Impacts of CO2 Mandates for New Cars in the European Union

Abstract

CO2 emissions mandates for new light-duty passenger vehicles have recently been adopted in the European Union (EU), which require steady reductions to 95 g CO2/km in 2021. Using a computable general equilibrium (CGE) model, we analyze the impact of the mandates on oil demand, CO2 emissions, and economic welfare, and compare the results to an emission trading scenario that achieves identical emissions reductions. We find that the mandates lower oil expenditures by about €6 billion, but at a net added cost of €12 billion in 2020. Emissions from transport are about 50MtCO2 lower with the vehicle emission standards, but with the economy-wide emission trading, lower emissions in transport allow an equal increase in emissions elsewhere in the economy. We estimate that tightening CO2 standards further after 2020 would cost the EU economy an additional €24–63 billion in 2025 compared with achieving the same reductions with an economy-wide emission trading system.