Energy and Environment

issues in road transport

Prof. Stef Proost

KULeuven (B)

Long term trends?

2050 World Share OECD

Road use cars

x 2.5 From 50% now

to 20% in 2050

Road use trucks x 5 From 50% now

to 20% in 2050

Air transport x 5

GHG emissions

transport

x 2 or x 3 From 60% now

to 35% in 2050

What is the right policy answer?

• EU roadmap 2050 is one of the answers

• I think we can do “better”

– By doing less

– By doing things differently

EU white paper for transport

(March 2011) – Key goals 2050 – No more conventionally fuelled cars in cities (and

50% less in 2030)

– 40 % use of sustainable low carbon fuels in aviation

– 50% shift of medium distance intercity passenger and freight journeys from road to rail and waterborne transport (30% shift by 2030)

– Triple length of HSR network by 2030

– Near zero road casualties (and 50% less by 2020)

– Move towards full application of user pays and polluter pays principles…

Outline

• Distinguish 3 issues: • Conventional air

• Energy supply issues

• Climate issues

• Issue + Policy response

• What transport policies make sense? • Land use decisions

• Modal choice

• Type of vehicle

• Intensity of vehicle use

polluting activity

Cost/unit

Price

P°

Q°

Demand function for the polluting acivity

P°+d°

PEff +d*

Q*

Remaining env damage

Increased prod cost

PEff

Q°*

Environmental policy: best mix of technology and behaviour

Conventional air pollution 1

• Problem is health damage

• Solved mainly by better technologies

(Auto-Oil) • catalytic converter

• Cleaner fuels (less sulfur)

• Overall pollution from cars since 1995: -70 to -90%

despite growth in volume of car use

• Remaining problems • Local (hot spots)

• New health concerns

Conventional air pollution 2

• Remaining problems

– New evidence that very small particulates are

more harmful for health than expected

– Local hot spots of pollution require local policy – Low emission zones: Germany experimented in +50

cities, only vehicle emission standards worked well.

– One major mistake that can easily be

corrected: – Diesel cars are more polluting and pay less taxes per

vehicle-mile than gasoline cars, they have a very small

(5%) advantage in CO2 emissions but this does not

justify their current taxation advantage

Share of diesel in new passenger car

registrations (%)(2000 and 2009)

0

10

20

30

40

50

60

70

80

Be

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Luxe

mb

ou

rg

Nor

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Fran

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Port

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Fin

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5

EU-1

5 +

EFT

A

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De

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Ital

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Ice

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Ge

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and

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2000

2009

Outline

• Distinguish 3 issues: • Conventional air : more or less “SOLVED”

• Energy supply issues

• Climate issues

• Issue/Policy ?

• What transport policies makes sense? • Land use decisions

• Modal choice

• Type of vehicle

• Intensity of vehicle use

Energy supply 1

• Car Transport is 90% dependent on oil

• Fuels in Cars are taxed much more than

other oil use and so transport has highest

WTP for oil

• What is problem?

– Running out of oil for the world?

– Sudden interruptions in oil supply?

Energy supply 2

- Running out of oil for the world?-

• Hotellings intertemporal arbitrage

condition for a fixed stock of oil reserves • Resource owners will arbitrage selling now or later

• They can not sell at more than choke price (or

price of backstop technology – solar, coal liquids..)

• Result: (price – extraction cost) increases over

time with rate of interest and there is already a

scarcity premium now

• Prices incorporate latest information on present

and future demand and cost information

1

TIME

PRICE

Of

Fossil

energy

Choke price or cost backstop P*

Extraction

cost

N

PRICE PROFILE 1 OVER TIME

Energy supply 3

• What is problem?

– Running out of oil for the world?

– Sudden interruptions in oil supply?

• Price fluctuations due to short term changes in

supply and demand

• Kilian (2008) shows that unanticipated supply

changes have been overemphasized – demand

fluctuations have been important too

• Main suppliers will benefit from reliability status of

their deliveries – unreliable suppliers need to give

discounts

Outline

• Distinguish 3 issues: • Conventional air : more or less “SOLVED”

• Energy supply issues

• Climate issues

• Issue/Policy ?

• What transport policies makes sense? • Land use decisions

• Modal choice

• Type of vehicle

• Intensity of vehicle use

Climate issue

• Essentials of climate issue

• Economics of international agreements

• Effects of EU climate & transport policy on

energy markets

Climate = international + stock

problem+uncertain – Economic growth requires more energy

– Energy can be more or less carbon intensive (coal = 2 gas)

– Sum of world emissions builds up a stock of greenhouse gasses

– Climate effect

– Damage

• All relations (physical + economical) are uncertain and we can only learn very slowly

Simplest model for Economics of

international agreements

• Barrett (1994)

• N identical countries, constant Marginal Benefit of emission reduction

• Endogenous determination of – Number of signatories n out of max N

– Terms of agreement for signatories

• One shot game – An equilibrium “Self Enforcing International

Agreement” requires (cfr. cartel theory) • Each country signing is as well off as a non signing country

• A signing country maximizes the total welfare of the members of the group joining the agreement

– Result: only very few countries (max 3) will sign an agreement

10 MB

Marg Benefit

3MB

Marg Abatement Cost

abatement

$/ton

1 3 10

nash

Int agreement

Total abatement effort

Nash equilibrium: 1x10 = 10

Intern Agreem 3x3 + 7= 16

Full cooperation (FB)= 10x10=100 (FB is better for everyone but you can not enforce the contract)

1

Economists are pessimistic on

international climate agreements

• Pure public bad problem for which no

international binding contracts are possible

– Repeated game (tit for tat) offers slightly better

perspectives but national leaders change (can we

blame Obama for attitude of Bush?)

– Catastrophic damages do not necessary lead to an

agreement when precise treshold for catastrophe

isuncertain

• Climate agreements exist, have been signed

– But are not observed

– Can be useful to exchange ideas

EU as climate policy forerunner

• EU policy justification?

– Feels responsible for world damages of its

emissions

– Cooperative attitude: i make efforts if the

others follow

– Show the rest of the world it is not costly to

realize deep cuts?

• But what can the EU really do and is it

cost-effective?

Reactions of energy markets to

unilateral EU climate policy

• Distinguish between – fossil fuels without rents (coal, non conventional oil and

gas)

– fossil fuels (oil, gas) with large rent element in price

• If EU reduces coal use, world price of coal may decrease somewhat but there is a decrease in total world emissions

• If EU reduces conventional oil use, it will ONLY DELAY EMISSIONS NOT REDUCE emissions (“green paradox”)

• If EU invests successfully in R&D for cheaper carbon free substitute (car running on water), it will INCREASE CURRENT EMISSIONS

Effect of unilateral commitment of EU to

reduce use of oil: from profile 1 to profile 2

Effect of breakthrough in vehicle technology

or biofuels : price over time from profile 1 to

profile 3

Smarter climate policies?

• Achieving absolutely a reduction of

emissions in Europe is NOT cost-effective

– Buy emission reductions in rest of world via

Clean Development Mechanism

– Favour technology options over behaviour

• Traditional thinking: right mix of technand

behaviour via emission taxation, a technology

standard has not right mix

• But technology advances spread over the whole

world and this has much larger effect (Europe is <

25% of world car market)

polluting activity

Cost/unit

Price

P°

Q°

Demand function for the polluting acivity

P°+d°

PEff +d*

Q*

Remaining env damage

Increased prod cost

PEff

Q°*

EU white paper for transport

(March 2011) – Key goals 2050

• TECHNOLOGY – No more conventionally fuelled cars in cities (and

50% less in 2030)

– 40 % use of sustainable low carbon fuels in aviation

• MODAL SHIFT – 50% shift of medium distance intercity passenger and

freight journeys from road to rail and waterborne transport (30% shift by 2030)

– Triple length of HSR network by 2030

– Near zero road casualties (and 50% less by 2020)

– Move towards full application of user pays and polluter pays principles…

What transport policies make

sense 1 • No quantity targets for CO2 emissions in transport sector (even if it

is growing) as there are cheaper options in other sectors

– gasoline pays a 200 Eur/ton CO2 taks, but it is called “gasoline tax”

• Technology policies:

– Push technologies that could be adopted by rest of world (they have not

the same CO2 incentives – so you can not be world leader for

something for which there is no market)

– So prefer simple and cheap (gasoline engine) over performant and

expensive (hybrid and electric)

• Favour gasoline over diesel because of tax and health reasons

• Put same excises per mile on electric cars, hydrogen cars etc. as on

gasoline cars (implicit subsidies for electric cars of 1000 Euro/ ton of

CO2

What transport policies make

sense 2

• Modal shares:

– No quantitative ojectives (EU plans for HSR,

trains and maritime result from carbon

objectives)

– Modal shift could result from better transport

policies addressing congestion, local health

etc.

• Rethink TEN-T prioirity projects

– Half of them are not justified

Energy & Environment policies

in Road Transport – Conclude? • 3 issues:

• Conventional air : more or less “SOLVED” –except

diesel/gasoline choice

• Energy supply issues: not a major issue

• Climate issues: is a problem but EU can not do

much

• Transport policy should be guided by other

issues we can address • peak load pricing in private and public transport

Diagnosis of road transport problems