes but higher km charges. The final result is a reduction oftransport volumes and emissions of CO2 in the transport sector as an important byproduct.
Second, it was demonstrated that an industrialized economy that wants to reduce its emissions of
GHG at lowest cost, has more cost efficient options to reduce CO2 emissions in other sectors than the

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transport sector. This holds even for very ambitious national targets (30 to 50%), reduction of emissions in
the transport sector is almost never a cost effective option.
Thirdly, the main advantage of reducing GHG emissions is the reduced damage worldwide. If countries are
not able to make a self enforcing climate change agreement, the benefit for each country to reduce
emissions in the transport sector (or in any other sector) becomes very small.
International cooperation to adopt and to develop a super fuel efficient car technology has someappeal because there are economies of scale in adoption. On the other hand one starts with carbon that isalready very highly taxed in the transport sector and the production of cars benefits already from strong
economics of scale internationally.
This is an analysis far in the future on a very global scale requiring many assumptions. One
underdeveloped aspect in our analysis is oil market uncertainty. This raises two issues: first the level of theoil price, second the gains of cooperation for oil importing countries. The oil price scenario that has beenused is one of moderate increase. A much higher oil price (beyond 100 $/bbl would at first sight reduce theneed for specific GHG reduction policies. When one takes into account the potential substitution by more
CO2 intensive substitutes like synfuels based on coal, high oil prices do not necessarily solve the climatechange issues. When we discussed the gains of a reduction of fuel use in the transport sector we did notconsider the monopsony gains of the oil importers. They exist but are less important than the GHG
reduction benefits, their magnitude will depend on the precise fuel reduction policy that is adopted as thisis a repeated game with the oil exporters (Liski and Tahvonen (2004)).

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