Car makers will not invest in low carbon technology while polluting is cheap. Strict emissions standards are the only way to decarbonise road transport and stimulate a modal shift, argues William Todts.
William Todts is transport programme manager at Transport & Environment.
Should we put road transport in the Emissions Trading Scheme (ETS)? It’s a discussion that resurfaces every now and then. Last year, Denmark argued for putting all transport fuels in the ETS – the idea was rejected. Now BMW and Opel are giving it another try, and to give their “grand idea” extra credibility they commissioned a study with which they will no doubt try to influence the reform of the EU ETS and the upcoming car CO2 regulation.
The report by the Centre for European Economic Research (ZEW) assesses the feasibility and benefits of incorporating road transport in the ETS. While the study does acknowledge “there is some indication” that CO2 standards have helped improve car fuel efficiency in Europe, they don’t seem to think continuing standards is a good idea at all. They argue that the ETS can achieve emissions reductions at much lower costs in other sectors. So the study recommends not setting new CO2 standards, but putting road transport in the ETS instead. It would work by requiring fuel suppliers to submit allowances covering the level of CO2 emissions of their fuel sales. So the ETS would essentially work as a small top-up on the fuel tax.
It is easy to see why the study’s authors and their paymasters – Opel and BMW – like the ETS: they know it would let car makers off the hook.
In fact, Opel and BMW could have saved themselves the effort of paying ZEW to come to this conclusion. Numerous independent studies (including Cambridge Econometrics and Öko-institut) have already found that the ETS price signal is far too weak to bring about any significant CO2 emissions reductions in the road transport sector and would shift the burden to other sectors. At the current price of €8/tCO2, the inclusion would lead to an increase in the fuel tax of 2 cents per liter. A €25 carbon price would add around 6 cents to the cost of fuel – that is if governments don’t compensate by lowering national fuel taxes. This would decrease road transport CO2 by around 3% but would have no impact at all on things like modal shift. For example, the €25 ETS price would push up truck diesel price from around €1 to €1.06 – an increase of 6%. Since fuel costs are only around a quarter of total haulage costs, the latter would increase by just 1.5%. This could in the long run lead to a shift from trucking to rail freight of around just half a percent.
To bring about real change in the transport sector, much steeper fuel tax increases would be required. To be clear, the reason you need high fuel or carbon prices is that fuel-efficient cars, while having very good payback periods and saving car drivers money, do not on their own get the market moving. The reality is the business of car buying isn’t a rational one. People care more about other things than saving fuel. To overcome this well-known and widely accepted market failure, the EU, the US, Japan, China, Canada and virtually every other mature automotive market have put in place fuel efficiency or CO2 targets for new cars. These have generally worked well and delivered cheap fuel savings and big economic benefits.
As such, higher fuel taxes are a good idea – especially if they help reduce income taxes – but trying to get big fuel tax increases through the ETS is foolish. An emissions trading system that contains exposed sectors (carbon leakage from, say, energy intensive industry) and sheltered sectors (for example, transport) will always end up with carbon prices that are too high for the exposed sectors and too low for the sheltered sectors. Simply put, it is highly unlikely that the steel producers and their friends in politics would ever accept the level of carbon price that is needed to incentivise cleaner transport.
Leaving fancy studies aside, the truth is that car makers, and BMW in particular, really don’t like the CO2 regulation and would prefer to shift the burden to other sectors or even their own customers. Claiming this would be good for the climate is nonsense. Indeed, if we put road transport in the ETS, car makers will stop investing in the cleaner cars we need to decarbonise road transport. And without decarbonised passenger transport, the EU’s climate goals are simply not achievable.
Climate Commissioner Cañete knows this and has already said he doesn’t like the idea at all. Instead he has announced “ambitious but achievable” fuel-efficiency standards for new cars and vans. We can only hope that buries the discussion around road transport in the ETS once and for all.