Reducing CO2 from cars in the European Union: Emission standards or emission trading?

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 vehicle emission standards reduce CO2 emissions from transportation by about 50 MtCO2 and lower the oil expenditures by about €6 billion, but at a net added cost of €12 billion in 2020. Tightening CO2 standards further after 2021 would cost the EU economy an additional €24-63 billion in 2025 compared with an emission trading system achieving the same economy-wide CO2 reduction. We offer a discussion of the design features for incorporating transport into the emission trading system.