Oil price scenarios and climate policy: welfare effects of including transportation in the EU emissions trading system

The stringency of policies needed to meet a climate target is influenced by uncertain oil prices because price changes cause emission changes, making the robustness of climate policy instruments important. As a result of its dependence on oil, emissions from the transport sector are particularly sensitive to oil price changes. We use a computable general equilibrium model to study the effects of including the transport sector in the EU’s emissions trading scheme under three future oil price scenarios. Our results show that there are potentially significant welfare gains from including transportation in the emissions trading scheme because the system as a whole helps absorb required changes in climate policy to meet the overall EU cap on emissions. There is, however, a cost in terms of somewhat greater permit price uncertainty.