Cost-effective reduction of fossil energy use in the European transport sector

The paper “Cost-effective reduction of fossil energy use in the European transport sector” will be presented at the FSR Sustainability Conference on “Greening Infrastructures” (22 June 2022).

Abstract

This paper surveys the different climate policies in the EU transport sector covering the road, aviation and shipping sector. The transport sector stands for 27% of total EU emissions in 2017. Within the transport sector, the major sources of emissions are the car and van sector (51%), followed by the truck and bus sector (21%), aviation (14%), and shipping (13%). Policies to decrease carbon emissions in the EU transport sector should therefore focus on all four sectors.

We summarize current policies in the EU transport sector, with a focus on the proposals of the Fit for 55 Package, and put the different policies in a unifying economic framework. We show that the set of policies aims to reduce carbon emissions from transportation by targeting i) consumption decisions, ii) investment decisions, and iii) R&D efforts. We also categorize the policies according to the type of instrument being used (cap-and-trade, target, emission performance standard, ban, obligation, etc.) As we live in an imperfect world there with dozens of market failures and inefficiencies (e.g. network effects, technological spillovers, inequality, dynamic cost aspects, and political constraints), it is no surprise that the European Union uses a range of policies to combat climate change. We discuss how each policy instrument targets specific market inefficiencies. For example, EU ETS and the new transportation and heating ETS target the carbon emissions externality; the electric charging capacity mandate targets network effects; future sustainable aviation fuel mandates target dynamic cost aspects; and Horizon 2020 targets R&D spillovers.

Next, we analyze the cost-efficiency of this set of policies and focus on five issues: the current implicit carbon price, the interaction with  other externalities in the road transport sector, the dynamic cost aspect and its policy implications, and finally the options for cost-efficient trading with other emission sectors.  We identify the possibilities to improve the cost-effectiveness of current EU climate policies in the transport sector. Current proposals to trade emission reductions with other sectors like building need to be amended if one wants to use them to improve efficiency. In addition, the European policy has important side effects on the rest of the world that need to be taken into account in the selection of policies. Finally, we discuss the social challenges that vulnerable groups in society may face as a result of the different policies and how the new Social Climate Fund can cost-effectively mitigate these issues.

The European Union’s Fit for 55 Package is an unprecedented set of policy instruments and targets to reduce greenhouse gas emissions in 2030 by 55% compared to 1990 and to be on the road to net-zero by 2050. Because climate change is a multi-dimensional challenge touching every aspect of society, this set of policies targets all domains, ranging from energy and transport, to land use and taxation. In this paper, we discuss the different policy proposals in the European transport sector – covering road, aviation, and shipping – and analyse  their cost-effectiveness.

In an imperfect world there are dozens of market failures and inefficiencies that cannot only be addressed by a carbon tax. In addition to the negative externality from carbon emissions, there is consumer inattention, congestion, network effects, technological spillovers, uncertainty, local air pollution, inequality constraints, bounded rationality, information failures, heuristic decision making, limited horizons, missing markets, asymmetric information energy security issues, learning-by-doing spillovers, liquidity constraints, dynamic cost aspects, and political constraints (Gillingham 2009, Stiglitz 2019). It is therefore no surprise that the European Union uses a range of policies to combat climate change (Tinbergen 1952, Fischer and Newell 2008, Proost and Van Dender 2001, Parry and Small 2005, Parry 2007, Creutzig et al 2020). Some policies target consumption decisions, while others focus on investment decisions or support research and development.

First, we characterize EU climate policies in the transport sector according to two dimensions: the decision stage (consumption, investment, and R&D) and the type of instrument being used (cap-and-trade, target, emission performance standard, ban, obligation, etc.). All Fit for 55 policies are summarized in one table and discussed in relation to the specific market inefficiencies they target.

Second, we analyse the cost-efficiency of different policies and instruments discussed in the . Based on this analysis, we provide recommendations for further improvement of these policies to reach the European Union’s climate targets at the lowest cost. We also briefly discuss the social challenges that vulnerable groups in society may face as a result of the different policies and how the new Social Climate Fund can cost-effectively mitigate these issues.

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