Current regulation of GHG emissions in the transport sector relies heavily on fuel-efficiency and low-carbon fuel standards—non-market standards with only limited coverage, the report notes. While each can be effective and efficient in their particular context, they lack comprehensive scope and fail in setting optimal incentives due to both generic inconsistencies and specific design, the report argues.

• Fuel efficiency standards incentivize automakers to improve the efficiency of their products. The current regulations are effective and efficient, the report finds. However, fuel efficiency standards are subject to two rebound effects. First, increased market shares of more efficient cars are partially offset by greater demand for road transport. Second, car manufacturers can react to standards through technology and innovation, shifting their automobile portfolio, but also by pushing additional fuel efficient cars into the market (e.g. by offering discounts). As such, the report notes, fuel efficiency standards set perverse incentives.

  Additionally, car manufacturers can only influence tank-to-whee efficiency and/or emissions, and thus these policies do not provide proper incentives for fuel producers. Emission trading can then be a suitable instrument to address GHG emission across all fuels and technologies, and hence, providing a level playing field, the report suggests.

• Low carbon fuel standards address fuel producers and favor low-carbon fuels but can incentivize increased production of low-carbon fuels without lowering the production of high-carbon fuels.

  The report says that in its current implementation, the California LCFS disproportionately favors electricity (counting only a third of average Californian GHG emissions from power generation). The burden of emission responsibility is shifted to car manufacturer whereas utilities can influence life cycle emissions of BEVs, and thus, are the appropriate actor to be regulated, the report argues. The upstream GHG emissions (from power generation) of electric cars are not strictly accounted for.

  A reform proposal is to use LCFS for regulating the carbon intensity of liquid fuels only. This would incentivize a low-carbon biofuel infrastructure and inhibit the use of high-carbon unconventional oils.

Crucially, both fuel efficiency standards and low carbon fuel standards leave transport demand mostly unregulated. In fact, transport volumes may even increase above business-as-usual due to rebound effects. Some failures can be alleviated by better design, e.g. switching to energy-based efficiency measures for fuel efficiency standards. However, for rebound effects, perverse incentives, and overall regulation of GHG emissions in the road transport sector, other instruments are required. Here we argue for quantity instruments, regulating absolute emissions, and an associated price signal. This can be, for example, a cap and trade scheme.

—CITIES

The effects of such a policy approach would include:

• A transport-sector or economy-wide cap and with a corresponding price on GHG emissions ensures efficiency, environmental effectiveness and provides a level playing field across all fuels.

• Low-carbon fuels are systematically incentivized. As such, a cap and associated price signal perfectly complements fuel efficiency standards measured in tank-to-wheel efficiency.

• A cap eliminates the perverse incentive effects of LCFS.

• An economy-wide cap makes inefficient cross-sectoral regulation (e.g. the LCFS regulation of electricity with respect to BEVs) unnecessary. LCFS can focus on regulation of fossil fuels and biofuels, and possibly be phased out with emission trading in place.

• Possible rebound effects of fuel efficiency standards (higher transport demand) are avoided.

• Transport demand is subject to an economy-wide efficient price signal and becomes part of the overall mitigation effort.

Used in Europe already within the scope of the emission trading for stationary systems, a cap-and-trade program can in the future effectively reduce the total CO₂ emissions in the traffic sector, the report suggests. A total volume of CO₂ will be specified that is reduced annually. Every fuel will be comprehensively assessed according to the climate impact of its production and use. CO₂ certificates can be traded within the system. Thereby, reaching the CO₂ targets for fuels will be simplified, while trading CO₂ certificates promotes a competition for the introduction of innovative and efficient technologies.

The study CITIES indicates how the energy sector, in addition to the innovations of the automobile industry, can contribute to sustainable mobility. Going forward, the CO₂ emissions will no longer be determined by the automobile alone, but to a large degree by the upstream energy chain. To include the emissions from the transport sector at the fuel production level will provide for a more stringent macroeconomic treatment of the greenhouse gases. Simultaneously, a maximum flexibility and economic efficiency will be guaranteed for the mitigation options. The respective responsibilities of the actors will be more precisely defined with an emission trading for fuel producers and efficiency regulation for automobile manufacturers.

—Professor Edenhofer

Among the findings of the study:

• In order to reduce CO₂ emissions in the transport sector, all system participants must live up to their respective responsibility. Fuel producers must reduce the CO₂ content of their fuels; automobile manufacturers must increase the efficiency of their products.

• The CO₂ content varies considerably depending on the production method, regardless of the type of fuel used. Automobile manufacturers have no influence on that. As a result, political instruments must be created that specifically address fuel producers and automobile manufacturers in their respective responsibilities.

• The introduction of emission trading for fuels is not supposed to replace the regulations on CO₂ emissions for new cars. Rather it can bring forward the additional decarbonization of the entire traffic sector in a comprehensive manner.

• Electric cars should be credited with 0 g/km CO₂ within the context of regulations on fleet consumption, since the automobile manufacturers have no control over the origin of the electricity. In the longer term, an efficiency factor (i.e. MJ/km) can be used that rates the car’s energy consumption technology-neutral for all kinds of propulsion systems, regardless of the respective fuel.

• The CO₂ content of fuels should be regulated at the level of the fuel producers, in order to increase the efficiency of the regulation and provide incentives for CO₂ reductions.

• In the light of changing conditions on the fuel market and the related CO₂ emissions, Cap and Trade is suitable as an instrument to holistically realize the CO₂ reduction goals in the traffic sector.

The department “Economics of Climate Change” at Technical University Berlin researches the relations between mobility, economics and climate change. Scientists at the Potsdam Institute for Climate Impact Research are working interdisciplinarily on researching climate change and its impacts on ecological, social and economic systems. Professor Edenhofer, as deputy director and chief economist, heads the field of study Sustainable Solution Strategies at PIK and has a professorship at TU Berlin. He is also co-chair of the working group III of IPCC, Dr. Felix Creutzig is the Team Leader for Sustainability and Transport Economy at the Technical University Berlin and lead author of the transportation section of the upcoming IPCC report.

Resources

• Creutzig, F., Flachsland, C., McGlynn, E., Minx, J., Brunner, S., Edenhofer, O. (2010). CITIES: Car industry, road transport and an international emission trading scheme – policy options.