Impacts of CO2 Mandates for New Cars in the European Union

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.