CO2 Emissions, Energy, and Economic Impacts of CO2 Mandates for New Cars in Europe

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 while the mandates reduce the CO2 emissions from transportation by about 50 MtCO2 in 2020 and reduce oil expenditures by about 4.7-6.2 billion Euro in 2020, the net cost of the mandates is 12 billion Euro/year in 2020. Tightening CO2 standards increases the welfare cost for the EU. In 2015 the policy costs are estimated at 0.7 billion Euro/year, in 2020 the cost increases to about 12 billion Euro/year, and keeping the 2021 target unchanged leads to a consumption loss of about 24 billion Euro/year in 2025. Increasing the stringency of CO2 emissions targets further leads to a consumption loss of 40-63 billion Euro/year in 2025. CO2 mandates are less cost effective than an emission trading scheme, with year-on-year consumption loss rising to 0.69% in 2025 under the proposed emission standard, compared to 0.08% under an emission trading system that achieves an equivalent reduction in CO2 emissions.