The Impact of CO2 Emissions
Trading on the European
Transport Sector
Per Kågeson
VINNOVA Report VR 2001:17
TITLE: The Impact of CO2 Emissions Trading on the
European Transport Sector
FÖRFATTARE/AUTHOR: Per Kågeson
SERIE/SERIES: VINNOVA Rapport VR 2001:17
ISBN 91-89588-21-5
ISSN 1650-3104
PUBLICERINGSDATUM/DATE PUBLISHED:
2001/07
UTGIVARE/PUBLISHER:
VINNOVA – Verket för Innovationssystem/
The Swedish Agency for Innovation Systems,
Stockholm
ABSTRACT (aim, method, results):
The objective of this report is to analyse how a common European scheme for CO2 emissions trading covering all
sectors of society would affect the transport sector. Transport externalities other than CO2 are assumed to be
internalised by kilometre charging. This means road fuels will no longer be subject to taxation.
The European Union’s commitment under the 1997 Kyoto Protocol can be reached at a marginal abatement cost
around 65 Euro per tonne of CO2 in a case where emissions trading replaces all current taxes on fossil fuels. In a
case where emissions trading is supplementary to today’s energy and carbon taxes, the current average taxation
(45-50 Euro per tonne CO2) and the shadow price of the emission permits (33 Euro per tonne) would together give
a total marginal abatement cost around 80 Euro per tonne of CO2.
Having to buy emission permits would significantly raise the cost of fuel and electricity used in rail, aviation and
short sea shipping, as these modes are currently not taxed at all. The resulting long-term (2025) improvement in
specific energy efficiency is estimated at around 25 per cent compared to trend for rail and 20 and 40 per cent
respectively for aviation and sea transport.
A combination of CO2 emissions trading and km charging would moderately raise the variable cost of driving a
gasoline car. The cost of using diesel vehicles would rise considerably in most Member States. Annual mileage
per car would therefore decline somewhat. The fuel, however, would become cheaper than today (especially
gasoline) and this would reduce the incentive to buy fuel-efficient vehicles. The reform would thus hamper the
introduction of new, more efficient, technologies that might be needed for meeting more long-term commitments.
Emissions trading would not encourage the introduction of biofuels in road transport. The incremental cost of
producing ethanol or RME is much too high and cannot be expected to fall to the extent needed. Road fuels
would also in future be produced from crude oil or natural gas. The latter would be the base for hydrogen used in
fuel cells.
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The Impact of CO2 Emissions Trading
on the European Transport Sector
Per Kågeson
Nature Associates
June 2001
Acknowledgements
I wish to express my gratitude to Arie Bleijenberg, Jos Dings, Malcolm Fergusson, Thomas
Sterner and Marian Radetzki who constructively reviewed my draft manuscript. I also
received valuable comments and provocative questions from the reference committee of the
SNS “CONTINUE” project of which this paper is a part. The professors and graduate students
at the Institute of Physical Resource Theory at the Chalmers University of Technology
provided additional comments and constructive suggestio ns at a special seminar. Finally I
wish to thank my friend and colleague Chris Bowers for correcting my linguistic mistakes.
Contents
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Introduction
Current transport trends and a forecast for 2020
Measures for reducing transport carbon emission
Improving the specific energy efficiency of vehicles and vessels
Prospects for alternative transport fuels
Current taxation and mechanisms for internalising climate costs
Transport carbon emissions under ”continuous confusion”
The effect on road transport of CO2 emissions trading
The effect on rail transport of CO2 emissions trading
International maritime shippin g and international aviation
Summary and conclusions
References
1
4
9
13
23
26
32
35
42
44
49
52
1. Introduction
This paper is part of a larger research project carried out by the Swedish Studieförbundet
Näringsliv och Samhälle, SNS (Centre for Business and Policy Studies). The overall objective
of the project is to explore and analyse major issues likely to arise in the implementation of a
European climate policy in a 10-15 years perspective, and to study the ensuing implications,
choices and opportunities for actors and policy makers in the energy sector. This paper constitutes the transport part of the study.
Methodology
SNS’ project uses two cases, a case of “continuing confusion” and a case of “acting together”,
to illustrate the economic impact of different ways of tackling the climate problem and to fulfil
Europe’s obligation under the Kyoto Protocol of the United Nations’ Framework Convention on
Climate Change (UNFCCC). In the first of the two cases, the assumption is that the member
states of the European Union will largely fail to develop a common climate change strategy,
including elements such as common tax levels and/or a common scheme for intra-European
emissions trading. The second scenario is built on the assumption that the Community successfully implements a common scheme for CO2 emissions trading. The potential use of other flexible mechanisms (Joint Implementation and the Clean Development Mechanism, CDM) is disregarded in this paper. Oil, gas and coal prices are assumed to remain at today’s levels for the
foreseeable future.
Other transport externalities, following the principles in the Commission’s White Paper on Fair
Payment for Infrastructure Use (European Commission, 1998f), are assumed to be internalised
by methods that reflect the underlying costs better than fuel consumption. This means for road
transport that the social marginal costs of road maintenance, traffic accidents, air pollution and
noise would be internalised by kilometre charging. Switzerland has already introduced km
charging for trucks and Germany and the Netherlands have declared their intention to follow
suit. It is technically feasible to extend km charging to all road vehicles.
The main objective of the paper is to investigate how tradable CO2 permits in combination with
km charging would affect the transport sector. Being a potentially efficient mechanism for CO2
abatement, emissions trading could be expected to create the conditions for lower transport
charges compared with a business-as-usual scenario. Lower charges, on the other hand, may
hamper the market introduction of new road transport technologies that may be needed for
meeting long-term climate obligations.
It should be noted that a common CO2 tax covering emissions in all sectors of society would
provide the same incentive as emissions trading. However, the Member States of the EU have
failed to develop a common scheme for energy taxation. This is partly explained by the fact that
unilateral action in this field would have a negative impact on the competitiveness of energy
intensive European industries. With emissions trading this problem can be avoided if CO2 emission permits are allocated free of charge to such industries (for instance corresponding to 90%
of their historical use). Other users of fossil fuels, however, would have to buy permits at a
monthly or bi-monthly state auction. Where road fuels are concerned the distributing oil companies would have to obtain permits corresponding to their sales.
Being based on a legal cap, emissions trading has the advantage over CO2 taxation of ensuring
that the abatement target is achieved. CO2 taxation would meet the same objective only in a case
when the tax rate is set at (or above) the efficient level. Emissions trading could therefore be
regarded as an optimal solution, and the same is true for km charging.
In a case where CO 2 emissions trading is combined with km charging there would be no need
for energy taxation beyond the possible use of charges that differentiated for sulphur content or
1
other aspects of the chemical composition of the fuel. The associated loss of government revenue would be partly or fully compensated by state income from selling CO2 emission permits.
Whether such a shift is politically feasible is left out of consideration in this study. The obje ctive is to study how the transport sector would be affected by an economically optimal scheme
for internalising the social marginal costs.
It should be interesting to study how energy efficiency, choice of transport fuels, modal split,
and overall transport demand would be affected. Of particular interest is to see how modes that
are currently not taxed at all (i.e. aviation, maritime shipping and rail) would be affected in a
case where they are required to obtain emission permits that match their use of fossil fuels, including fuels used for electricity production.
As a background to the analysis the paper begins with a summary of current transport trends,
technical and other measures for reducing transport carbon emissions and the prospects for alternative transport fuels. These introductory sections are followed by an overview of the current
taxation of transport fuels and electricity and an investigation of the potential instruments for
internalising the climate costs of the transport sector. The analysis of the impact of emissions
trading and km charging follows at the end of the report.
The Kyoto Protocol
At the third Conference of the Parties in December 1997, the Parties adopted the Kyoto Protocol. Article 3 of the Protocol commits the industrialised countries (Annex I Parties) to individual, legally binding targets for the reduction of their greenhouse gas emissions. These targets are
listed in Annex B to the Protocol and range from minus 8 per cent for the European Union as a
whole to plus 10 per cent for Iceland. In total these commitments add up to a reduction of 5.2
per cent from 1990 levels to the period 2008 to 2012.
The targets cover emissions of six major greenhouse gases: carbon dioxide (CO2 ), methane
(CH4 ), nitrous oxide (N2 O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur
hexafluoride (SF6). For accounting purposes all six greenhouse gases and removal of them by
so-called “sinks” go into the same basket. However, this paper covers only carbon dioxide. As
CO2 accounts for around 80 per cent of total greenhouse gas emissions (calculated as CO2
equivalents), it is here assumed that the European Union must reduce its carbon emissions by
approximately the same 8 per cent in order to fulfil its overall commitment.
Some specified activities in changes of land use and forestry (namely, afforestation, deforestation and reforestation) that emit or remove carbon dioxide from the atmosphere are also covered
by the Protocol. The natural carbon sinks will be disregarded in this study.
The European Community is allowed under the Protocol to redistribute its commitment among
its 15 Member States and did so in a 1998 burden sharing agreement. Non-compliance by one or
more Member States will most likely have an impact on Community overall compliance. There
is, however, as yet no legal instrument that the Community can apply on a non-complying
Member State. In a case of overall non-compliance, each Member State is therefore obliged to
meet the -8 per cent target.
Parties included in Annex B1 of the Protocol may participate in emissions trading for the purposes of fulfilling their commitments under Article 3. Any such trading shall, according to Article 17, be supplemental to domestic actions for the purpose of meeting the target. This requirement has led a number of parties to the Protocol, including the EU, to call for a ‘cap’ on trading
and other flexible mechanisms at 50 per cent of reduction commitments. The European Union is
a Party to the Protocol, which means unlimited emissions trading is possible within EU15.
1
The commitments of the industrialised countries in Annex 1 to the Framework Convention are listed in
Annex B of the Protocol.
2
Emissions from international aviation and maritime shipping
Fuels used in international aviation and maritime shipping are only to a small extent burnt in
respectively the air space and territorial waters of the country where the fuel was purchased. The
Parties of the UNFCCC therefore decided to exclude emissions from such fuels from the national emission inventories. Instead, the International Maritime Organisation, IMO, and the
International Civil Aviation Organization, ICAO, both UN bodies, were instructed to analyse
ways to reduce carbon emissions from these fuels.
In this report its is assumed that international aviation and shipping in European waters will
become subject to fuel taxes or distance-related environmental charges that correspond to the
equilibrium price of CO2 permits required for reaching the Kyoto commitment of the European
Union.
3
1. Current transport trends and a forecast for 2020
Figure 2:1 shows that the total number of passenger kilometres in EU15 more than doubled
between 1970 and 1995. The average growth rate, 2.9 per cent, was faster than that of GDP.
Figure 2:1. Passenger kilometres in EU15 1970-1995. Index 1970 = 100.
250
200
150
pkm
pkm/GDP
pkm/cap.
100
50
0
1970
1975
1980
1985
1990
1995
Source: Eurostat (2000a).
As shown in Figure 2:2, the total number of tonne kilometres almost doubled between 1970 and
1995, representing an annual growth rate of 2.7 per cent, which is slightly higher than GDP.
Figure 2:2. Freight kilometres in EU15 1970-1995. Index 1970 = 100.
250
200
150
tkm
tkm/GDP
tkm/cap.
100
50
0
1970
1975
1980
1985
1990
Source: Eurostat (2000a).
4
1995
Table 2:1 shows the development of EU passenger transport by mode. Cars and aviation gained
at the expense of rail, public transport, cycling and walking. Motorised road transport moved
from 78.7 per cent of the market in 1970 to 83.2 per cent in 1995.
Table 2:1. Passenger transport in EU15 in million passenger kilometres and by modal split
in 1970 and 1995.
Motorbike
Car
Bus
Tram and metro
Rail
Ship
Aviation
Walking
Bicycling
Total
Million passenger kilometres per year
1970
1995
Change
97
121
+24.7%
1583
3656
+131.0%
270
384
+42.2%
38
41
+7.8%
217
270
+24.4%
13
27
+107.6%
43
274
+537.2%
155
163
+5.2%
60
70
+16.7%
2477
5005
+102.1%
Modal split %
1970
1995
Change
3.9
2.4
-1.5
63.9
73.1
+9.2
10.9
7.7
-3.2
1.5
0.8
-0.7
8.8
5.4
-3.4
0.5
0.5
±0.0
1.7
5.5
+3.8
6.3
3.3
-3.0
2.4
1.4
-1.0
99.9
100.1
Source: Eurostat (2000a)
Table 2:2 features the development of freight transport by mode. It shows a fast growth of
goods transport by road and short sea shipping. Rail lost not only market shares (from 21 to less
than 9%) but also in quantity of freight moved (-16%).
Table 2:2. Freight transport in EU15 in billion tonne kilometres and modal split in 1970
and 1997.
Billion tonne kilometres per year
1970
1997
Change
Road
416
1202
+189%
Rail
283
237
-16%
Inland waterways
104
115
+11%
Short sea shipping
473
1124
+138%
Oil pipelines
66
88
+30%
Total
1341
2764
+106%
Modal split %
1970
1997
31.0
43.5
21.1
8.6
7.8
4.2
35.3
40.7
4.9
3.1
100.1
100.1
Change
+12.5
-12.5
-3.6
+5.4
-1.8
Source: Eurostat (2000a)
Table 2:3 shows the trend in final energy consumption between 1985 and 1997. Total demand
for transport purposes rose by 42 per cent while passenger and tonne kilometres doubled. The
difference between growth in volumes and in energy demand was particularly marked in aviation but also large in road and sea transport. Rail increased its energy demand despite continuing electrification of the network and diminishing demand for its services. Inland navigation
experienced a surprisingly large decline in energy efficiency if the Commission’s figures are
correct.
5
Table 2:3. Total final energy demand in EU15 in million toe and per cent of total final consumption.
Road
Rail *
Inland navigation
Aviation
Marine bunkers
Total transport
All other sectors
Total demand
Final energy consumption, Mio toe % of total final energy consumption
1985
1997
Change
1985
1997
Change
170.4
238.5
+40.0%
20.0
24.6
+4.6
7.0
7.6
+8.6%
0.8
0.8
±0.0
4.3
6.5
+51.2%
0.5
0.7
+0.2
22.1
36.0
+62.9%
2.5
3.7
+1.2
28.0
40.1
+43.2%
3.3
4.1
+0.8
230.9
328.9
+42.4%
27.2
33.9
+6.7
619.1
641.3
+3.6%
72.8
66.1
-6.7
850.0
970.2
+14.1%
100.0
100.0
* Note: Most of the end use energy consumed by rail is electricity (49 and 64% in respectively 1985 and
1997). The conversion losses in electricity production are greater than in the production of liquid transport fuels. Table 2:3 thus underestimates the gross effect on energy consumption by rail transport.
Source: Eurostat (2000a)
In 1997 transport was responsible for 27.5 per cent of the emissions of carbon dioxide in EU15. 2
Its share is rapidly increasing and in some member states approaching 40 per cent. The 24 per
cent reduction for rail in table 2:4 is an effect of electrification, as the resulting emissions from
power stations are not reflected in the figures. The rail sector’s overall demand for energy rose
as previously shown in table 2:3.
Table 2:4. Transport CO2 emissions in EU15 in 1985 and 1997 according to Eurostat estimates.
Road
Rail *
Inland navigation
Aviation
Total transport #
All sectors
CO2 emissions in million tonne
1985
1997
Change
501.0
706.0
+40.9%
11.1
8.4
-24.3%
13.3
20.1
+51.1%
62.5
106.8
+70.9%
587.9
841.3
+43.1%
2,984.3
3,059.3
+2.5%
% of total CO2 emissions
1985
1997
Change
16.8
23.1
+6.3
0.4
0.3
-0.1
0.4
0.7
+0.3
2.1
3.5
+1.4
19.7
27.5
+7.8
100.0
100.0
* Emissions from electricity production not included.
# Emissions from short sea shipping not included (no figures given by Eurostat).
Source: Eurostat (2000a).
The driving forces behind transport growth
As shown in figures 2:1 and 2:2, transport demand has for decades increased at or above the
GDP growth rate. The driving forces differ somewhat between passenger and freight transport.
Research indicates that personal travelling on average takes place within a time budget that
stays almost constant over time (Schafer and Victor 1997, Michaelis et al, 1996). The average
citizen spends 60-70 minutes per day on mobility, just as he or she did 50 years ago. Higher
2
Fuels used in shipping not included.
6
average speed is thus what makes the increase in passenger transport possible. With growing
net income we spend more money on buying speed. Freight transport is growing as a result of
GDP growth, structural change, European economic integration and reduced cost per tonne
kilometre, the latter in particular in road transport.
Forecasts for 2010 and 2020
There is no official forecast for transport growth in EU15. However, some projections based on
the PRIMES-model, developed at the Technical University of Athens, have been made.
In a study for the European Commission (DG Environment) a group of consultants used the
PRIMES-model for establishing baseline levels for 2010 with and without the agreement between the motor industry and the European Commission. 3 Tables 2:5 and 2:6 show the results.
Table 2:5. Baseline trends in CO2 emissions from transport in EU15.
1990 emissions
Baseline 2010
Mt CO2
Passenger
Cars
Motorcycles
Trains 1
Buses
Aviation2
Navigation3
Total passenger
Freight
Trucks
Trains 1
Navigation
Total freight
Total (all)
1.
2.
3.
Mt CO2
Change
1990-2010
% change
Change in specific
fuel consumption
% change
367
7
7
27
82
11
500
479
8
1
29
153
14
683
31%
14%
-89%
7%
87%
24%
37%
-2%
-6%
-26%
0%
-27%
-4%
222
2
9
233
734
296
1
13
310
993
33%
-62%
40%
33%
35%
-9%
-20%
-4%
The reduction is mainly due to a continuing shift from diesel to electric trains.
Air passenger transport also includes airfre ight. Figures include domestic and international aviation.
Not including international maritime transport.
Source: AEA (2000) based on PRIMES.
The PRIMES-model was also used by the European Commission (1999a) in its “European Union Energy Outlook to 2020”. Motorised passenger transport is projected to increase by 1.6 per
cent per annum between 1995 and 2020 (equal to +48%), the fastest growth being in aviation
and rail transport. The model assumes that future growth will be constrained by several factors,
the most important being that growth in average speed of travel will be limited by technological
and safety considerations as well as congestion. Travel distance per capita is assumed to be limited to an increase of 1.4 per cent per annum despite a growth in per capita income of nearly 2
per cent. Rail is projected to grow considerably faster as a result of faster trains, large infrastructure investments and improved connections between major European cities.
3
For details on the agreement see chapter 4.
7
Table 2:6. Baseline trends in CO 2 emissio ns from cars in EU15 with and without the
agreement with the motor industry.
1990 emissions Baseline 2010 Change
1990-2010
Mt CO2
Mt CO2
% change
Without agreement
Cars
All transport
With agreement
Cars
All transport
Change in fuel consumed per vehicle -km
% change
367
734
479
993
31%
35%
-2%
367
734
408
918
11%
25%
-17%
Source: AEA (2000) based on PRIMES.
Freight transport is also projected to grow annually by 1.6 per cent. A large shift from road to
rail is assumed to occur between 1995 and 2020. The consultants responsible for the PRIMESmodel and the Commission’s services expect that rail will move from 17.5 to 23.1 per cent of
total tonne kilometres produced, while road transport will lose a similar share of the market.
However, they provide no evidence to support their prediction, which contradicts current trends
and would take place in an environment where heavy or bulky low value goods (which are a
natural market for rail freight) make up a shrinking part of all goods and services.
Considering the uncertainty of the underlying prognosis one should take the Commission’s
long-term energy forecast with a pinch of salt. The report predicts that final energy demand in
the transport sector will grow by 1.1 per cent per year and that its share of overall consumption
will rise from 31.1 to 32.4 per cent. The outcome is partly a result of assuming a major shift
from road to rail and rail services being increasingly electrified. The model does not consider
the agreement between the EU and the motor industry on the specific fuel consumption of future
cars. The consumption of road fuels is nevertheless predicted to stagnate after 2010. Electricity
for rail transport is assumed to grow on average by 2.8 per cent per year. The report does not
expect any market penetration by non-fossil road fuels before 2020. Transport CO2 emissions
are thus projected to grow at the rate of energy demand and reach 40 per cent over their 1990
level.
8
2. Measures for reducing transport carbon emissions
The use of fossil fuels in the transport sector can diminish in principle by four different means
of action:
•
•
•
•
lowering demand for transport services
shift from high to low consuming modes of transport
improved efficiency in road vehicles, trains, vessels and aircraft
shift to renewable sources of energy
Network efficiency, for instance through optimised traffic speeds and reduced congestion, might
also be important in this context but will not be treated as a separate category in this report.
The focus of this paper is on the impact on fuel demand from different types of regulatory
and/or fiscal systems for reducing carbon emissions. Such measures raise the price of fossil
fuels and provide an incentive to users to become more fuel-efficient. Higher fuel prices would
also facilitate a shift from high to low consuming modes as well as a shift to renewable sources
of energy. The extent to which such shifts will take place depends on how relative prices are
affected by climate change policies. In a case where the incremental cost of CO 2 abatement is
small by comparison to the overall cost of the service, the impact on demand as well as on modal and fuel shift would be limited. In such a case other factors may have a greater role to play
in triggering efforts to hold back or reduce demand for transport services. Of particular interest
in the context of this paper is to study how the two main cases, “continuing confusion” and
“acting together”, will affect the potentials. Thus it is mainly the difference in incentive between the two cases that is of interest.
As indicated in table 3:1, fuel (or electricity) represents 5-15 per cent of the overall cost of most
transport services (fixed costs included). Where fuel taxes are charged the share may reach 1525 per cent of the total cost.
Table 3:1. Fuel as percentage of overall cost of different types of European transport.
Cars
Buses and coaches
Trucks
Pre tax price
7
10
14
Taxes levied on the fuel
18a
5
7
Trains
Maritime shipping
Civil aviation
3-8b
10-20c
9-15d
In most countries none
none
none
Total cost of fuel
25
15
21
3-8
10-20
9-15
Source: Own compilation from a variety of sources. Where road transport is concerned based on current
Swedish data.
a) VAT included.
b) Andersson (2000).
c) Michaelis et al (1996), and Michaelis (1997a) referring to Wright (1996). High-speed ships may
proportionally have an even higher fuel costs.
d) 12% on average according to Bleijenberg and Wit (1998). Higher for long hauls and less for short
distance.
9
Lowering demand for transport services
Many factors can potentially affect demand for transport. However, most of them are not at all
or only to a small degree related to the price of transport fuels. This is the case with physical
planning, including land-use regulation, affecting, for instance, the establishment of shopping
centres or the location of major working cites. Video conferencing has a high potential for replacing travelling to short meetings, especially in cases where the participants know each other
well. The cost-effectiveness of this measure, however, is not affected much by fuel prices. What
makes video-conferencing economically viable is mainly that it raises productivity and reduces
overall travel costs. The same is true for consolidated distribution as well as computer-based
logistics and communications systems, including mobile communications, electronic maps and
GPS, used for improved routing and management of fleets of distribution vehicles and taxis. In
these cases an increase in fuel price by, say, 20 per cent would only raise the margin by 1-2 per
cent. Road pricing (for reducing congestion), km charges and road tolls reduce transport demand independently of fuel costs. Vehicle taxes influence car ownership but not distance per
car.
Measures that increase the pric e of fuel, however, will affect overall demand for transport. For
cars the long-term fuel price elasticity for distance per vehicle is approximately -0.20. However,
a large part of the long-term adaptation to a higher gasoline price would concern specific energy
consumption as shown in table 3:2.
Table 3:2 Gasoline price elasticities for passenger car ownership, annual mileage per vehicle, specific fuel consumption, total mileage by car and total demand for gasoline.
Fuel price elasticity for:
Source
Very short term Short term
Long term
Jansson & Wall Jansson & Jansson & Michaelis
Johansson
Wall
Wall
& Schipper
Car ownership
0
-0.05
-0.10
-0.20
-0.10
Mileage per vehicle
-0.10
-0.15
-0.20
-0.20
-0.20
Specific fuel consumption
-0.11
-0.11
-0.41
-0.30
-0.40
Total mileage by car
-0.10
-0.20
-0.30
-0.40
-0.30
Total demand for fuel
-0.21
-0.31
-0.71
-0.70
-0.70
Sources: Jansson and Wall (1994) partly based on Goodwin (1992), Michaelis (1996b), also partly
based on Goodwin (1992), and Johansson and Schipper (1997).
It is less well known how the recorded fuel price elasticity for total mileage is split between not
travelling at all and choosing another mode of transport (including cycling and walking). The
fuel price elasticity for total mileage by car would, anyway, be lower than shown in the table in
a case where all modes simultaneously had to face higher fuel costs as a result of a new climate
change policy. It appears reasonable to believe that reduced specific fuel consumption in such a
case would account for up to 70 per cent of the long-term adaptation.
The long-term price elasticity of demand for freight transport by road is, according to NEI and
CE (1999), -0.6 to -0.9 (based on an international literature study and a Dutch survey). However, this is under the assumption that prices of competing modes are not simultaneously affected. According to this study the fuel price elasticity for specific fuel consumption is only
around -0.15.
Shift from high to low consuming modes of transport
Many factors influence individuals’ and companies’ choice of transport mode. Price is important but so are time, quality, flexibility and reliability. Most firms have transport costs that
amount to 2-4 per cent of their turnover. This means that they in many cases value other factors
10
higher than small differences in transport cost. This is particularly true for high value goods,
which are generally transported by truck (or by air) even though it could have been cheaper for
the customer to use ships, trains or inla nd waterways (Schipper, Scholl and Price, 1997). The
future competitive position of different modes may also be affected by continuing deregulation
(rail in particular) and improved enforcement of working hours and load limits in road haulage.
Hauliers may, on the other hand, gain more from computer-based logistics and communications
systems. Transport brokers have just started to use the Internet for establishing a spot market for
empty space on trucks. This is likely to improve the average load factor. Railway wagons are
less flexible than trucks and can be expected to have difficulties making use of this opportunity.
The size and weight limits of trucks are also essential factors in the context of modal competition. The National Road Transport Commissio n in Australia estimates that a 15 per cent increase in vehicle mass limits would generate savings of 840 million AUS$ (or 535 million US$)
per year in transport costs (Levins and Ockwell, 2000). Sweden enjoys an exemption from the
Aquis Communautaire that permits the country to allow trucks of 60 tonnes and 25.25 metres.
Higher limits also mean fewer vehicles on the roads, fewer accidents and exhaust emissions and
less fuel per tonne kilometre. The fact that higher limits will give road haulage a competitive
advantage over rail does not necessarily mean that overall energy consumption will increase.
The amount of goods that would shift to road would presumably be a great deal less than the
quantity that would transfer from smaller to larger trucks as a result of the reform. A recent
Dutch study indicates that permitting a gross vehicle weight of 50 or 60 tonnes would cut CO2
emissions from road freight by about 1 per cent with negligible impact on intermodal freight
transport. The so-called rebound effect (lower prices resulting in larger transport volumes)
would be more significant. This effect is expected to cut the initial emissions reduction (i.e. 2%)
by half (Dings and Klimbie, 2000).
The European Union has started a process aimed at internalising the social costs of transport
(European Commission 1998f and High Level Group, 1999). However, Swedish and Dutch
studies show that internalising the remaining externalities of all modes (concerning infrastructure, accidents, emissions, noise and climate change) would not change modal split significantly
(Kågeson, 1998, and Dings et al, 1999). The percentage increase on current prices would not
differ much between modes. The only clear “winner” is the gasoline car, which already pays all
or most of its social marginal costs. The Swedish study also indicates that short sea shipping
could gain a competitive edge over rail provided that it makes use of some comparatively inexpensive methods for reducing its high emissions of sulphur and nitrogen oxides (Kågeson,
1998).
Improved energy efficiency
The energy efficiency of a vehicle in operation depends on several factors. Most important are
the efficiency of the engine and the driveline, second comes speed and driving style. Wind and
waves are also important, and in road transport tyres and the condition of the road surface. The
price of fuel has a decisive impact on most of these factors. As shown above the fuel price ela sticity for specific fuel consumption accounts for more than half of the adaptation of car owners
to a higher price of gasoline. Shipowners are very sensitive and tend to optimise speed against
the price of bunker fuel oils.
Training car, bus and truck drivers to drive in an economic way is in most cases economically
feasible already at today’s fuel prices (Kågeson, 1999a and 1999b). Training drivers in
“EcoDriving” in Finland and Sweden has resulted in long-term fuel efficiency improvements in
the range of 5-15 per cent (Jochim Donner, MOTIVA, personal communication, and Trivector,
1999). A higher fuel price, however, would extend the profitability of such training to drivers
with fewer hours behind the wheel. Under Swedish conditions the limit for profitability currently lies at approximately 13,000 kilometres for drivers of diesel cars and 19,000 kilometres
for gasoline cars (the positive effect of reduced wear not included) (Kågeson, 2001). Training
11
drivers of buses and trucks always pays off as they drive very long annual distances in highconsuming vehicles.
Fuel consumption in road vehicles is highly related to speed. Cars are generally fuel optimised
for speeds between 50 and 70 km/h. Running the car at constant speed at 120 km/h instead of
100 km/h increases fuel consumption by 15-20 per cent (MTC, 1991). The European Commission (1998) estimates the potential for reducing road fuel consumption by stricter speed limits
and improved enforcement to 5 per cent. Speed limiters are currently mandatory in heavy-duty
vehicles. Extending them to light duty vehicles and cars would increase the potential for reducing specific energy consumption in highway traffic. Congested traffic also suffers from inefficiency. Fuel consumption may exceed that of driving at 50 km/h by four to five times (Henke,
1999).
Measures aimed at influencing road speeds are not affected by higher fuel prices, though public
acceptance may theoretically improve in times of high prices.
Shift to renewable sources of energy
An as yet very limited amount of biofuels is used in European road transport. Bio alcohol such
as ethanol and methanol produced from agricultural products or wood residuals can – despite
agricultural subsidies – only compete with fossil road fuels when exempt from tax. Since taxation accounts for such a large share of the pump price of conventional road fuels it should be
potentially interesting to investigate the impact of different CO2 abatement policy instruments
on the continuing introduction of biofuels. Introducing a common carbon tax or a system of
tradable emission permits should improve the competitive position of biofuels in sectors that are
currently exempt from carbon or energy taxes (such as rail, sea and air transport). The direction
of the outcome is less obvious for road transport where such instruments would, partially or
fully, replace current taxes.
Conclusions
From the above analysis one may conclude that it appears to be worth taking a closer look at the
impact of new CO 2 abatement mechanisms on specific fuel consumption and choice of fuel. The
fuel represents a high cost to vehicle owners and operators and even a modest alteration in consumer prices may have a considerable impact on their market opportunities. The demand for
transport services and modal choice, on the other hand, appears to be influenced primarily by
factors other than fuel cost. The indirect effect on total demand and modal split will therefore
not be subject to any closer examination in this report.
12
3. Improving the specific energy efficiency of vehicles and vessels
The specific fuel efficiency of most types of vehicles has improved significantly in the past few
decades and this trend is expected to continue for the foreseeable future and in some cases even
become stronger. The European Commission (1999b) believes that transport CO2 emissions
could be cut at low cost (less than ε 5/tonne CO2 ) by as much as 80 million tonnes below the
baseline level predicted for 2010. An additional 70 million tonnes could be reduced at “medium
cost” (5-50 ε/tonne). Table 4 shows estimates for energy efficiency improvements for new
stocks in 2010 relative to the 1990 intensity. An estimate based on the PRIMES-model was
presented above (table 2:5) and alternative estimates will be added in later sections of this chapter.
Table 4:1. Potential for energy efficiency improvements. Per cent relative to 1990 intens ities.
Mode
Cars
Buses
Trams
Passenger trains
Air travel
Average road freight
Heavy trucks
Freight trains
Marine freight
Air freight
Economic reduction potential at Technical reduction potential at
constant performance
constant performance
-20 to -50
-35 to -70
0 to -20
-20 to -40
0 to -20
-20 to -30
0 to -20
-25 to -35
-20 to -30
-30 to -50
-15 to -30
-10 to -30
-10 to -20
+10 to -10
-10 to -20
-30 to -50
-20 to -40
-25 to -35
-20 to -30
-30 to -50
Source: Michaelis et al, 1996 (partly based on several other sources)
The figures in table 4:1 indicate that the technological potential is significantly larger than the
economic. This means higher crude oil prices, increased fuel taxes and the introduction of CO2
emission permits can play a role in determining how much of the technological potential will
become economically available.
Cars and light duty vehicles
The total number of cars in the EU reached 170 million at the end of 1997, up 16 per cent since
1990. Annual new registrations currently amount to about 14 million. The average fuel consumption of new cars stayed stable between 1985 and 1995 and has since declined by 6 per
cent. The decline, however, is to some extent the result of a shift to diesel powered cars.
The power delivered by the engine of a car is used to overcome air resistance, friction, rolling
resistance and inertia (vehicle weight) during acceleration. When driving at low speed the main
factor determining power requirements is vehicle weight. From the technological progress
achieved since 1985 one would expect an annual reduction in average specific fuel consumption
in the order of 1.5 per cent. Van den Brink and Van Wee (1999) found without the increase in
weight, engine size and power rating since 1985 the average new passenger car in the Netherlands in 1997 would have been around 20 per cent more fuel efficient. This order of magnitude
13
is confirmed by the European Automobile Manufacturers Association (ACEA), which says that
the fuel economy of the new European fleet would have improved by an additional 20 per cent
between 1983 and 1997 had not the efficiency improvements been offset by other factors (cited
in Keay-Bright, 2000).
Voluntary agreement with the motor industry
In 1995, the European Council approved a Community Strategy to reduce CO2 emissions from
passenger cars aimed at reducing CO2 emissions by 2010 to an average level of 120 g/km for
newly registered cars. The Commission, however, failed to convince the automotive industry
that 120 g/km can be reached in the foreseeable future. Instead, the European Commission and
ACEA in July 1998 reached an agreement whereby the European car industry commits itself to
achieving an average CO2 emissions figure of 140 g/km by 2008 for all its new cars sold in the
EU, as measured according to the EU’s test procedure (Directive 93/116/EC). The commitment
is not legally binding.
The European Commission later concluded agreements on CO2 emissions from cars with the
Japan Automobile Manufacturers Association (JAMA) and the Korean Automobile Manufacturers Association (KAMA) for their sales in the EU. JAMA and KAMA promise to meet the
target value of 140 g CO2 /km one year later (i.e. by 2009).
ACEA has stated that its CO2 target “will mainly be achieved by technological developments
affecting different car characteristics and market changes linked to these developments”. Its
statement goes on to say that ACEA will aim at a high share – up to 90 per cent – of new cars
being equipped with direct injection gasoline or diesel engines. Down-sizing is not an element
in ACEA´s strategy.
Neither ACEA nor JAMA and KAMA have made any decision on how the burden is to be
shared among its members. The fact that they want to avoid a burden-sharing agreement means
that each company is in effect committed to the same target – but in absolute or percentage
terms? If the first is true it is obviously far easier for some manufacturers than for others. KeayBright’s (2000) interviews with car manufacturers show that producers of large cars advocate a
percentage target while manufacturers of small cars prefer an absolute target. The latter also
argue that producers of larger than average cars, which generally yield greater profits, would be
able to pass on the extra cost for advanced technology to consumers more easily.
Continuing “dieselisation” and a broad introduction of direct fuel injection in gasoline engines
are important parts of the car industry’s fuel efficiency strategy. 4 Currently less than 1 per cent
of new cars sold on the European market have direct injection petrol engines. However, to alter
production to direct injection does not require entirely new engines. A different fuel injection
system and some minor modifications of the engine are all that is needed. From a production
point of view it would thus be feasible to carry out a major shift to direct injection over the next
few years.
By analysing current market trends, manufacturers’ intentions and the opportunities for production and market entries, Kågeson (2000) found that “dieselisation” (assuming 35% of total sales
in 2008 5 ) and the use of energy-efficient commonrail diesels could achieve 18.4 per cent of the
total reduction needed for reaching an average of 140g/km in 2008. Increasing the share of direct injected gasoline engines to 30 per cent of all new gasoline fuelled cars would add another
4
Direct injection petrol engines (often referred to as Gasoline Direct Injection (GDI)) use modified
chamber designs and direct fuel injection into the chamber to achieve a good combustion of a comparatively weak fuel/air mixture. Most experts believe that GDI will offer an improvement of around 10 per
cent during typical mixed cycle operation.
5
The diesel share of the European market was 28.4% in 1999 and 22.2% in 1995, which may indicate a
figure as high as 40% in 2008.
14
12.8 per cent to meeting the target. The introduction of new powertrain technologies, such as
hybrid electric and fuel cell cars, and alternative fuels would at best contribute 10.5 and 3 per
cent respectively. This leaves 55.3 per cent to be achieved by measures applied to traditional
gasoline engines and general measures, such as the use of lighter materials and reduction of air
drag and rolling resistance, that can be applied on all cars regardless of fuel and drivetrain.
Manufacturers will try to improve the efficiency of the traditional indirect injection gasoline car,
which would under the above assumptions still dominate the market in 2008. There are many
ways of further improving the fuel efficiency of conventional gasoline engines, among them:
•
•
•
•
•
•
High-powered ignition systems that ensure complete combustion of the fuel available
Improved fuel injectors
Computer controlled engine management
Improved compression at low engine loads
Variable valve timing
Variable compression
Based on experiences from the 1990s it is reasonable to believe that general improvements and
an increased use of light materials could reduce the average fuel consumption of new cars by
around 10-15 per cent in 2008 (compared with 1995). To be on the safe side of 140 g/km would
take a yearly improvement of 1.2 per cent (on top of dieselisation and new engines). This is
technically feasible but requires the full participation of all brands and models as well as a halt
to the existing trend towards higher performance and four-wheel drive. An obstacle in this context is the fact that wholesalers and car dealers are inclined to continue to promote this trend as
it earns them more money than the promotion of less luxurious and high-performing vehicles.
It is essential to avoid the kind of development that has happened in the United States. Vans,
sport utility vehicles, pickups and “other” increased their combined share of the US market for
new cars and light trucks from 40 per cent in 1994 to 47 per cent in 1998 and their market share
is expected to continue to grow (FT Automotive Quarterly Review, 1999). This trend and rising
average horsepower and performance resulted in a 6 per cent decline in fuel economy for light
vehicles (cars and light-duty trucks) between 1987 and 1999 (from an average of 25.9 miles per
gallon to 23.8 mpg) (EPA, 1999). In some European markets there is now a fast trend towards
minivans and sport utility vehicles though market shares are generally still in the range of 6 to
10 per cent.
The car manufacturing industry appears to be aware of this problem. A study by ACEA (no
exact reference made at ACEA’s website) concludes that nearly half of the total potential gains
that are feasible by 2005 will be offset by regulations on safety, emissions, noise and anticipated
customer demands. If this proves correct, the average annual improvement would have to be in
the order of 3.5 per cent to counterbalance this trend. The conclusion is that the industry will
need the help of market incentives/disincentives to be able to reach the target (Kågeson, 2000).
In its first communication to the European Council and Parliament on the implementation, the
European Commission (2000a) reports that the specific CO2 emissions from new cars in EU15
fell by 5.6 per cent between 1995 and 1999. The details are provided in table 4:2. Average emissions are weighted for sales.
Under the assumption that the associations continue with average annual reduction rates in the
same range as in the first reporting period, ACEA would meet the 2003/04 intermediate target
(165-170g), JAMA would be slightly above and KAMA significantly below. In order to meet
the final target the annual reduction rate must be around 2 per cent per year. Currently ACEA is
achieving on average about 1.5 per cent, JAMA 1.15 per cent and KAMA 0.4 per cent per year
15
(European Commission, 2000a). For cars produced by ACEA members the average car mass
and engine power increased by 8 and 12.7 per cent respectively over the reporting period.
Table 4:2. Average improvement between 1995 and 1999 in specific fuel consumption of
new passenger cars in EU15 by type of fuel and producer association. Per cent.
ACEA
Gasoline
Diesel
All fuels
JAMA
KAMA
-4.3
-8.5
-6.0
-5.2
-7.5
-4.6
All cars
-3.0
-18.1
-1.5
-4.4
-7.5
-5.6
Source: European Commission (2000a).
Costs
The cost of reducing fuel consumption varies widely between different measures. The motor
industry claims it can fulfil its commitment to the European Union without being needing the
incentive of higher fuel prices or a differentiated sales tax. For market acceptance it must then
be able to keep incremental capital costs within a range where motorists would be fully compensated by lower running costs. The commitment by the motor industry is equal to a reduction
in fuel intensity of approximately 25 per cent. A study by IEA (2000a) confirms that “available
near-term ‘conventional’ technologies could be employed to reduce fuel intensity by as much as
25 per cent in a cost-effective manner at current fuel prices” (p22). AEA (2000), on the other
hand, believes that several of the technical measures identified by the motor industry would cost
a great deal more than what is cost-effective at today’s fuel prices (including taxes). Continuously variable transmission and a shift to hybrid powertrains are expected to cost an additional
863 and 604 Euro respectively per tonne of CO2 avoided. The use of lightweight materials also
represents costs well above what consumers could expect to win back from lower fuel consumption at today’s prices.
A higher fuel tax or crude oil price would, of course, provide more room for investment in fuel
efficiency compared to unchanged levels.
Negative s ide -effects of diesel and direct injected gasoline engines
A major shift to diesel engines and direct injected gasoline engines is the single -most important
part of the motor industry’s carbon abatement strategy. This strategy, however, has some negative side effects that may force the Community and/or individual Member States to react. Both
types of engine emit substantially more nitrogen oxides (NOx) and particles than conventional
gasoline engines. The emission limits for diesel cars that enter into force in 2005 will narrow the
gap for particles. For gasoline cars there is no limit value as they have traditionally been known
to emit much fewer particles than diesel cars. Direct injected gasoline cars, however, have been
shown to give rise to nearly as many small particles as the cleanest diesel cars (Färnlund et al,
2001). A growing share of diesel and direct injected gasoline cars may make it difficult for
some European cities to comply with the Community’s air quality standard for PM10.
Hybrid-electric and fuel cell cars
Manufacturers are now preparing for the introduction of hybrid electric cars and fuel cell cars.
Hybrid electric cars are powered by a combination of a conventional engine and a large battery.
The latter is charged by the engine. Hybrid cars can provide large savings especially in urban
driving where the efficiency of the internal combustion engine is particularly low. The first
commercial hybrid, Toyota’s Prius, has been on sale in Japan and Europe since late 1997 and
mid-2000 respectively.
16
Fuel cell electric vehicles convert chemical energy into electricity on board using a fuel cell
system. Several different types of fuel cells are being actively explored. Currently the most
promising is the Polymer Electrolyte Membrane fuel cell (PEM).
Several car manufacturers are already announcing the commercialisation of fuel cell cars.
Honda, Toyota, Nissan, Ford and DaimlerChrysler have all pledged to have a limited number of
fuel cell cars for sale in 2004. DaimlerChrysler says it intends to market around 1,000 units of
the Necar 5. It should be recalled that 2004 is the target year for pre-production prototypes from
the American “Partnership for a New Generation of Vehicles” (PNGV)6 .
Virtually any hydrogen-rich fuel can be reformed and used in PEM fuel cells, including methanol, propane, CNG and gasoline. However, fuel cells using reformers for onboard extraction of
hydrogen are more costly and complex than fuel cells using pure hydrogen. A fossil-fuelled
PEM cell driven car will at best cut fuel consumption by 40-45 per cent compared with the same
car using a modern gasoline-fuelled internal combustion engine. Fuel cells using pure hydrogen
require their own refuelling infrastructure which makes them more suitable for dedicated fleets
of city buses and distribution trucks than for passenger cars, at least in the short to medium
term. Several different concepts for storing hydrogen on board vehicles are currently being explored.
There are numerous technical as well as non-technical barriers to overcome before commercial
mass production of fuel cell vehicles can become reality. The main barrier to a market introduction is high cost, and little is yet known about the price range for mass-produced fuel cell vehicles. Most experts agree that electric hybrid and fuel cell cars will gain considerable market
shares only in the long term, i.e. beyond 2010 or 2015. Some of them believe, contrary to the
expectations of the motor industry, that fuel cells will be used in stationary applications and
heavy duty vehicles (including locomotives) before they become commercially viable in cars.
The contribution from hybrids and fuel cell cars to CO2 targets depends on production capacity,
price and market acceptance. Hybrid electric cars are expected to cost around 4,000 US$
(+25%) more to buy than a comparable conventional mid-size car (Duleep, 1999). To be competitive, the cost of producing fuel cell engines compared with internal combustion engines will
have to drop tenfold. Mass production will narrow the gap, but buyers will probably have to pay
a considerable premium, at least initially. Thomas et al (1998) estimate the initial production
cost of a mid-sized, direct-hydrogen fuel cell car to be 110,000 US$, which would under mass
production drop to around 20,000 US$. The latter implies a retail price differential to conventional cars of 4,000-5,000 US$. Lipman (1999) estimates that the fourth generation of fuel cell
cars (2015-2026) would in a case of high production entail retail prices between 24,000 and
35,400 US$ (25,900 to 27,100 US$ in the “mid cost case”). Market acceptance will, of course,
also depend on performance, reliability and status.
Buses and trucks
The specific energy efficiency of large trucks has improved by approximately 20 per cent since
1970 (US Department of Transportation, 2000). In a report for the European Commission, AEA
Technology Environment et al (2000) estimate the technological potential for reducing emissions from new trucks in 2010 to be around 9 per cent. Engine improvement accounts for
roughly half of the overall improvement, while reduced rolling resistance and improved aerodynamics make up the other half. Buses are assumed to remain at today’s specific energy requirement. Michaelis et al (1996) put the economic reduction potential at constant performance at -10
to -30 for heavy trucks and 0 to -20 for buses (2010 over 1990).
6
An American programme started in 1993 and co-funded by the federal government and the automotive
industry aiming at producing a family Sedan which is 3 times more fuel efficient than the average 1994
Sedan.
17
The US Department of Transportation (2000), however, sets the fuel economy target for transit
buses at +200 per cent (equal to a specific fuel consumption reduction of -67 %) for 2010. Its
target for freight trucks is +100 percent (equal to a fuel consumption of -50%). These targets
apply to “production prototypes” and are the official objectives of the “21st Century Truck Initiative”, which is a ten-year joint research effort of the federal government and the motor industry. The reason for setting the target much higher for transit buses than for trucks is that the
former are assumed to undergo frequent braking events – and therefore to have more recoverable braking energy – than the latter. Some of the features used for achieving these improvements will probably be employed in mass production, but it is difficult to say how fast they will
penetrate the market.
For the foreseeable future most trucks and buses will remain powered by diesel engines and
diesel fuels. Electric hybrid and fuel cell vehicles though can be expected to start to penetrate
the markets for transit buses and distribution vehicles. DaimlerChrysler will supply between 20
and 30 fuel cell buses to operating companies in Europe starting in 2002. In North America a
limited number of fuel cell buses have been in operation in Vancouver and Chicago for some
years. The Californian Air Resources Board, CARB, decided in 2000 to demand that bus companies operating more than 200 diesel buses should introduce at least three zero emission buses
by 2003. By 2008 the requirement would be extended to 15 per cent of the fleets of these companies.
The energy consumption per tonne kilometre varies considerably with the size of the vehicle
and its capacity utilisation. Heavy trucks, when fully loaded, use about one eight of the fuel per
tonne kilometre as a light delivery truck (Schipper and Marie -Lilliu, 1999).
Trains (diesel and electric)
Rail in EU15 increased its final energy consumption by 8.6 per cent between 1985 and 1997
despite a fast shift from diesel locomotives to electric trains (51/49 in 1985 to 64/36 in 1997).
This is a surprisingly bad record that can only to a small extent be explained by structural
change. Between 1985 and 1997 tonne kilometres produced fell by 14 per cent and passenger
kilometres rose by 7.6 per cent. Overall production of tonne and passenger kilometres fell by
3.4 per cent. In 1990 (approximately midway between 1985 and 1997) passenger transport by
rail accounted for 52 per cent of the total number of tonne and passenger kilometres produced.
Growing speeds, particularly in passenger trains, presumably contributed. Both air resistance
and kinetic energy consumption increase by the square of speed. Simulations show that on average energy consumption for a number of passenger trains will increase by the power of 1.5-1.7
of top speed. For example, if top speed is increased by 50 per cent, the energy consumption will
increase by 80 to 100 per cent (Andersson, 2000).
It can be questioned whether electrification has really contributed to an improved overall energy
efficiency. The marginal base load production of electricity is based on coal-fired condensing
power in almost all of Europe. This means that the well-to-wheels efficiency for diesel trains
and electric trains is about the same and that life cycle carbon emissions are higher from electric
trains (due to higher carbon content of coal per unit of energy).
The energy efficiency of trains can be improved in many ways. Andersson (2000) lists the following measures for technical and behavioural improvements:
•
•
•
•
•
Reducing the running resistance, in particular air drag resistance.
Reducing the tare weight of the train.
Reducing energy losses in tractive vehicles and also losses in the catenary and feeding systems of electric railways.
Reducing the energy consumption of comfort systems such as heating and air conditioning.
Introducing regenerative breaking, feeding back energy in the braking mode and in downhill
grades.
18
•
•
•
Improved utilisation in passenger trains (more seats per wagon).
Efficient driving, in particular coasting the train (i.e. running without propulsion for a
while) before braking or approaching downhill grades.
Running the train with fewer stops, especially those that could be avoided by improved
traffic control, signalling systems and driving discipline.
Despite the disappointing historical record the potential for energy efficiency improvements in
the rail sector thus appears to be large. Table 4:3 shows some estimates.
Table 4:3. Estimates of the potential for energy efficiency improvements in trains .
Type of train
Passenger trains
Passenger trains
Passenger trains
Passenger trains
Inter city trains
Commuter trains
Freight trains
Freight trains
Freight trains
Freight trains
Freight trains
Freight trains
All types
Base year
Target year
1990
1990
1990
1990
2010
2020
2010
2010
1990
1990
2000
2010
2020
2020
2015
2010
2010
2020
1990
1990
Change over
base year
-23 #
-46 #
0 – -20a
-26
-35 – -40b
-40c
-21 #
-42 #
-40
-25c
-10 – -20d
-20
-20e
Source
European Commission, 1999
European Commission, 1999
Michaelis et al, 1996
AEA et al, 2000
Andersson, 1998
Andersson, 1998
European Commission, 1999
European Commission, 1999
US DoT, 2000
Andersson, 1998
Michaelis et al, 1996
AEA et al, 2000
Brunner and Gartner, 1999 f
# The net-effect of a major shift from diesel to electric trains is included.
a)
b)
c)
d)
e)
f)
Economic reduction potential at constant performance
Assuming that average speeds increase by 20%
Assuming that average speeds increase by 10%
Economic reduction potential at constant performance
At today’s energy prices.
Cited in UNDP et al (2000).
Some experts believe that fuel cells will become economically viable in trains before they become affordable in road applications (European Commission, 1999a, DeCiccio, 2001). Diesel
locomotives already use electric drive, powered by diesel generators, which means much of the
electric drive costs are already part of the existing package (in contrast to road vehicles). A shift
from diesel to fuel cells would raise the CO 2 efficiency of the propulsion system by around 25
per cent and make further electrification of non-electrified railway lines not only unnecessary
but also meaningless from an energy-efficiency point of view (see chapter 8).
Marine vessels
Shipping accounts for approximately 2 per cent of global antropogenic emissions of CO2 . The
annual growth rate was close to 2.5 per cent during the past decade (IMO, 2000). Close to 30
per cent of world sales of marine bunker fuel take place in OECD Europe (1997 IEA statistics),
and Annex I countries accounted for 60 per cent of total bunker fuel sales in 1994 (Michaelis,
1997a). Residual fuel oils account for 80 per cent of marine bunker consumption (IEA statistics). Gas-oil is used by smaller vessels and on large vessels to run auxiliary motors, and also to
run the main engines in and near port.
19
Table 4:4 shows the world merchant fleet and the corresponding marine emissions of CO2 by
types of ship. The differences in specific fuel consumption indicated by the two columns reflect
differences in size of ships, types of engine and operating speed.
Table 4:4. World fleet (1999) and marine CO 2 emissions (1996) by types of vessel.
Ship type
World fleet by tonnage (dwt), %
Oil tankers
Bulk carriers
General cargo ships
Container ships
Liquid gas tankers
Chemical tankers
All others
In total
Total tonnage, Mdwt
Total emissions, Mton
35.4
34.6
12.7
8.0
2.2
1.0
6.1
100.0
799.0
Overall CO2 emissions by type of
ship, %
22.2
22.9
19.4
15.4
3.2
3.3
13.6
100.0
419.3
Sources: UNCTAD (2000) and IMO (2000).
IMO (2000) estimates that technical measures applied on new ships could reduce specific fuel
consumption by 5-30 per cent, optimised hull shape and choice of propeller being the two most
important measures. Improved engine efficiency would account for 2-5 per cent for low speed
diesels (if a trade-off with NOx emissions is accepted) and 10-12 per cent for medium speed
engines. Low speed diesels already have efficiencies in the 48-54 per cent range. Because of
high cost and comparatively small efficiency improvement (over slow speed engines) fuel cells
are predicted not to play a major role as a prime mover of ships. However, fuel cells may be
used in the auxiliary power systems. Optimal hull and propeller maintenance can reduce emissions from existing ships by 4-8 per cent. Shifting from heavy fuel oil to middle distillate oil
would reduce CO2 from shipping by 4-5 per cent due to the lower carbon/hydrogen ratio of the
latter. This, however, means heavy fuel oils would have to be burned elsewhere.
IMO estimates that the overall technical potential for reducing CO2 emissions from the world
fleet (old and new vessels) is 17.6 and 28.2 per cent by respectively 2010 and 2020 (compared
with a base line fleet when no additional measures are applied). Michaelis et al (1996) set the
2025 fleet average potential at -25 to -35 per cent over the 1990 base line level. The European
Commission (1999a) estimates the efficiency potential in shipping at -5 per cent in 2010 and -7
in 2020 (over 1990). It is, however, unclear whether this figure allows some room for increased
speeds. The estimates by IMO and Michaelis et al are based on the assumption of unchanged
performance. The US Department of Transportation (2000) takes a very optimistic view when
setting its research and development target at -40 per cent by 2010. AEA et al (2000), on the
other hand, believe that real improvement in EU15 will stop at a modest 4 per cent (2010 over
1990).
CO2 emissions could also be reduced significantly by fleet planning and improved routing. Shipowners, however, plan fleet operation as well as the speed of each ship according to economic
considerations. The current trend is towards higher speeds, in particular in ferries and Ro-Ro
vessels. Fast ships are motivated by the need to fill the gap between air cargo and traditional
shipping with respect to price and delivery time. The same applies to passenger transport, at
least with regard to some major European routes.
20
The fuel consumption per distance travelled increases approximately with the square of the
speed (all else being equal). New types of hulls (e.g. trimarans) can only partially compensate
for this. As a result doubling the speed from, say, 20 to 40 knots by shifting from a conventional
ship to a high-speed craft may increase fuel consumption by 300 to 500 per cent. For Ro-Ro
ships the equation is particularly negative as they carry less useful cargo compared with container ships and even less compared with bulk carriers. The empty truck weight makes up 40 to
50 per cent of the gross cargo weight.
Aircraft
Aviation fuel burnt worldwide corresponds to approximately 3 per cent of the global emissions
of antropogenic CO2 . Aviation, however, contributes to global warming in several ways. Three
different processes are involved: (1) the emission of radiatively active substances such as CO2
and water vapour; (2) the emission of chemicals which produce or destroy radiatevely active
substances (like NOx which modifies the 03 concentration); (3) the emission of substances
which trigger the generation of aerosol particles or changes in natural clouds (e.g. contrails).
The direct or indirect radiative forcing from water vapour and chemical species is closely related to flying altitude. The formation of contrails and cirrus clouds affects the climate by reflecting sunlight back to space and by trapping the outgoing infra-red radiation from the earth’s
surface. For high clouds, the latter effect is larger. Most subsonic aircraft fly at 9000 to 11000
metres, while supersonic aircraft fly in the stratosphere, several thousand metres higher. In addition, NOx emitted at this altitude causes stratospheric ozone depletion (ICCP, 1999).
Aircraft built in the late 1990s consume roughly 30-40 per cent less fuel per seat-kilometre than
those used in the early 1970s. During the same period the load factor has risen from 50 to 60 per
cent for domestic routes in most OECD countries. These changes have led to a 50 per cent decline in the energy intensity of air travel (Schipper and Marie -Lilliu, 1999).
Supersonic aircraft are less fuel-efficient than subsonic aircraft. They consume about twice as
much fuel per passenger kilometre as subsonics of the same size and range (IPCC, 1999).
Most aviation emission scenarios take a figure of 4 to 5 per cent for long-term growth of air
transport and 1 to 2 per cent for annual efficiency improvement (WEC, 1998, and IPCC, 1999).
This indicates that based on “business-as-usual” CO2 emissions from civil aviation will in the
foreseeable future rise by 2 to 4 per cent per annum.
Substantial fuel efficiency improvements require measures on the airframe, combustion chambers and other engine components and airframe-engine integration (IPCC, 1999). Table 4:5
provides some estimates of the potential for energy efficiency improvements.
Table 4:5. Estimates of the potential for energy efficiency improvements in civil aircraft.
Base year
Air travel
Air freight
Average fleet
New aircraft
New aircraft
Fleet average
New aircraft
1990
1990
1995
1990
1990
2000
1992
Target year
2010
2010
2010
2020
2020
2020
2025
2020
Change over
base year
- 20-30%
- 10-20%
- 12-14%
- 39%
- 62%
-30-40%
- 37%
- 50%
21
Source
Michaelis et al, 1996
Michaelis et al, 1996
AEA et al, 2000
European Commission, 1999b
MTU, 1992
CE et al, 2000
Bleijenberg and Wit, 1998
US DoE, 1997
Not all sources referred to in table 4:5 clarify whether their estimates are strictly technical or
depend on assumptions about higher fuel prices. Michaelis et al (1996), however, make such a
distinction and claim that the technical potential over 20 years could be as high as 30-50 percent. Their estimate is confirmed by a more recent study of the technical potential that concludes that ultra-high bypass turbofan engines in combination with aerodynamic enhancements
and lighter-weight materials could reduce fuel consumption by 30-40 per cent without compromising current design speeds (CE et al, 2000). Applying high-speed propeller propulsion would,
according to the same study, require 50 per cent less fuel than the expected 2010 average aircraft provided that a speed reduction of 15 per cent is acceptable.
22
4. Prospects for alternative transport fuels
Fossil alternatives
Fossil fuels other than diesel and gasoline in road transport, kerosene in aviation and middle
distillates and heavy fuel oils in maritime shipping account for less than 1 per cent of European
transport fuel demand. Most of this is liquefied petroleum gas, LPG, (2,884,000 toe in EU15 in
1997) and natural gas (303,000 toe) used in road transport. These two are equal to 1.3 per cent
of the energy consumption in road transport (Eurostat, 2000a)
DME (dimethyl ether) is a potential replacement for diesel fuel. It can be produced from syngas
made from natural gas, biomass or coal. The rationale behind substituting diesel lies in the environmental properties of DME, which is a very clean fuel. The reason for wanting DME rather
than natural gas is that the latter requires special fuel tanks and a separate distribution system.
The conversion from natural gas to DME, on the other hand, consumes around 30 per cent of
the gross energy supplied (Wang, 2000). About one third of this loss, however, is regained when
DME is replacing natural gas in a heavy duty vehicle as the energy efficiency of DME used in a
diesel engine is higher than the efficiency for compressed natural gas (CNG) in a comparable
gas engine (Arnäs et al, 1997).
Methanol can also be produced from syngas. There are currently around 22,000 methanolfuelled passenger cars and 600 buses worldwide. Methanol is also a potential fuel for fuel cell
vehicles in a case when an on-board reformer produces the hydrogen. When reforming methanol
the temperature need not be higher than 250°C, compared with 550 and 850°C for ethanol and
gasoline respectively.
Renewable transport fuels
Ethanol and RME (rapeseed methyl ester) are currently the two most important biofuels used in
European road transport. They account for 0.3 per cent of the European market for liquid fuels.
Quantified targets for renewable energy in the EU were set within the context of the ALTENER
R&D programme. The goals include a 5 per cent market share for biofuels of total motor vehicle fuel consumption by 2005. In a more recent White Paper on renewable energy the European
Commission (1997b) sets the target for 2010 at 18 Mtoe, compared to 0.5 Mtoe in 1995. The
European Biomass Association (1998) thinks 11 Mtoe is more realistic.
One million m3 RME was produced in Europe in 1999 (Kjell Lindqvist, Svenska Ecobränsle
AB). Most of it was used in biodiesel (5-15% RME). Ethanol is used mainly in low-blend with
gasoline. Using ethanol in a conventional otto engine can raise efficiency by 6 per cent and by
as much as 15 per cent if the engine is optimised for ethanol. This would raise the average efficiency of the otto engine from 18 to 19 and 20 per cent for respectively the conventional and the
alcohol optimised engine (Åhman, 1999). Flexible -Fuel Vehicles (FFV) cannot be optimised for
ethanol as they sometimes run on 100 per cent gasoline.
What is often overlooked when assessing road fuels produced from biomass is the amount of
primary energy consumed in the conversion. Life cycle analysis generally limits the comparison
between traditional and new fuels to the amount of fossil CO2 emitted from well to wheel. Biomass, however, is a scarce resource, which must be well utilised in order to contribute signif icantly to the abatement of greenhouse gases. The “World Energy Assessment” (UNDEP et al,
2000) has compiled existing data on net energy efficiency of conversion for the production of
different road fuels from biomass. The results for conversion of lignocellulosic biomass are
summarised in table 5:1. Conversion of agricultural crops generally has lower conversion rates
than those presented in the table. For instance, producing ethanol from sugar beet and sugar
cane has net energy efficiency rates of only 50 and 44 per cent respectively.
23
Table 5:1. Net energy efficiency of conversion of lignocellulosic biomass into different
types of road fuel. Per cent.
Biofuel option
Concept
Net energy efficiency short term
Net energy efficiency long term
Ethanol
Hydrogen
Hydrolysis, fermentation Gasification
and electricity production
55-65
60-70, incl. power and
heat generation
Methanol
Bio-oil
Gasification Glash pyrolysis
60-70
50-60
70 (raw bio-oil)
60-70
Source: UNDEP et al (2000), based on a large numb er of primary sources.
From table 5:1 it is evident that producing liquid road fuels from biomass is associated with a
loss of primary energy in the 30-40 per cent range. This is ten times the loss of primary energy
induced from producing wood chips or pellets from forest residuals. From an efficiency point of
view it thus appears reasonable to produce liquid fuels from biomass only when the potential
demand for wood chips and pellets has been satisfied. The latter is also more competitive at
current pric es. The most energy efficient way of using lignocellulosic biomass is for heating
homes and in Combined Heat and Power (CHP) production.
Road fuels in a global context
Azar et al (2000) used a global energy systems model, with a transportation module, for assessing the future worldwide demand for road fuels. The model was used under the assumption that
atmospheric concentrations of CO2 should be stabilised at 400 ppm. Two main results emerge:
(1) despite the stringent CO2 constraint, oil-based fuels rema in dominant in the transport sector
over the next 50 years, and (2) once a transition towards alternative fuels takes place, the preferred choice is hydrogen. A general feature obtained in all runs of the model is that the use of
biomass increases rapidly in response to stringent CO2 targets. Biomass, however, is used for
residential heating and process heat, and not in the transport sector. The use of natural gas
grows as well, but mainly in electricity production. Oil is phased out in electricity and heat production, but is increasingly used in the transport sector. The use of coal remains roughly constant over the first couple of decades, and grows rapidly thereafter as a result of carbon sequestration technologies being employed on a large scale. A major shift from oil to hydrogen in the
transport sector takes place between 2040 and 2050.
In a sensitivity analysis, Azar et al demonstrate the robustness of their results to alternative assumptions (generally ±50 to 100%) with regard to biomass availability, natural gas and oil resources, biomass, natural gas and oil costs, maximum limit on biomass used for heat production,
heat and electricity demand, discount rate, CO2 stabilisation target and transport parameters
such as transport energy demand, costs of fuel cells, demand for aviation and several assumptions favourable to methanol. None of these alternative assumptions make it possible for fuels
produced from biomass to penetrate the transport sector and the transition from oil to hydrogen
is at most advanced or delayed by one decade. The authors assume that the CO2 stabilisation
target is secured by carbon taxes or tradable permits that treat all sectors alike.
Azar et al explain that although the long-term costs are very uncertain, the cost differentials
between hydrogen and methanol production from different fuels can be understood from basic
physical and chemical properties. Conversion of natural gas into methanol or hydrogen can be
done at higher efficiency and at lower cost than what can be achieved for biomass and coal. This
follows from the fact that gasification of the fuel is not needed when natural gas is used as a
feedstock, which also explains the higher energy conversion efficiency.
24
From Azar et al it is clear that biofuels cannot be expected to ever become major transport fuels
if all emissions of fossil CO2 are subject to the same tax or emission permit requirement. However, this should not prevent alternative fuels such as natural gas, biogas or excess hydrogen
from refineries from being used in niche markets (e.g. city buses) long before a general transition to hydrogen-fuelled fuel cells takes place.
Bioenergy potential in Europe
The study by Azar et al is long-term and global. What would the outcome be if the analysis
were limited to Europe and the next two decades? Would Europe’s biomass supplies suffice for
both heating, combined heat and power production and production of biofuels for road transport?
Bioenergy supplies consist of organic municipal waste, residues and by-flows from the food and
material sectors, and dedicated energy crops. Residues include wood from forest felling, sawmill and paper mill residues, harvest residues from food and fibre crops production, and black
liquor, which is a by-flow from the production of pulp. Dedicated European plantations include
sugar beet, starch crops (corn, barley, wheat), oil crops (rapeseed, soybean, sunflower), perennial herbaceous crops and short rotation woody crops (salix, poplar, eucalyptus).
The European Commission’s (1997b) White Paper on renewable energy sources estimates the
bioenergy potential of EU15 in 2010 at 135 Mtoe, compared to approximately 55 Mtoe in 1998.
Based on an assessment of ten earlier studies, Hall and House (1995) calculated the long-term
potential for Western Europe to fall into the 9.0-13.5 EJ per annum range. This corresponds to
211-317 Mtoe. The primary energy demand in EU15 was 1,436 Mtoe in 1998 (European Commission (2000g). According to the European Biomass Association (1999), the heat market accounted for approximately 628 Mtoe per cent of the primary energy demand in 1995. The current demand for low-temperature heat (382 Mtoe) alone is larger than the maximum future production of bioenergy.
The estimate by the European Commission, mentioned above, is based on the assumption that
18 of the 135 Mtoe produced in Europe would be liquid biofuels. The net energy yield differs
between crops, being higher for electricity from wood (209 GJ/ha) than for ethanol from wheat
(58.4 GJ/ha), ethanol from beet (200.6 GJ/ha), rape methyl ester (48.9 GJ/ha) and methanol
from wood (158.1 GJ/ha) (OECD/IEA, 1994). Heat from wood, not mentioned in the report,
would have an even higher net energy yield. On the other hand, environmental and social considerations might prevent the entire cropland surplus from being used for fast-growing plants
such as poplar and salix. In such circumstances perennial herbaceous crops can be used for production of pellets and briquettes for the heat market.
Solid biomass in the form of wood chips, pellets or briquettes can be used for heating individual
homes and in district heating networks, including Combined Heat and Power production. Another option is to mix 5-15 per cent pulverised wood with coal in existing power plants and
district heating furnaces.
Given the fact that the production of liquid biofuels is currently around 3 times more expensive
than conventional road fuels (European Commission, 1997b), it is by no means obvious that the
European Union and its Member States should subsidise production of such fuels when considering that the net energy efficiency is a great deal higher when the biomass potential is used for
heating and CHP.7
7
The current Swedish tax deduction for ethanol produced for road transport is equal to Euro 215 per
tonne CO2 .
25
5. Current taxation and mechanisms for internalising climate costs
In Europe taxation of transport fuels in most Member States applies only to road fuels. Fuel
used by trains and commercial ships, barges and aircraft are with a few exceptions excluded
from fuel and/or electricity tax.
Table 6:1 shows the current excise duties on gasoline and die sel in the 15 Member States as
well as the EU minimum rate. The table shows a large variation. The United Kingdom is the
only Member State that taxes diesel on a level with gasoline. The British tax on diesel is currently 86 per cent above that of Italy which is second in rank among the Member States of the
Union.
Table 6:1. Current excise duties on road fuels in Member States of the EU. Euro per 1 000
litres.
Country
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
United Kingdom
EU minimum rate
1.
2.
3.
4.
5.
6.
Gasoline 1
Diesel
408
5082
512
5524
586
562
307
374
542
372
5925
349
372
5116
751
287
VAT %
283
290
3443
3004
389
378
257
325
403
253
3475
246
270
3346
7513
245
20.0
21.0
25.0
22.0
20.6
16.0
18.0
21.0
20.0
12.0
17.5
17.0
16.0
25.0
17.5
Ordinary gasoline. High-octane blends are taxed higher in some Member States.
Including energy charge.
Low sulphur.
Environment friendly.
Including “environmental fuel charge”.
Environmental Class 1.
Source: European Commission, DG Taxation (status November 2000)
There is a common minimum excise duty on LPG of 100 Euro per tonne. Most Member States
charge between 100 and 300 Euro/tonne. Methane used as a propellant is taxed in some Member States, rates ranging between 11 and 433 Euro/tonne. According to the Mineral Oil Directive (92/81/EEC), alternative fuels should be taxed in line with the mineral fuel that they substitute.
However, there is a provision under article 8(4) whereby Member States can seek the approval
of the Commission and the Council to depart from the general rules in certain circumstances.
Most Member States have under this provision been authorised to apply lower tax rates on road
26
fuels used for public transport. Electricity and diesel oil used by trains are subject to taxation in
a few Member States. Some Member States have also used this provision for exempting biofuels from taxation. The rule here is that such fuels should only be exempt from tax or enjoy reduced rates when produced under pilot programmes. In some cases, however, zero rates have
been applied for longer periods.
In 1997, the Commission presented a proposal for a new Directive on energy product taxes,
which included a step-wise increase in the minimum excise duties. The taxes on gasoline and
diesel would according to the proposal reach 500 and 393 Euro per 1,000 litres respectively in
2002 (European Commission, 1997b). However, the ECOFIN Council has not been able to
come to an agreement on this Directive.
Sales and annual vehicle taxes
Ten of the current 15 Member States enforce an excise duty on car sales and they all have
differing systems of taxation. Most of them, however, have differentiated their taxes for differences in fuel consumption or factors that indirectly affect fuel consumption (such as cylinder
capacity, power rating and vehicle weight). Some use progressive rates. The sales or registration
taxes are generally (Greece and Denmark being exceptions) rather low and therefore have limited influence on the average specific fuel consumption of new cars.
All Member States tax cars in use. The annual vehicle tax is often based on power rating, cylinder capacity, weight or even fuel consumption or CO2 emissions (Denmark, the UK and to a
certain extent Austria). The rates, however, are generally too low to significantly influence vehicle choice.
Sales and annual vehicle taxes might also have to be used for purposes other than improved fuel
efficiency. Germany, for instance, has differentiated its annual vehicle tax for exhaust emissions
with differing tax levels for cars meeting the requirements of the different existing and future
EU emission standards. In addition, however, Germany grants cars that travel 100 km on three
litres of fuel a total exemption from vehicle tax up to 31 December 2005 or to the point when
the accumulated exemption reaches 1,000 DEM (Bundesministerium für Verkehr, 1998).
Internalising social costs
Making transport pay its true costs has been discussed in the European Community for close to
10 years (Kågeson, 1993, European Commission 1995, Mauch, Rothengatter et al, 1995, ECMT
(1998b) and European Commission, 1998f). One conclusion of these studies is that the different
costs should be internalised as close to source as possible. Where carbon dioxide is concerned
this is easy as the amount of CO2 emitted is proportional to the carbon content of the fuel. A fuel
tax differentiated for carbon content is thus an obvious option. Another solution would be to
include fossil transport fuels in a common scheme for carbon dioxide emissions trading. In this
case the supplier would have to submit permits that match monthly or annual sales.
Current road fuel taxes are also used for internalising costs other than those associated with
climate change. As a result the effective tax on CO2 emissions from road transport is much
higher than the equivalent taxes on emissions from fossil fuels used in other sectors of society.
Table 6:2 shows the effective charge per tonne of CO2 of different fuel taxes in Sweden. All
excise duties applied to the fuels are included (but not VAT) as it is the size and not the name of
the tax (energy tax, CO2 tax etc) that matters. However, one should not forget that the excise
duties on gasoline and diesel are currently used to internalise some other costs as well, albeit not
very efficiently.
27
Table 6:2. Current fuel taxes in Sweden recalculated into effective charge. Euro per tonne
CO2.8
Fuel
Light fuel oil in the household and service sectors
Light fuel oil in manufacturing industry and agriculture
Heavy fuel oil used in district heating
Heavy fuel oil used in manufacturing industry and agriculture
Fuel used in power production
Diesel oil used in road vehicles (environment class 1)
Gasoline used in road vehicles
Oil products used in commercial shipping
Kerosene used in civil aviation
Natural gas used in vehicles
Natural gas used in district heating, households and the
commercial sector
Natural gas in manufacturing industry and agriculture
Peat in all sectors
Hard coal used in industry
Tax level
242/m3
58/m3
242/m3
58/m3
Tax per tonne CO2
90.7
21.8
80.9
19.6
0
332/m3
492/m3
0
0
114/1,000 m3
149/1,000 m3
0.0
123.5
215.3
0.0
0.0
56.8
75.4
44/1,000 m3
0
51/tonne
22.1
0.00
20.7
Source: Own calculation based on tax levels in January 2001. Exchange rate: 9.15 SEK=:1 Euro. Gram
CO2 /MJ; heavy fuel oil 76.2, light fuel oil and diesel oil 75.3, gasoline 72.6, kerosene 73.1, natural gas
56.5, hard coal 90.7, and peat 97-107.
From table 6:2 it is evident that the effective charge on CO2 varies between zero and 215 Euro
per tonne in Sweden. The situation is similar in other Member States. The highest effective
charge on CO2 is the British tax on gasoline, which is equal to 329 Euro per tonne (exchange
rate 1 GBG=1.59 Euro). The Swedish excise duties in table 6:2 are about average (rank 8 and 7
among EU15 for gasoline and diesel respectively).
Tradable permits for internalising the social cost of CO 2 emissions
From an efficiency point of view all emissions of carbon dioxide ought to be subject to the same
charge or tax. The European Commission’s services have analysed the price of emissions allowance under different kinds of emissions trading based on the PRIMES model. They found
that the price for complying with the Kyoto Protocol would be around 33 Euro per kg CO2 in a
case of EU-wide trading covering all sectors of society (European Commission, 2000b).
A background paper shows that complying with Kyoto on their own would cost Member States
an additional 3,000 million Euro per year (in 2010) compared to an “idealised” case where each
Member State were to operate its own internal scheme for emissions trading covering all sectors
of society (Capros and Mantzos, 2000). The “Cheese Slicer Case” in table 6:3 refers to a situation where Member States decide to enforce the same reduction target on all sectors of society.
This would more than double the compliance cost compared to the “idealised reference case”.
8 Only examples. There are additional tax rates for LPG, methane, petroleum coke, and fuels used in
Combined Heat and Power. There is also an opportunity for enterprises to apply to the taxation authority
for a reduction of the excess tax amount that exceeds 0.8% of the sales value of their products so that the
marginal tax burden does not exceed an amount equal to 12 % of the general tax level.
28
Table 6:3. Marginal abatement cost and compliance costs in EU15 for reaching the Kyoto
target under different scenarios .
Idealised reference case (based on
domestic trading)
The “Cheese Slicer Case”
EU Emissions trading in all sectors
Marginal abatement cost
Compliance costs
Euro (1999)/tonne CO2
Million Euro (1999)
54.3
9,026
125.8
32.6
20,508
5,957
Source: Capros and Mantzos (2000).
A possible conclusion from the work commissioned by the European Commission is that in a
case of “continuous confusion” abatement costs would end up somewhere between “the idealised reference case” and “the cheese slicer case”. This could mean an average marginal abatement cost between 70 and 80 Euro per tonne CO2 and a total compliance cost of the order of
12,000 to 15,000 million Euro per year.
The calculations initia ted by the Commission, however, are based on the assumption that emissions trading would supplement existing policies and measures, including the current taxes on
carbon and energy. This means that the case of internal emissions trading in EU15 shown in
table 6:3 does not represent the lowest possible abatement cost. Maintaining today’s large differences in energy taxation would, as indicated in table 6:2, would be relatively efficient compared to a system where each tonne of CO2 is equally taxed. The current taxation of mineral oil
products in EU15 equals 42.5 Euro per tonne CO2 (calculated from European Commission,
2001b). In addition some Member States impose relatively modest taxes on coal and natural
gas. In total, the average taxation of all emissions of CO2 from fossil fuels in the EU is probably
45-50 Euro per tonne.
As illustrated in table 6:4 this means that the total shadow price for reaching the Kyoto target is
78-83 Euro per tonne in a case where emissions trading within EU15 is allowed to supplement
existing taxes. The total shadow price for compliance is 99-105 Euro and 171-176 Euro in respectively “the idealised reference case” and “the cheese slicer case”.
Table 6:4. Total marginal shadow price in EU15 for reaching the Kyoto target under different scenarios. Euro per tonne CO 2 .
Marginal abatement cost Current aver- Total shadow
according to table 6:3
age taxation
price
Idealised reference case
54.3
45-50
99-105
The “Cheese Slicer Case”
125.8
45-50
171-176
EU Emissions trading in all sectors
32.6
45-50
78-83
The shadow prices of table 6:4 do not represent the total abatement marginal cost as current
taxation varies between different sectors of society. The total marginal incentive is a great deal
larger in sectors which are currently taxed far above average. The average current gasoline tax is
equal to around 215 Euro per tonne CO2 . This means that the total marginal incentive (or
abatement cost) is around 340 Euro per tonne CO2 in “the cheese slicer case” and approximately
270 Euro per tonne in the “idealised reference case”.
With the current tax structure it would evidently take an average CO2 taxation of 45-50 Euro per
tonne to keep Europe’s emissions at today’s level. In a case where the same rate were applied on
29
CO2 emissions from all sectors, a substantially lower tax rate would be sufficient to keep emissions at today’s level. Comparing with the results presented in table 6:4, one would expect a
level around 30 or 35 Euro per tonne to be enough. The total cost for keeping emissions at today’s level could presumably be reduced by at least 2 billion Euro under equal taxation. This
indicates that in a case where emissions trading covering all sectors of society in EU15 (or alternatively equal taxation of CO2 ) were allowed to replace all existing taxes on fossil fuels (except VAT), the shadow price for reaching the Kyoto target could be expected to be in the range
of 63 to 68 Euro per tonne of CO2 (30 to 35 Euro + 33 Euro).
In later sections of this report 65 Euro per tonne CO2 will be used for illustrating the outcome
of an optimal scheme for EU-wide emissions trading.
From an economic point of view, to continue to tax fossil fuels would require a second objective
(other than climate change). In addition, this second problem must be closely connected to the
handling or combustion of the fuel itself. From an environmental point of view it might, for
instance, be valid to enforce a sulphur charge or tax on fuels with a high content of sulphur (and
some Member States do). However, to use fuel taxation for internalising other types of externalities, which are not closely linked to the chemical composition of the fuels, is not economically
efficient.
Carbon storage puts an upper limit to the marginal abatement cost
It is difficult to justify higher short- to medium-term estimates than 65 Euro per tonne CO2 , as
removing CO2 from the flue gas of power plants and storing it in abandoned oil wells and other
suitable geological formations would cost 40-60 US$ per tonne with existing techniques (IEA,
2000c). Costs are expected to fall as the technology matures. Fairly large trials with storing CO2
in abandoned oil fields and natural aquifers have already been undertaken. The technology for
removing CO2 from large-scale fuel combustion is well known, and CO2 is a by-product when
reforming of natural gas produces hydrogen. The potential storage reservoirs are equal to several hundred years of CO 2 emissions.
Power production and industrial process heat account for 30 per cent of the CO2 emissions in
EU15. When the opportunity of storing carbon from this sector has been utilised (which will
probably take a few decades), a second option is to extend storage to residual CO2 from the
reformers used for producing hydrogen from natural gas. This however would only be possible
in a situation where fuel cells for different types of applications have started to become common. The incremental total cost of hydrogen reforming from natural gas, carbon storage and a
shift to fuel cells may turn out be quite high. Expressed as cost per kg CO2 avoided it may well
approach 120 Euro per tonne (based on the fuel cell cost assumptions in chapter 4). An option
that may turn out to be cheaper is to use hydrogen in internal combustion engines.
No need for subsidies for renewable energy sources
In its proposal for a 6th Environment Action Programme the European Commission (2001) foresees the parallel development of a common scheme for CO2 emissions trading, a general system
for supporting renewable energy sources and the use of energy taxation. However, in the presence of an EU-wide scheme for CO2 emissions trading that covers emissions from all sectors of
society, there is hardly a need for general support systems for renewable energy sources. Introducing green certificates, quota-based systems or general subsidies in parallel with emissions
trading might in fact reduce the cost-efficiency of the latter. Overcoming high initial costs for
new technologies and building new distribution networks may require temporary government
funding of R&D efforts but does not justify general subsidies.
30
Green certificates9 would not be needed if the Community allowed CO2 emissions trading to
substitute all existing fuel taxes. Emissions trading would provide potential producers of renewable electricity with a market incentive that is optimal from socio-economic point of view.
Based on the assumptions above an EU-wide scheme for trading would reward fossil-free ele ctricity with 65 Euro per tonne CO2 avoided. This translates into a price difference of 54 Euro per
MWh compared to electricity produced in a coal-fired condensing power station and raises the
issue of free allocation of permits to electricity intensive industries (grandfather rights).
On the other hand, if emissions trading is not allowed to replace all existing energy taxes,
Member States will find it necessary to continue to subsidise biofuels and other types of renewable. Such policies, however, may lead to biofuels being used in an inefficient way. This would,
for instance, be the case if production of liquid biofuels were subsidised to a total level above
65-70 Euro per tonne CO2 avoided, while cheaper opportunities in heat and power production
were not utilised because fossil fuels used in such applications were only burdened by the cost
of buying CO2 permits (i.e. 33 Euro per tonne).
Maritime shipping and aviation
To make full use of the potential for efficiency improvements a common European scheme for
tradable permits would have to replace all existing fuel taxes and cover emissions from industry,
households, and private and public services as well as all land-based modes of transport (including inland waterways). For reasons explained in chapter 11, fuels used in maritime shipping and
aviation are not likely to be included in such a scheme. Instead these modes might have to pay
fuel taxes or charges equal to the price of the emission permits. Another option might be to create separate schemes for emissions trading for international aviation and maritime shipping.
9
Green certificates have been suggested as a means of forcing the electricity utilities to increase the production of electricity from renewable sources. Companies distributing electricity would under this type of
scheme be required by the government to hold green certificates corresponding to a certain percentage of
the total end-use deliveries of electricity. Producers of renewable electricity would sell an amount of
certificates corresponding to the electricity that they feed into the electricity network.
31
6. Transport carbon emissions under “continuous confusion”
The current European transport and environment policy is, where CO2 abatement is concerned,
a patchwork. Fuel excise duties, taxing a tonne of CO2 by everything from 0 to 330 Euro, are
supplemented by a variety of subsidies and tax exemptions for biofuels. In addition a shift to rail
and intermodal transport is encouraged. In the absence of a European multi-sectoral CO2 tax or
a common scheme for CO2 emissions trading, the Community and its Member States are likely
to continue to add little pieces to the existing patchwork.
Harmonised energy taxes and/or common schemes for emissions trading have been discussed
for more than a decade. The Council has turned down several proposals for carbon and energy
taxation. In a case of “continuing confusion”, the Member States would fail to develop common
policies and each country would, more or less, be left on its own. This implies trying to “muddle-through” and would not only result in unnecessarily high abatement costs but also be associated with a clear risk of not achieving the target. Under “continuous confusion” most Member
States would probably continue to raise the excise duties on energy used by households and
road transport and keep on avoiding introduction of taxes on fuels used in industry and by other
modes of transport.
The irresolution of the European Commission
In its Green Paper on emissions trading the European Commission (DG Environment) comes
out strongly in favour of supplementing existing energy taxes with tradable CO2 permits (European Commission, 2000b). The emphasis is on cost-efficiency.
In the European Commission’s recent Green Paper on a European strategy for the security of
energy supply, issued by DG TREN in November 2000 (European Commission, 2000c), the
message is different. This Green Paper provides a picture of what could be expected in terms of
common policies in the absence of emissions trading. It underlines the importance of ensuring a
growing market share for biofuels, “despite their high production costs” (p 48). DG TREN’s
Green Paper calls for extended and harmonised tax breaks for biofuels in order to close the current price gap with competing products.
The Green Paper on energy supply also highlights the importance from a CO2 abatement point
of view of rebalancing the modal split, but it does not say how this would be done. When arguing for a shift back to rail the authors state that “an average lorry generates six times more CO2
per tonne/km than a train” (p 54) without understanding that this figure reflects high CO2 emissions from local distribution where rail is generally not an option. AEA et al (2000), consulted
by DG Environment, cites a Dutch study (IPM&ET, 1996), according to which switching
freight from road to combined road-rail could be expected to reduce CO2 emissions from container transport by 50 per cent (based on current EC weight and length limits for trucks).
DG TREN’s Green Paper does not discuss the cost-effectiveness of its abatement strategy and,
surprisingly, does not even mention that DG Environment launched a Green Paper on greenhouse gas emissions trading less than six months earlier (European Commission, 2000b).
Inefficient sectoral targets
Some Member States may even go further than the Commission, DG TREN, in undermining the
cost-effectiveness of their climate change policies. The Swedish Parliament in 1998 decided in
favour of a government proposal that CO2 emissions from the transport sector in 2010 should
not exceed those of 1990 (Government bill 1997/98:56). By enforcing this target, the government and parliament left cost-efficiency out of account. The different state transport agencies
and the Swedish Environmental Protection Agency concluded that meeting the sectoral target
would in addition to the current energy tax require a CO2 tax of 1:50 SEK/kg (160 Euro/tonne),
32
which is far above the marginal cost of achieving the same target in most other sectors of society (SIKA, 1999). This would in total represent a marginal abatement cost of 317 Euro per
tonne CO2 for gasoline-fuelled vehicles.10 This is close to five times the anticipated marginal
cost of achieving minus 8 per cent in EU15 in a case where emissions trading is allowed to replace current energy taxation. If the current energy tax were disregarded, the marginal abatement cost would still be about 2.5 times higher compared with a case of EU-wide emissions
trading. In its Green Paper on emissions trading, the European Commission (2000b) estimates
that a policy of equal percentage reduction targets for different economic sectors would be
nearly three times more expensive than a policy that encourages the biggest savings in sectors
where emissions can be reduced at relatively low cost.
Sweden is not the only Member State that has adopted far-reaching and inefficient targets for
the transport sector. Denmark, Finland and the Netherlands have also decided to freeze transport
emissions at their 1990 levels.
Lack of efficient pricing of diesel fuel and LPG
A problem with the Community’s current approach to road fuel taxation is the prevailing difference between the rates applied on gasoline and those enforced on diesel and LPG. 11 The lower
rates for diesel fuel neutralise much of the expected effect of the continuing shift to diesel cars
which forms an important part of the automotive industry’s strategy for meeting its CO2 commitment. A French survey (Hivert, 1995, quoted in Schipper et al, 2000) suggests that in countries with low diesel fuel prices, diesel vehicles are driven, on average, up to twice as far per
year as gasoline cars. The same effect occurs with LPG vehicles in countries such as France and
the Netherlands that offer low-priced propane. However, to a large extent this difference can
probably be explained by the fact that naturally high-mileage drivers tend to choose diesel and
LPG cars.
By comparing CO2 emissions from diesel cars with those of identical gasoline fuelled cars (with
the same power rating) Kågeson (2000) showed that the average difference for 10 volume models (model year 1998) was only 12 per cent.12 As the market shifts to more efficient direct injected “common rail” diesels the difference may approach 20 per cent. Real CO2 emissions,
however, will not diminish to the same extent unless the taxation of diesel fuel is changed in
most Member States. Currently a kg CO2 emitted from gasoline is taxed 65 per cent above that
of a kg from diesel. Based on a long-term fuel price elasticity for annual mileage of –0.3 to –
0.4, a privately owned diesel car is presumably on average driven approximately 8 per cent
more distance per year compared with a case where the same household chose an identical gasoline car. This means that today the average diesel car probably emits only a few per cent less
carbon than the average gasoline car (of the same size and with the same performance).
Fuels used in rail transport, aviation and shipping
In a case of muddling through, fuels used by trains, ships and aircraft would remain untaxed.
This implies a large loss of efficiency compared to a case where these modes would have to buy
emission permits that match their consumption of fossil fuels.
Conclusion
From the above and the analysis in chapter 6 it is evident that a case of “continuous confusion”
would lead to a comparatively high shadow price for achieving the Kyoto target. A total price in
the range of 125-157 Euro per tonne is perceivable (based on table 6:3 and current average taxa10
It should, however, still be remembered that the energy tax is used at least partly for internalising costs
other than CO2 .
11
The UK is an exception by enforcing the same rate on standard gasoline and low sulphur diesel. Standard diesel is taxed higher than low sulphur blends.
12
The difference in fuel consump tion, though, is bigger as gasoline contains about 13 per cent less carbon
per litre.
33
tion). If the large variation in current taxation is taken into account, a marginal incentive of
around 300 Euro per tonne would be needed in the transport sector. This implies raising the tax
on gasoline by 40 per cent in the average Member State. If the taxation is not raised accordingly
the risk of non-compliance is evident.
34
7. The effect on road transport of CO2 emissions trading
The analysis of this and the following two chapters is based on the assumption that the equilibrium price of CO2 permits required for the Kyoto commitment of the European Union will be
around 65 Euro per tonne. This level is based on the supposition that tradable emission permits
replace all current fuel taxes.
A shift from fuel taxation to tradable CO2 emission permits raises the issue of how to internalise
other road transport externalities. The costs of air pollution (other than CO2 ), transport accidents
and infrastructure use are only loosely related to fuel consumption. To reflect the true cost,
charges should account for both specific performance and annual mileage. This can be done by
a kilometre charge, which is differentiated for vehicle weight, axle load and specific emissions
of air pollutants and noise (Kågeson and Dings, 1999). In the longer term differentiation for
geographical differences in the sensitivity to air pollution would also be possible.
Switzerland has already introduced km charging for heavy goods vehicles (>12 t) and Germany
and the Netherlands have declared their intention to shift from the “Euro-vignette” to a km
charge. In principle it is technically (and probably also economically) feasible to extend km
charging to all road vehicles.
The European transport ministers recently passed a resolution recommending a gradual shift to
territorially based taxes and charges (e.g. tolls and km charges) as this contributes to “ensuring
non-discrimination, improving efficiency, avoiding problems of competitiveness between national haulage industries and promoting sustainability”(ECMT, 2000a and 2000b). The European transport ministers have agreed to follow the principle of internalising transport costs “in a
gradual step-wise manner in order to avoid economic shocks” and to co-ordinate the internalisation between modes “to avoid shifts in modal split that would prove uneconomic in the long
term” (ECMT, 1998).
Effects of emissions trading and km charging
In the following 65 Euro per tonne of CO2 is used for reflecting the cost to oil companies of
purchasing emission permits for the sales of road fuels. The social marginal costs of the infrastructure, traffic accidents and air pollution are assumed to be internalised by km charging. This
means that the fuel is no longer subject to any excise duty.
Table 8:1 shows the outcome for Sweden compared with the current level of fuel taxation. The
different regulated air pollutants have been valued according to the offic ial values for mixed
driving used by the Swedish state agencies (urban driving is assumed to take place in a conglomeration with 500,000 inhabitants).13 The cars in table 8:1 comply with the EC emission
limit values that came into force in the year 2000. Older vehicles would have higher costs.
The social costs of traffic accidents are assumed to be internalised by vehicle insurance where
medical treatment and material damage are concerned. The associated effect on insurance premiums is not included in the table. The external risk of traffic accidents, however, is included in
the table. It has been calculated according to the “net-effect method” (Kågeson, 1998), which
means that the net-effect in terms of fatalities and severe injuries in collisions between different
types of vehicles has been attributed to the heavier of the two vehicles (regardless of who was at
fault). The risk of single vehicle accidents and collisions between vehicles of the same type are
13
The Swedish values do not differ significantly from values provided by for instance Greene (1997),
Maddison et al (1996), Mayeres et al (1996), Small and Kazimi (1993), Bleijenberg et al (1998) and
McCubbin and Delucchi (1999). However, the Swedish valuation of particles in the urban environment is
high by comparison, which affects the social marginal cost of diesel vehicles.
35
considered internal, in the latter case because the two vehicles expose each other to a (more or
less) identical risk. The statistical risks that need to be internalised by km charging have been
calculated according to actual Swedish accident data (1995) and the official Swedish valuation
of fatalities and severe injuries.
Table 8:1. The cost per vehicle km in Sweden of internalising the social marginal cost of
transport by car in a case where the marginal abatement cost to reach the Community’s
CO2 commitment is 65 Euro/tonne.
Cost element
Gasoline car (8.0 l/100 km) Diesel car (6.0 l/100 km)
1
Carbon dioxide
0.012
0.010
Air pollution2
0.002
0.023
Traffic accidents3
0.009
0.009
Noise4
0.004
0.004
5
Road maintenance
0.012
0.012
Total cost per vehicle km
0.039
0.058
Current fuel tax per vehicle km6
0.040
0.020
Requirement compared with current tax
-0.001
+0.038
1.
2.
3.
4.
5.
6.
Gasoline 2.28 kg CO2 /litre fuel, diesel 2.68 kg CO2 /litre.
See text above, the cars are assumed to comply with the EC 2000 emission limits.
Based on Swedish 1995 road accident data, see text above.
Based on Swedish mixed driving data (SIKA, 2000).
Based on Swedish data and including fixed maintenance costs. The short-term damage cost is only in
the order of 0.001 to 0.002 Euro/vkm. New investments are assumed to be covered by annual vehicle
tax and revenue from congestion pricing.
Environmental Class 1 diesel and gasoline.
It should be noted that a diesel car complying with the 2005 emission limit values would generate air pollution equal to approximately half of the diesel car in table 8:1. The difference compared with today’s average fuel taxation would then shrink to 0.027 Euro per vehicle km. It
should also be noted that some Member States enforce a higher vehicle tax on diesel cars than
on gasoline cars. In a case of km charging it would no longer be justified to maintain such a
difference. For a diesel car of 1,501-1,600 kg registered in Sweden with an annual mileage of
20,000 km this would be equal to a reduction of 0.026 Euro/vkm.
The conclusion is that, for most Swedish motorists, shifting to km tax and tradable CO2 emission quotas would only bring small changes in overall taxation. The same is true for the United
Kingdom where today’s equally high taxes on gasoline and diesel would match most of the
social marginal costs of rural driving.
The difference, however, could be significant in countries where current taxes fall below the
European average and where traffic accident and road maintenance costs are higher than in
Sweden. Table 8:2 is based on Dutch data. The higher external accident cost is a result of a
somewhat higher accident rate and using “a gross-effect method” where fatalities in multi-party
accidents are divided among the various types of vehicle according to the number of people
killed in the opposite vehicle.14
14
For instance for collisions between cars and delivery vans the fatalities among car occupants have been
allocated to delivery vans and those among delivery van occupants to cars.
36
Table 8:2. The cost per vehicle km in the Netherlands of internalising the social marginal
cost of transport by car.
Cost element
Gasoline car
Carbon dioxide and air pollution
Traffic accidents
Noise
Road maintenance
Total cost per vehicle km
Current fuel tax per vehicle km
Requirement compared with current tax
Diesel car
0.013
0.018
0.005
0.017
0.053
0.046
+0.007
0.020
0.018
0.005
0.017
0.060
0.018
+0.042
Source: Dings et al (1999)
In table 8:3 data from ECMT (1998b) have been used for comparing the outcome for the average European country. The ECMT study differs from the assumptions on which tables 8:1 and
8:2 are based, in the sense that it assumes that no part of the traffic accident costs are internal
(not even single accidents). Another important difference is that the average European risk of
severe traffic accidents is about twice as high as that of Sweden. A third difference is that the
costs of policing and traffic management are included in the short-term marginal infrastructure
cost. For tail pipe emissions table 8:3 uses the same values as table 8:1 (the ECMT study, however, is based on average fleet emissions).
Table 8:3. The cost per vehicle km of internalising the social marginal cost of transport by
car in a case where the marginal abatement cost to reach the Community’s CO2 commitment is 65 Euro/tonne. Based on average European costs according to ECMT (1998b).
Cost element
Gasoline car (8.0 l/100 km) Diesel car 6.0 l/100 km
Carbon dioxide 1
0.012
0.010
2
Air pollution
0.002
0.023
Traffic accidents3
0.060
0.060
Noise4
0.005
0.005
Road operation and maintenance5
0.022
0.022
Total cost per vehicle km
0.101
0.120
Average EU fuel tax/vehicle km6
0.039
0.021
Requirement compared with current tax
+0.062
+0.099
1.
2.
3.
4.
5.
7.
Based on 65 Euro per tonne CO2
Same as in table 8:1.
Based on ECMT (1998b)
Based on ECMT (1998b)
Short-term marginal cost according to ECMT (1998b). Investment in new capacity assumed to be
financed by vehicle tax or revenues from congestion pricing.
Not weighted for population.
Applying the method used for calculating transport accident costs in table 8:1 to the average
European risk (assumed to be twice that of Sweden’s) would give uncovered costs considerably
below those at the bottom-line of table 8:3. The incremental cost would be 0.020 Euro per km
for gasoline cars and 0.057 Euro for diesel cars. Diesel cars complying with the EC 2005 emission limit values would face an increase in overall charges of 0.045 Euro/km.
37
This means in summary that the total charge/tax per kilometre for new gasoline cars would increase by 0-15 per cent in low accident countries and by as much as 150 per cent in Member
States with high accident rates. The total charge for new diesel cars would double in countries
with few accidents. However, in countries, where a diesel car is currently subject to a much
higher annual vehicle tax than the equivalent gasoline car (e.g. Sweden), the difference in additional charges would be very small. Diesel cars in countries with a high incidence of traffic accidents would be charged up to five times more than today (unless they currently face a higher
vehicle tax than their gasoline-fuelled equivalent models).
Heavy duty vehicles
It is much more complicated to show how the reform would affect heavy duty vehicles. The
outcome differs depending on total weight, axle weight and on what roads the vehicles are used.
However, in general heavy vehicles are taxed far below the social marginal costs they cause.
For instance, the traffic accident cost of heavy lorries (>20 t) in Sweden when calculated according to the net-effect method is 0.044 Euro per vehicle km or approximately five times that
of cars (Kågeson, 1998). The current average excise duty on diesel fuel in Europe is equal to
around 125 Euro per tonne CO2 . This is almost twice the expected equilibrium price for CO2
emission permits for complying with Kyoto. Most of the social marginal cost of freight transport by road would thus be internalised by km charging rather than by duties connected to the
purchase of diesel fuel.
Congestion costs not included
It should not be forgotten that congestion in many cases, particularly in large cities, accounts for
more than half of the social marginal cost of road transport (European Commission, 1998f, and
Dings et al, 1999). Internalising congestion costs by local or regional road pricing schemes will
decrease demand for road transport and simultaneously reduce CO2 emissions. In addition freeflowing traffic would require less fuel per vehicle km than cars moving in queues. A study
based on the TRENEN II model estimates that at the Community level, the policy of internalising all external costs of transport would reduce CO2 emissions on average by 11.5 per cent
(European Commission, 1998a, citing EUNET, 1998).
Effect on mileage and fuel demand
From the calculations presented above it appears reasonable to expect that CO2 emissions trading in combination with km charging would make the variable cost of driving a gasoline car
stay approximately at today’s level in countries with moderate accident and road maintenance
costs. The variable cost of using a diesel car (including wear) would increase somewhat in low
accident countries and rise by as much as 30-40 percent in Member States where diesel taxes are
currently low and the rate of traffic accidents is high.
The cost of freight transport by truck would rise considerably. Kågeson (1998) found that internalisation of the social marginal costs of Swedish long-distance trucks would increase freight
prices by 10-13 per cent. This means that vehicle kilometres by road transport would be reduced
(short-term) or would increase at a more moderate speed than under “business-as-usual” (medium- and long-term). An overall price increase of 12 per cent would, for instance, reduce demand for freight transport by 7.2 per cent (based on a long-term price elasticity of demand of 0.6). As an indirect consequence road freight demand for fuel would shrink by the same percentage (all else being equal).
A case where Member States try to reach the Kyoto target without emissions trading would as
shown in the previous chapter, result in a need for higher road fuel taxes, which would depress
demand for road fuels and road transport compared with trend. According to the Swedish
Commission on flexible mechanisms (2000), Sweden would without European emissions trading have to raise its gasoline tax by 29 per cent in order to achieve its Kyoto commitment
(+4%). Member States with relatively low transport fuel taxes might have to raise their taxes
even more. In the Swedish case the required tax is equivalent to an increase of 15 per cent in the
38
price at the pump and could be expected to depress long-term demand approximately 10 per
cent below trend.
The main difference between emissions trading and km charging and a case where CO2 abatement is based on traditional taxes is that total mileage by gasoline fuelled cars would be higher
in the first case as a result of lower fuel costs. Total mileage would, on the other hand, be higher
for all other categories of road vehicle. This, however, is predominantly an effect of using km
charging for internalising other social marginal costs than those associated with climate change.
The effect would be particularly pronounced in Member States with high accident rates.
Internalising the social marginal costs (other than CO2 ) by km charging would provide road
users with a strong incentive to reduce air pollution, road maintenance costs and traffic accident
risk below what would otherwise have been the case. This means charge levels are likely to fall
after a few years.
Impact on specific fuel consumption
The impact on specific fuel consumption would differ significantly compared with a situation
where road costs other than those associated with climate change were to be internalised by fuel
tax. Km charging (for social costs resulting from air pollution, traffic accidents and infrastructure use) would not provide an incentive to improve fuel efficiency. As costs resulting from
carbon emissions only correspond to around one third of the average current tax on gasoline and
around 48 per cent of the diesel tax (see table 8:1), the reform would significantly lessen the fuel
efficiency incentive.
As shown in table 3:2, the gasoline price elasticity for specific fuel consumption accounts for
one third to half of the total fuel price elasticity. Internalising social costs according to the principles expressed in the Commission’s White Paper would thus significantly reduce the incentive
to become fuel-efficient. The reform might reduce the gasoline price at the pump by as much as
one-third (VAT included). The total variable cost of driving, however, would (as noted above)
not diminish. The lower fuel price means motorists would be less inclined to choose fuel efficient engines and vehicles. The effect on the average specific fuel consumption of new cars
could be as high as +10 per cent. This would not be worrying in a case where a sustainable
situation were reached already through the EU’s first commitment but might be a problem in a
case where an additional improvement is required for reaching a longer term target.
Politicians may be reluctant to desert fuel taxation for fear of diminishing the fuel efficiency
incentive or losing tax revenue. The latter, however, is hardly a problem (at least not a big one)
in a case where most users of fossil fuels are obliged to buy their CO2 permits directly or indirectly from the government. The first concern is not economically sound. To distinguish between CO2 costs and other social costs is correct from an economic point of view. It gives consumers a solid ground for weighing fuel efficiency against, for instance, passive vehicle safety.
Continuing to use fuel taxes as a rough proxy for costs not closely connected to fuel consumption would have two severe drawbacks. It provides a poor incentive for motorists to reduce
these costs and it complicates the taxation of diesel used by vehicles subject to km charging (i.e.
heavy trucks). To solve the latter problem governments would probably have to use several
differently taxed (and coloured) diesel fuels for different types of consumption, which would
bring increasing difficulties with preventing fraud.
Long-term effects
It is difficult to know what will be required of the EU in the 2nd and 3rd commitment periods of
the Climate Convention. The marginal abatement cost could be expected to rise when the
cheapest measures have been utilised. The transport sector might have to make a more signif icant contribution in the longer term. This may in turn require a major technology push (e.g.
marketable fuel cell vehicles). In this context it is reasonable to assume that a comparatively low
fuel price during the next decade might give the necessary process a disturbingly slow start. The
39
technological development is partly driven by joint research efforts and commitments for prototype vehicles, which are rather independent of demand. Mass production, on the other hand, is
conditional on customers wanting to buy the new technology. Table 4:1 showed a large difference between the technical reduction potential and the economic potential at today’s fuel prices.
Reduced fuel prices would, of course, increase the gap.
Fuel taxes or tradable CO2 emission permits provide the broadest incentive to improve fuel efficiency as they affect choices of vehicle, driving behaviour and annual mileage. In theory no
additional policy instrument is needed to guarantee that the transport sector makes a sufficient
contribution. If politicians want to ensure that new and more fuel efficient technologies are developed in time for the 2nd and 3rd commitment periods, they could choose to raise the fuel tax to
a level which is sufficient for making the process begin. The negative side-effect of such a decision, though, is that it would raise the current cost of motoring to a level which is not motivated from a short-term point of view.
The voluntary agreement between the motor industry and the European Commission (confirmed
by the Council) is an indication that politicians are reluctant to raise fuel taxes further and are
therefore looking for supplementary policy measures. The choice becomes even more crucial in
a situation where emissions trading is allowed to replace all existing fuel taxes. In this case reintroducing fuel taxes as a supplement to the CO2 emission permits would hardly make sense.
It is evident from chapter 4 that additional incentives might be needed to stem the current trend
towards heavier and more powerful cars and to make the market fully consider fuel-efficie ncy.
The European Commission is aware that the commitments by the motor industry will at best
achieve the 140 g target by 2008-09. To approach the Council’s 120 g objective would require
measures that promote downsizing and affect the structure of the car market (European Commission, 1998c).
There are several possible economic incentives to consider and in addition some regulatory
measures:
•
•
•
•
Differentiated sales tax designed as a “feebate”15
Differentiated annual vehicle tax
Tradable CO2 emission permits for new registrations
Regulating average CO2 emissions from corporate car sales (similarly to the US Cafe act)
At a workshop in early 1998 (prior to the agreement with the automotive industry) the Commission presented a discussion paper containing different options for regulating vehicle fuel economy (European Commission, 1998d). The Commission’s assessment presented fee-bates, economic incentives and tradable credits having the potential to significantly improve the cost effectiveness of regulation compared to binding limit values. A few weeks later the Commission
(DG 2) presented a second discussion paper showing that the potential economic savings of
tradable credits could be in the order of 300-800 million Euro annually (European Commission,
1998e).
If the Community introduces policy instruments aimed at reducing the average specific fuel
consumption of new vehicles, it is essential to set the target so that the resulting abatement cost
does not exceed the expected long-term marginal cost of meeting future climate change targets.
The marginal abatement cost cannot grow unbounded. The cost of CO2 capture and storage puts
an upper limit on the marginal cost of achieving long-term commitments. This cost, however,
might turn out to be considerable once the relatively cheap opportunities in the utility sector
have been utilised.
15
A fee on high-consuming models and a rebate on low-consuming ones (“feebate” in American jargon).
If well done, this means the system would not put any tax burden on the average new car.
40
Biomass would not be used for road fuels
In a case of European CO 2 emissions trading, biomass appears to be less likely to be used for
the production of road fuels. It is also unlike ly that ethanol produced from biomass will be
available at a cost that would be competitive with the capture and storage of fossil CO2 .
In an analysis of the future oil market, Mitchell (1999) anticipates that close to 90 per cent of
crude oil produced in 2020 will be used for road fuels. Only if oil supply continues to expand
can other markets for oil be maintained so that transport’s share of the oil supply could remain
close to 50 per cent in 2020. Producing a higher share of gasoline and diesel would require more
process energy to be consumed in the refinery and cracking process. Mitchell estimates that this
might result in an extra CO2 penalty corresponding to as much as 5 per cent of emissions per
unit of transport fuel. This, however, is little compared with the 30 per cent loss of primary energy in the conversion of solid biomass into liquid road fuels.
CO2 emissions trading would create a strong incentive to use bioenergy for heating. 65 Euro per
tonne of CO2 is for heating oil equal to an 18 Euro per MWh price increase. The cost of wood
chips is currently around 12 Euro and the additional cost of transporting the fuel between Member States (and even across oceans) is comparatively small. It is less certain that tradable CO2
emission permits would give biomass a definitive competitive advantage over natural gas in
Combined Heat and Power Production. The reason for this is that natural gas allows for a much
higher electricity conversion rate than biomass (alfa-value 1.20 compared to around 0.40 for
wood chips).
An additional opportunity for biomass in power production would be to market pulverised wood
for co-firing (up to 20% wood) with coal in condensing power plants (Hein et al, 1999). The
current price difference is approximately 8 Euro per MWh, according to the Swedish Biomass
Association (Kent Nyström, personal communication). 65 Euro per tonne of CO2 would add 21
Euro/MWh to the cost of buying hard coal. In 1997, 149 Mtoe coal was used for power production in EU15. 20 per cent of this is equa l to 30 Mtoe of biomass or 23 per cent of the expected
biomass production potential in 2010. The conclusion is that the European biomass potential
would under CO2 emissions trading be consumed primarily by heat and power production.
41
8. The effect on rail transport of CO2 emissions trading
Railway companies would under emissions trading have to purchase permits in relation to their
consumption of diesel oil. The price of electricity would increase when power companies had to
obtain emission permits for their use of coal, oil and natural gas. The marginal cost of producing
electricity in coal and gas-fired condensing power plants would increase by approximately 0.06
and 0.02 Euro per kWhe respectively. It is, however, difficult to know whether the electric ity
utilities would be able to pass on all of the incremental cost to their consumers and whether all
categories of consumption would be equally affected. Currently railway companies in the Nordic countries pay around 0.02 Euro per kWh for electricity from the grid. The cost of purchasing
emission permits could thus double or quadruple the current price.
Making rail transport pay the social marginal cost of its electricity and diesel fuel consumption
would provide a strong incentive to improve the energy efficiency of trains. It would probably
trigger long-term efficiency improvements in the order of 40 per cent (i.e. the highest estimates
mentioned in table 4:3). This probably means a reduction around 25 per cent below trend. If
politicians feel that full internalisation of rail carbon emissions would give competing modes an
upper hand, they could consider giving railway companies part of their emission permits for free
(“grandfather rights”). If limited to, say, 80 per cent of the current energy demand of each operator, this would not weaken their incentive to make use of all available cost-effective measures. The important thing is to provide the same marginal incentive to all users of fossil fuels.
Electrification of additional railway lines
The introduction of tradable CO2 emission permits in the rail sector may also affect the competitiveness of electrification. The cost of purchasing electricity from the grid will, as shown above,
more than double. That means retrofitting diesel locomotives with particle filters and Exhaust
Gas Recirculation (EGR) may turn out to be a less expensive way of reducing particle and NOx
emissions than turning to electricity. An alternative option in the medium and long-term would
be to shift to electric traction based on onboard fuel-cells.
In the “European Union Energy Outlook to 2020”, the (then) Directorate General for Energy
anticipates that all remaining diesel trains will for environmental reasons be replaced by electric
trains powered from the grid by 2020 (European Commission, 1999a). However, electrifying
additional railway lines may turn out to be unnecessarily expensive compared to replacing diesel and diesel-electric engines by fuel cell engines.
The Swedish National Rail Administration found that electrifying an existing railway line in the
southern part of the country would cost 3.9 SEK million per km (0.43 MEuro/km). In a costbenefit analysis of the project the administration disregarded the fact that emissions of nitrogen
oxides and particulate matter from diesel engines can be cut by 50 and 90 per cent respectively
at comparatively low cost by retrofitting the engine with Exhaust Gas Recirculation (EGR) and
a particle filter. Despite comparing electrification with the worst possible diesel traction and
assuming that the marginal electricity would be produced by zero emission power plants, the
National Rail Administration had to suggest the investment be written off over 60 years in order
to make the project socio-economically feasible (Kågeson, 2001). The Swedish Parliament recently passed a government bill allowing the National Rail Administration to carry out the project. However, it appears reasonable to expect that fuel cells will become an economically viable option long before the end of the 60 years depreciation period. In fact the Swedish State
Railways are participating in a UIC fuel cell pilot project with the ambition to introduce the first
fuel cell locomotive by 2008 (Marie Hagberg, SJ, personal communication).
Table 9:1 shows fuel cells fuelle d with hydrogen from natural gas to be the alternative for train
propulsion that has the lowest specific emissions of CO2 in a life-cycle perspective. The mar42
ginal production of base load electricity is assumed to take place in coal-fired condensing power
stations. In the longer term this production may be taken over by power plants using natural gas.
In such a case the specific CO2 emissions from electrification would be about the same as for
the fuel cell alternative.
Table 9:1. The primary energy requirement and carbon dioxide emissions from delivering
1 kWh to the electric engine of trains with differing types of traction.
Delivered to the electric engine
Losses in diesel engine or fuel cell
Losses in production and distribution of grid electricity #
Losses in reforming natural gas to
hydrogen
Total primary energy requirement
Type of primary energy
CO2 per kWh of primary energy
CO2 per kWh delivered to the
electric engine
Pre-combustion processes #
Total life-cycle CO2 emission per
kWh
1.
2.
Type of traction
Diesel electric Electric, supplied Electric, supplied from
from the grid
onboard fuel cell stack
1 kWh
1 kWh
1 kWh
1.50 kWh
Not applicable
1 kWh
Not applic a1.65 kWh
Not applic able
ble
Not applic aNot applicable
0.35 kWh
ble
2.50 kWh
2.65 kWh
2.35 kWh
Crude oil
Hard coal
Natural gas
0.274 kg
0.327 kg
0.203 kg
0.685 kg
0.867 kg
0.477 kg
0.032 kg2
0.717 kg
0.042 kg1
0.909 kg
0.014 kg2
0.491 kg
Brännström-Norberg (1998)
Blinge (1998)
# CO2 emissions from distribution and production prior to diesel engine, power plant or hydrogen reformer
Assumed efficiencies:
1. Diesel engine 40%
2. Fuel cell 50% (average)
3. Hydrogen reformer (from natural gas) 85%
4. Coal fired condensing power station: 40%
Source: Own calculation
The conclusion is that existing lines should only be electrified if socio-economic cost-benefit
analysis shows that the investment can be written off before fuel cells can be expected to become a viable option for powering trains. This suggests a depreciation period of no more than
20 to 25 years.
43
10. International maritime shipping and international aviation
Fuels used in international aviation and maritime shipping are only to a small extent burnt in
respectively the air space and territorial waters of the country where the fuel was purchased. The
Parties to the UNFCCC therefore decided to exclude emissions from such fuels from the national emission inventories. Instead, the International Maritime Organisation, IMO, and the
International Civil Aviation Organization, ICAO, were instructed to analyse ways to reduce
carbon emissions from these fuels.
It would indeed be rather complicated to include marine bunker oils and fuels used in international aviation in a scheme for European CO2 emissions trading. An inclusion would require the
Kyoto Protocol to be amended accordingly and would also open a new discussion in the European Union over its internal burden sharing agreement. The Netherlands, for example, accounts
for one third of all marine bunker oil sold in Europe and would probably demand the agreement
to be renegotiated. Allocating emissions to Parties according to the nationality of the transporting company, the country where the vessel is registered or the country of the operator would be
even more complicated. It is often difficult to determine the country of ownership of a vessel or
who is the real owner or responsible for its operation (IMO, 2000).
To avoid such complications it appears wise to restrict CO2 emissions from shipping and aviation by other means than national caps. In both cases the choice is primarily between CO2 taxation and an environmental charge related to specific fuel consumption and distance. Where aviation is concerned one could also contemplate an international cap in combination with emissions
trading. Use of efficiency standards is probably not a realistic option as it would rule out all
types of high speed craft (unless numerous exemptions were granted).
Shipping
A fuel tax or environmental charge would reduce bunker demand and associated CO2 emissions
through (Michaelis, 1997a):
•
•
•
•
•
energy efficiency improvements in ship engines and ship design,
changes in operation practices including load factors, routeing and sailing speeds,
switching to a different type of vessel,
switching to alternative fuels,
reduction in demand for maritime traffic.
The effect of a tax or charge that corresponds to 65 Euro per tonne of CO2 would be significant.
It would add close to 190 US$ to the cost of purchasing one tonne of residual fuel oil. The market price of untaxed residual oil is currently around 109 US$ per tonne (Charlotte Östring,
Nynäs Petroleum, personal communication). Low-sulphur requirements and new refinery
strategies will also affect the future price of residual fuel oils. For fuels used in Europe it makes
sense to enforce the same marginal CO2 incentive on land and sea. For bunker fuel used in
transatlantic and other overseas operations, comparisons might have to be made with marginal
CO2 abatement costs in other parts of the world. This may argue in favour of a lower rate.
A charge or tax corresponding to 65 Euro per tonne of CO2 would affect operational speeds in
European short sea shipping and make it uneconomic to order new high speed vessels. This
would result in long-term CO2 emissions at least 40 per cent below trend (assuming a long-term
fuel elasticity of -0.25).
44
The international nature of shipping makes it easy to avoid costs imposed by the policies of
individual countries. A tax on the carbon content of marine bunker oils or an equivalent environmental charge would therefore have to be introduced either on an international level or by an
entire region. The European Union and its EFTA partners and candidate countries might together form a geographical bloc that is large enough to make it difficult for ship owners to avoid
the charge. It would in most cases be costly to divert ships to ports outside the region just for
bunkering. Ships in intra-European trade would hardly change their routes for this purpose. An
agreement with Russia might be needed for preventing untaxed bunkering in the ports of St
Petersburg and Kaliningrad. Similar agreements might also be required with Albania and Croatia. Intercontinental vessels entering ports just outside Europe for reloading to feeder ships
could potentially become a problem.
Dealers who are independent of the major oil companies supply a large percentage of the global
bunker market (IMO, 2000). An increasing proportion of bunker fuel is loaded offshore from
supply barges so that ships can avoid calling at ports where they would have to pay port fees
and might be subject to loading limits. Michaelis (1997a) therefore believes that charge colle ction at the point of sale would be administratively complex and says charges could be avoided
by bunkering on international waters. The charge, however, could be raised from oil companies
at the point of sale to the bunker dealer. Bunkering at sea could be prevented if the International
Maritime Organisation, which is a UN body, allows the participating countries to make such
operations illegal in their economic zones (i.e. 200 nautical miles from land). The voting rules
of IMO, though, differ greatly from those prescribed in the UN Framework Convention on Climate Change and the Kyoto Protocol.
A CO2 charge related to specific CO2 emissions and distance on “European waters” could be
collected at port based on the vessels “environmental rating” and distance controlled by the
mandatory transponder (that allows the authorities to register the route of the ship). The charge
would be impossible to avoid for short sea shipping. Ships in over seas operations could potentially seek new “hubs” in countries bordering the area covered by the charge. Negotiations to
introduce an environmental charge would need to be carried out with the co-operation of the
IMO.
A main difference between the fuel tax and the environmental charge is that the latter would
provide ship operators with no additional incentive to save energy by changing routes or speeds.
As operational change accounts for a high proportion of the potential for energy efficiency improvements in shipping this would really be a drawback.
Aviation
Kerosene used in civil aviation is exempt from fuel tax in accordance with the EU Mineral Oil
Directive. In addition to this favourable treatment, VAT is not applied to intra-EU airfares.
These exemptions have artificially increased demand for air transport and prevented the industry
from making use of some of the potential for fuel efficiency improvement.
Several policy measures have been discussed for providing an incentive to airlines to become
more fuel efficient. The three main options are a tax on kerosene bunkered at European airports,
a CO2 emissions charge connected to the en-route charge collected by EUROCONTROL16 and a
special scheme for tradable emission permits. The idea of a voluntary agreement between the
EU and the aviation industry was abandoned when the AEA turned down a proposal from the
European Commission suggesting that the target should be based on a 4 to 5 per cent annual
improvement. The AEA said that the projected 1.1 per cent annual fall between 2000 and 2012
was itself “ambitious” and involved early aircraft replacements (ENDS Daily, 1.12.1999, and
7.1.2000).
16
The European Organisation for Safety of Air Navigation (EUROCONTROL) is the organisation that
co-ordinates the air traffic management in Europe and collects en-route charges.
45
A study by the OECD found that the rate of energy intensity reduction in civil aviation has been
very responsive to fuel price in the past and suggested that fuel levies could result in at least a
30 per cent reduction in aviation energy used in 2020 relative to a business-as-usual scenario
(Michaelis, 1997b). This level was confirmed one year later by a Dutch study that found that a
gradual increase in fuel price of 0.20 US$ per litre, or an equivalent emissions charge, would
reduce emissions by 30 per cent compared with current growth trends to 2025 (Bleijenberg and
Wit, 1998). The tax (or charge) would reduce total consumption of aviation fuel by a combination of optimised aircraft design, aircraft size, load factor and volume growth.
The current price of aircraft kerosene is around 0.265 US$ per litre (Anders Svidén, SAS, personal communication, March 2001), and a tax or charge equal to 65 Euro per tonne CO2 would
add 0.14 US$ per litre.
Fuel tax
An analysis produced for the European Commission shows that taxation of aircraft fuel (ε
0.245/l) would have very limited effect on fuel consumption and cause problems in terms of
increased fuel tankering and distortions to competition between hubs inside and outside the EU
(Resource Analysis et al, 1999). The conclusions, however, are based on the expected impact by
2005. The development of new aircraft designs and the renewal of the fleet take much longer.
The negative side-effects would be less serious if the tax were to cover fuel bought in all EU,
EFTA and accession countries. The study may also have exaggerated the likelihood and extent
of fuel tankering.
A major legal obstacle to the introduction of a European kerosene tax is the International Civil
Aviation Organisation’s (ICAO) policy on fuel taxation and the so-called bilateral service
agreements between EU Member States and other countries.
The Chicago Convention on International Civil Aviation (with which the ICAO was founded in
1944) prohibits any levy on kerosene in transit (Art. 24) but does not rule out taxation of fuel
bunkered in the territory of a contracting state. In 1996, however, the ICAO Council adopted a
Resolution on Environmental Charges and Taxes which, recognising the importance of the Polluter Pays Principle, recommended that environmental levies should be in the form of charges
rather than taxes. Charges should correlate with the environmental costs and should not be imposed for fiscal objectives. The revenues should be used to defray these costs, and the charges
should not discriminate against air transport vis-à-vis other modes of transport (Loibl and Reiterer, 1998).
Bilateral Air Service Agreements (ASAs) exist both between EU Member States and with other
countries. They often include exemptions that prevent taxation of fuel taken on board an aircraft
in the territory of the bilateral partner. A few ASAs allow taxation on a reciprocal basis. As
decisions on taxes in the EU must be unanimous, an EC Directive on aviation fuel taxation
would in practice overtake any ASAs between Member States (and indirectly those with accession countries). Another possibility could be to negotiate such an agreement in the European
Civil Aviation Conference, ECAC (established in 1954), to which the 15 Member States of the
EU and 21 other European countries belong. However, pending the renegotia tions of the ASAs
between the European states and other countries, fuel bunkered by aircraft from these other
countries would have to be exempt. This probably means that the European countries would
have to make an equal exemption for European carriers bound for destinations outside Europe.
CO2 en-route charge
The CO2 en-route charge has the advantage over the fuel tax that it does not provide any incentive for fuel tankering. It could be levied in the air space of the current EU Member States, the
EFTA countries and the accession states and would then apply to all airline companies operating in that area. However, also in this case most bilateral service agreements with countries
46
outside Europe would have to be renegotiated. One potential problem is that en-route charges
can under current rules only be levied in national territory, which includes the 12-mile off-shore
zone but excludes the air space above large marine waters such as the Baltic, the North Sea and
the Mediterranean.
One option would be to make the CO2 charge an additional levy, another to recycle the revenue
back to the industry. The latter could in theory be done either by differentiating the current enroute charge for the specific fuel consumption per seat-km of different carriers or by returning
the revenues to the industry in proportion to the their production of passenger and tonne kilometres. However, recycling the revenues would be contrary to the theory of internalising the social
costs of transport and distort competition with road transport (where taxes are not recycled to
the road users). What may argue in favour of recycling the money is the need to renegotiate the
bilateral air service agreements between Member States of the European Union and countries
outside the EU.
However, a charge of the size envisaged in the Dutch report (Bleijenberg and Wit, 1998) would
have to be additional to the en-route service charge enforced by EUROCONTROL. It is not
possible to differentiate the en-route charge for differences in specific fuel consumption as it is
much smaller than the proposed emission charge. Refunding is thus the only remaining option if
it is considered necessary to make the charge regime revenue neutral (Kågeson, 2000b).
For the airline a CO2 emissions charge (where the revenues are recycled) and taxation of aircraft
fuel offer the same incentive when selecting new aircraft. In both cases the airline would have to
choose from aircraft models on offer. However, for the manufacturer the effect of the fuel tax is
easier to predict than the relative impact on the designs and costs of new aircraft of a recycled
CO2 charge.
In new aircraft design, there is a trade-off between fuel consumption and productivity. As demonstrated in an earlier section of this report, sacrificing design cruise speed could further reduce
fuel consumption. Lower cruise speeds probably make relatively little difference for short-haul
flights provided that the value of fuel cost savings is high enough. According to CE et al (2000),
model simulations indicate that a design speed 15 per cent below current levels would be
unlikely to cause operational problems or reduce fares for flights in a range up to a few thousand kilometres.
Emissions trading
A third option is to introduce an international scheme for tradable emission permits. This would
involve setting an overall cap on aviation CO2 emissions and allow airlines to buy and sell the
permits. There are three possible variants of such a system. In the first, trading would be exclusively within the aviation industry. In the second, trading with other sectors would be allowed.
In this variant, international aviation of Annex 1 countries could be included as a separate Party
to the Convention and the Kyoto Protocol. The third option would be a hybrid system which
forces the aviation industry to make some internal reductions but allows it to make up the balance from trading with other sectors (DETR, 2000).
Routeing and choice of cruising altitude
All three main options – CO2 tax, CO2 charge and tradable permits – would provide incentive to
reduce fuel consumption and thus indirectly affect emissions of other chemicals than CO2 .
These instruments, however, would not make airlines alter routes and/or cruising altitudes in
order to reduce contrails and the formation of high altitude clouds. It would therefore take a
second policy instrument to optimise their operations from a climate point of view. In addition
to a CO 2 tax or charge equal to that applied to emissions from land-based sources (or to the
marginal cost of CO2 emission permits), one would then have to contemplate a charge that is
based on specific non-CO2 emissions of water vapour, NOx, SO 2 and particles as well as on
distance, atmospheric circumstances and cruising alt itude.
47
There is large uncertainty about the exact effects of emissions of water vapour, SO 2 and soot
particles at cruising altitudes. However, due to their influence on the formation of contrails,
clouds and aerosols, these aircraft pollutants may have a share in the greenhouse effect equal to
that of the emissions of CO2 from aviation (IPCC, 1999). A second generation of supersonic
aircraft might cruise at altitudes 7-8 km higher than subsonic aircraft. Per unit of fuel burnt the
greenhouse effect of stratospheric emissions may then be five times greater than that of tropospheric emissions (i.e. from subsonic aircraft) (CE et al, 2000). An instrument to reduce high
altitude non-CO2 emissions would also affect Boeing’s plans for a “Sonic Cruiser” that is being
designed for Mach 0.95 and a cruising altitude of 12,000 to 13,000 metres. Before making a
proposal for the exact shape of such an instrument the effects of high-altitude emissions need to
be better understood.
As noted in an earlier section, the Annex I Parties to the Climate Convention shall, according to
the Kyoto Protocol, pursue limitation of greenhouse gases from aviation fuels through the
ICAO. At a meeting in January 2001, the Committee on Aviation and Environmental Protection
of ICAO agreed on a resolution for adoption by the Council and Assembly later this year. It
discusses voluntary mechanisms, further studies, guidelines for an open emissions trading system and the possible use of environmental charges but does not make any concrete proposal for
a global scheme of any kind. It is expected to be further watered-down as it passes through the
ICAO Council (T&E Bulletin 96, March 2001).
The European Commission (1999d) says in its strategy on air transport and the environment that
the European Community may introduce its own system of charges if no agreement can be
achieved by the end of 2001 on a global system for aviation taxation. In September 2000, the
European Parliament adopted a report in response to the Commission’s communication calling
for a kerosene tax on all flig ht departures from the EU (ENDS Daily, 7.9.2000).
Following the calculations by Bleijenberg and Wit (1998) (regarding the outcome of a charge
equal to 0.20 US$ per litre of fuel), a tax or aviation charge equal to 65 Euro per tonne CO2
(0.14 US$/l fuel) would reduce CO2 emissions from civil aviation by around 20 per cent below
the long-term trend.
A future instrument to reduce the climatic impact of non-CO2 emissions would provide an incentive to use cleaner engines and most probably to fly at lower altitudes. The latter may imply
increased fuel consumption. If the revenue is not recycled, the charge would also affect demand
for air transport. The combined effect on fuel consumption is probably small.
48
11. Summary and conclusions
The objective of this report is to analyse how a common European scheme for CO2 emissions
trading covering all sectors of society would affect the transport sector. Other transport externalities, following the principles in the Commission’s White Paper on Fair Payment for Infrastructure Use (European Commission, 1998f), are assumed to be internalised by methods that reflect
the underlying costs better than fuel consumption. This means for road transport that the social
marginal costs of road maintenance, traffic accidents, air pollution and noise would be internalised by km charging.
The European Commission’s services have analysed the price of emissions allowance under
different kinds of emissions trading based on the PRIMES model. They found that the price for
complying with the Kyoto Protocol would be around 33 Euro per tonne CO2 in a case of EUwide trading covering all sectors of society (European Commission, 2000b). The calculations
initiated by the Commission, however, are based on the assumption that emissions trading
would supplement existing policies and measures, including current taxes on carbon and energy.
This means that the case of internal emissions trading in EU15 does not represent the lowest
possible abatement cost. Maintaining today’s large differences in energy taxation would result
in a relatively large loss of efficiency compared to a system where each tonne of CO2 were
equally taxed. The average taxation of emissions of CO2 from fossil fuels in the EU is currently
around 45-50 Euro per tonne. The range is between 0 and 329 Euro per tonne, where taxation of
road fuels represents the highest figures. It should be recalled, however, that fuel taxation in the
latter case is used partly as a primitive method for internalising social costs other than CO2 .
In a case where the same rate were applied on CO2 emissions from all sectors 30 to 35 Euro per
tonne (rather than 45-50) would be sufficient to keep emissions at today’s level. This indicates
that if EU-wide emissions trading were allowed to replace all existing taxes on fossil fuels (except VAT), the marginal abatement cost for meeting the EU’s Kyoto commitment could be expected to be in the range of 63 to 68 Euro per tonne CO2 (33 Euro + 30 to 35 Euro). In this report 65 Euro per tonne of CO2 is used for illustrating the outcome of an optimal scheme for EUwide emissions trading.
It is difficult to justify higher estimates than 65 Euro as removing CO2 from the flue gas of
power plants for storage in abandoned oil wells and other suitable geological formations would
cost 40-60 US$ per tonne with existing techniques (IEA, 2000c). This type of removal and carbon sequestering could in the longer term (beyond Kyoto) cut overall EU emissions by up to 30
per cent.
Fuels used in international aviation and maritime shipping are only to a small extent burnt in
respectively the air space and territorial waters of the country where the fuel was purchased. The
Parties to the UN Climate Convention therefore decided to exclude emissions from such fuels
from the national emission inventories. Instead, the International Maritime Organisation, IMO,
and the International Civil Aviation Organization, ICAO, were instructed to analyse ways to
reduce carbon emissions from these fuels. This report assumes that fuels used in domestic and
international aviation and shipping will in future be subject to a carbon tax or environment
charge equal to 65 Euro per tonne CO2 emitted in European waters and the European airspace.
Conclusions
The conclusion is that using tradable emission permits 17 would reduce considerably the cost of
complying with Kyoto compared with a business-as-usual scenario called “continuous confu17
The same effect could in principle be achieved by replacing all existing energy taxes with a common
tax on carbon dioxide applied on all use of fossil fuels.
49
sion” where fossil fuels used in industry and for power production are to a large extent exempt
from energy taxation. The reform would approximately reduce the shadow price by half. The
difference would be even greater if the full range in current taxation of CO2 is taken into consideration, including the high tax levels enforced on road fuels for reasons other than CO2.
However, shifting from fuel tax to CO2 emission permits would reduce the fuel cost of cars and
other road vehicles. Internalising the social marginal costs of road transport, on the other hand,
would for gasoline-fuelled cars imply kilometre costs close to those of today in Member States
with low accident rates (congestion pricing not included). The increase in total charges (including the cost of CO2 permits) could be as high as 150 per cent in Member States with high accident rates and relatively low fuel tax.
The variable cost of driving a diesel car would increase dramatically in most Member States.
The charges on new diesel cars would double in countries with few accidents. However, in
cases, where a diesel car is currently subject to a much higher annual vehic le tax than the
equivalent gasoline car (e.g. Sweden), the difference in additional charges would be very small.
Diesel cars in countries with high rates of traffic accidents would be charged several times more
than today (unless they currently face a higher vehicle tax than their gasoline-fuelled equivalent
models). This would increase the variable cost of driving a diesel car by 30-40 per cent.
It is more complicated to show how the reform would affect heavy duty vehicles. The outcome
differs depending on total weight, axle weight, accident rates, road costs and current taxation.
The total cost of freight transport by long distance trucks would rise by 10-13 per cent (based on
costs in Sweden).18 An overall price increase of 12 per cent would reduce demand for freight
transport by 7.2 per cent (based on a long-term price elasticity of demand of -0.6).
Effect on total mileage
A main difference between emissions trading and km charging and a case where CO 2 abatement
is based on traditional taxes is that total mileage by gasoline-fuelled cars would be higher in the
first case as a result of lower fuel costs. For all other categories of road vehicle the reform
would reduce total mileage compared with business-as-usual. This, however, is predominantly
an effect of using km charging for internalising other social marginal costs than those associated
with climate change. The effect would be particularly pronounced in Member States with high
accident risks.
Internalising the social marginal costs (other than CO2 ) by km charging would provide road
users with a strong incentive to reduce air pollution, road maintenance costs and traffic accident
risk below what would otherwise have been the case. This means charge levels are likely to fall
after a few years.
Specific fuel intensity
CO2 emissions trading in combination with a shift to km charging would significantly reduce
the incentive to improve the specific fuel consumption of new vehicles as km charging for costs
not associated with CO2 would not affect the fuel price. The reform would thus hamper the introduction of new, more efficient technologies that might be needed for meeting more long-term
commitments (the 2nd and 3rd commitment periods). 65 Euro per tonne CO2 represents 48 per
cent of today’s average tax on diesel fuel and less than a third of the average gasoline tax in
EU15. The long-term fuel price elasticity for specific fuel consumption is -0.30 to -0.40 for
passenger cars and around -0.15 for trucks. The effect on the average specific fuel consumption
of new cars could be as high as +10 per cent.
18
Including capital cost, driver’s salary and overhead costs.
50
One way of solving this potential longer-term problem would be to supplement the emissions
trading scheme with some type of policy instrument aimed at the specific fuel efficiency of new
cars and trucks. This could be a separate system of emissions trading, where motor companies
producing “thirsty” cars would have to buy permits from those who produce vehicles that consume less than the threshold. The European Union could alternatively introduce a registration
tax that is heavily differentiated for specific fuel consumption. By combining the tax with a
rebate for fuel efficient cars it would be possible to avoid making the average new car more
expensive (a “feebate” system).
Rail, sea and air transport
Aviation, shipping and rail transport would more be affected than road transport by a common
scheme for CO2 emissions trading as they are generally not subject to energy taxation today.
The cost to rail services of purchasing electricity from the grid would more than double. Including rail transport and power production in the trading scheme would in the longer term (2025)
make trains consume around 25 per cent less electricity compared with trend. Retrofitting diesel
locomotives with particle filters and Exhaust Gas Recirculation (EGR) may in this situation turn
out to be a less expensive way of reducing particle and NOx emissions than ele ctrification of
additional railway lines. An alternative option in the medium and longer term would be to shift
to electric traction based on onboard fuel cells. Moreover, continuing electrif ication of railway
lines does not make sense from a climate change point of view as electric trains give rise to
larger emissions of CO2 than diesel trains and fuel cell trains when the marginal base load production of electricity takes place in coal-fired condensing plants.
Enforcing CO2 taxes or CO 2 related charges on aviation and short sea shipping would depress
long-term fuel demand by around 20 and 40 per cent respectively below trend. Tankering would
not be a problem with distance-related fuel charges as they cannot be avoided by fuelling outside the Europe. For sea transport a fuel tax would have the advantage over a distance-related
CO2 charge of influencing shipowners’ choice of operational speed. Demand for new highspeed craft would diminish.
No biofuels in road transport
Emissions trading would not encourage the introduction of biofuels in road transport. The incremental cost of producing ethanol or RME is much too high and cannot be expected to fall to
the extent needed. A problem is this connection is that 30-40 per cent of the primary energy is
lost in the conversion of residual wood or agricultural crops into liquid fuels. The corresponding
loss is only a few per cent when residual wood or short rotational crops such as salix are used
for production of wood chips, pellets or briquettes. Bioenergy would under emissions trading be
used predominantly for heating, in combined heat and power production, and for co-firing (up
to 20% wood) with coal in condensing power plants. Road fuels would also in future be produced from crude oil or natural gas. The latter would also be the base for hydrogen used in fuel
cells.
Transport demand and modal split
The demand for transport services and modal choice are influenced primarily by factors other
than fuel cost. The indirect effect on total demand and modal split of a shift to emissions trading
therefore is not subject to any closer examination in this report. Swedish and Dutch studies
show that internalising the remaining externalities of all modes (concerning the costs of infrastructure, accidents, emissions, noise and climate change) would not change modal split signif icantly (Kågeson, 1998, and Dings et al, 1999). The percentage increase on current prices would
not differ much between modes. The only clear “winner” is the gasoline car, which already pays
all or most of its social marginal costs. The Swedish study also indicates that short sea shipping
could gain a competitive edge over rail provided that it makes use of some comparatively inexpensive methods for reducing its high emissions of sulphur and nitrogen oxides (Kågeson,
1998).
51
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