December 16, 2014

Regulation via EU Emissions Trading System better than stricter CO2 limits: Deutsche Bank Research Study on CO2 emissions from cars

The integration of road transport into the EU Emissions Trading System (EU ETS) using an upstream approach (with refineries and fuel importers as participants) is superior to the instrument of CO2 limit values for cars on the counts of ecological effectiveness and macroeconomic efficiency.

This applies in particular if a cap on CO2 emissions enjoys top political priority. Higher taxes on fuel would also be more appropriate than a further tightening of limit values after 2020/21. Nonetheless, if policymakers should decide that (stricter) CO2 limit values for cars are to remain the instrument of choice after 2021, it would be appropriate to gear them to the (lower) targets in other large auto markets.

The CO2 targets for new vehicles are currently the EU's most important instrument for achieving a further reduction in road traffic emissions.

By 2021 the average CO2 emissions for newly registered passenger cars must drop to 95 grams per kilometre (2013: 127 g/km). This is an ambitious but attainable target. However, the makers of larger cars in particular already have to electrify a significant part of the drivetrain to be able to comply with the required targets.

The instrument of CO2 limit values for cars has disadvantages.

It is not based on the actual emissions of road traffic; heavy-duty vehicles are not taken into account. Furthermore, it exacts reductions in CO2 emissions in an area where this is particularly expensive. The danger does exist that much stricter CO2 targets after 2021 will send production costs rising sharply; as a reaction, production capacities could be relocated abroad.

Instead of stricter CO2 targets for passenger cars there could be increased fuel tax rates in future.

This instrument offers advantages: petroleum tax is established in all EU countries. A higher petroleum tax rate would apply to all road vehicles. The tax is based on a vehicle's actual fuel consumption and not the theoretical amount. However, higher petroleum taxes cannot guarantee that fuel consumption and/or CO2 emissions from road traffic will be limited to a desired amount. A hike in tax rates harmonised across all EU member states is also made difficult by the fact that tax issues in the EU are a matter for the member states. Higher petroleum taxes would have negative social implications.

Integrating road traffic into a reformed EU ETS from 2020/21 would yield many benefits.

First and foremost are ecological effectiveness and economic efficiency. This combination is not provided by either CO2 limits or taxes. European climate protection policy would become more effective. Rising oil prices and competition in the auto industry would remain drivers of technological progress in the alternative propulsion technologies segment. The potential impact on competition with other industries participating in the EU ETS would also have to be factored into the equation, of course. Read more on Deutsche Bank Research

Eric Heymann

Eric Heymann, Author of the Study

DB research
DB research

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