Mitigating Transport CO2 Emissions

On December 11, 2009, AGI hosted a lecture by DAAD/AGI Fellow Carl-Friedrich Elmer on “Mitigating Transport CO2 Emissions in the United States and Europe.” In his presentation Mr. Elmer focused on U.S. and European climate approaches for the transport sector with an emphasis on vehicle emission standards.

Mr. Elmer stressed that the transport sector is a major contributor of greenhouse gases. It accounts for one fourth of the CO2 emissions in the European Union and almost one third of the emissions in the United States. The major part of transport emissions originates from road transport. Against this background Mr. Elmer explored the use of vehicle emissions standards, which aim at improving fuel economy and at the same at reducing CO2 emissions as well as oil dependence and energy security costs.

Mr. Elmer argued that the justification for mandatory vehicle emission standards is typically a combination of market failures in inducing intended behavioral changes through the transmission of price signals and a political infeasibility of sending sufficiently strong fuel price signals. However, in the absence of market failures, transmitted price signals – like fuel and carbon taxes or allowance prices – facilitate achieving the goal of optimal vehicle efficiency.

If policy fails in giving the right incentives or if market participants do not react appropriately, the result will be suboptimal levels of fuel economy. Mr. Elmer stressed that in this context new vehicle fuel economy standards can help to achieve an appropriate level of fuel economy, but the efficiency of fuel economy standards depends significantly on the details of standards implementation. For example, attribute based standards distort the abatement decisions, as heavy cars are allowed to emit more and therefore, a reduction of weight is rarely used. Hence, footprint based standards are more efficient than weight based standards, since the distortion affects the abatement decision less. In addition, the flexibility of credit trading enhances the regulation’s efficiency.

Mr. Elmer further illustrated that regulations in Europe are based on weight based standards without an explicit trading option while in the United States regulations are footprint based with an option for trading. Furthermore, Mr. Elmer pointed out that if gasoline and diesel are subject to emissions trading, a tightening of the fuel economy standard would not have an effect of the overall CO2 emissions. Yet, fuel economy standards are nevertheless a useful policy instrument to overcome market failures.

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This event is supported by the German Academic Exchange Service (DAAD) and the AGI Business & Economics Program.