Emissions trading and fuel efficiency in road transport, An analysis of the benefits of combining instruments

Despite EU and national climate policies, CO2-emissions in the transport sec-tor have grown steadily in the past decades, whereas many other sectors have managed to reduce emissions. Reason for the Swedish Environmental Protection Agency, Naturvrdsverket, to commission CE Delft to analyse a potential solution to this problem. The report starts with a literature overview on emissions trading in the road transport sector. Two systems are assessed: emissions trading as part of the EU ETS or as a separate system. Then, the potential drawbacks and benefits of a combination of emissions trading with CO2 emission regulation for new passenger cars are analysed. It is concluded that the combination of these policy measures has significant advantages. Fuel efficiency improvements in passenger cars are a relatively cost-effective measure to reduce emissions, with significant CO2 reduction potential. However, due to temporal myopia of car buyers, this measure is insufficiently addressed by price incentives created by emissions trading. At the same time, an emissions trading system can be complementary to fuel efficiency regulation, as it can alleviate a number of disadvantages of regulation.