Using Cap and Share to control emissions from the EU transport sector

June 2007

Executive Summary.

Cap and Share is a cap and trade system in which tradable rights to whatever is being capped are distributed on an equal-per-person basis to every adult in the general population rather than being auctioned or being grandfathered (given) to existing users. Because those receiving the rights under C&S sell them within a year of receipt, it automatically compensates the least-well-off in society for the price rises that the shortages brought about by the imposition of the cap inevitably generate. This fairness and built-in fiscal neutrality make it a more politically acceptable way to control emissions than other allocation methods.

Carbon dioxide emissions from all forms of transport apart from rail are rising within the EU at a time when those from other sectors are falling. Within the transport sector, emissions from road vehicles are rising most rapidly in absolute terms. However, the EU emissions trading system is unsuited to controlling them because of the way it was designed. As only aviation and marine emissions can be taken into the ETS with reasonable ease, this is what the Commission is proposing to do.

This paper argues that capping some transport emissions and not others would be a serious mistake because the various transport modes are in competition with each other. Not only would the Commission's proposals distort competition between the modes but, because of the short-term inelasticity of the demand for transport, they are unlikely to cause total transport emissions to fall. Instead, by pushing up the cost of emissions permits thoughout the ETS, they could force other areas of the EU economy.to charge higher prices and/or contract. This would make the EU less competitive.

A solution to this problem would be to devise a separate emissions trading system suited to the transport sector which would not distort competition between the modes but which was linked to the present ETS. Cap and Share is administratively light way of achieving this, and thus bringing transport emissions under control.

Read the entire document (PDF document, 250K).