Energy and Environment issues in road transport. Prof. Stef Proost KULeuven (B)

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1 Energy and Environment issues in road transport Prof. Stef Proost KULeuven (B)

2 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 Air transport x 5 From 50% now to 20% in 2050 GHG emissions transport x 2 or x 3 From 60% now to 35% in 2050

3 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

4 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

5 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

6 Cost/unit Price Environmental policy: best mix of technology and behaviour Demand function for the polluting acivity P +d P Eff +d* Remaining env damage P Eff P Increased prod cost Q* Q * Q polluting activity

7 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

8 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

9 Belgium Luxembourg Norway France Spain Portugal Ireland Finland EU-15 EU-15 + EFTA Austria Denmark Italy Uinited Kingdom Sweden EFTA Iceland Germany Switzerland Netherlands Greece Share of diesel in new passenger car registrations (%)(2000 and 2009)

10 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

11 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?

12 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

13 P* PRICE Of Fossil energy PRICE PROFILE 1 OVER TIME Choke price or cost backstop 1 Extraction cost N TIME

14 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

15 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

16 Climate issue Essentials of climate issue Economics of international agreements Effects of EU climate & transport policy on energy markets

17 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

18 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

19 /ton 10 MB 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) Marg Abatement Cost Int agreement 3MB 1 nash Marg Benefit abatement

20 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

21 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?

22 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

23 Effect of unilateral commitment of EU to reduce use of oil: from profile 1 to profile 2

24 Effect of breakthrough in vehicle technology or biofuels : price over time from profile 1 to profile 3

25 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)

26 Cost/unit Price Demand function for the polluting acivity P +d P Eff +d* Remaining env damage P Eff P Increased prod cost Q* Q * Q polluting activity

27 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

28 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

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30 What transport policies make Modal shares: sense 2 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

31 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

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33 Diagnosis of road transport problems