A new article on climate policies published

Orvika Rosnes has, in cooperation with Brita Bye, Kevin R. Kaushal and Hidemichi Yonezawa at Statistics Norway and Karen Turner at Centre for Energy Policy, University of Strathclyde, published a new article in Environmental and Resource Economics: «The Road to a Low Emission Society: Costs of Interacting Climate Regulations».

Transportation is one of the main contributors to greenhouse gas emissions. Climate regulations on transportation are often a mix of sector-specific regulations and economy-wide measures (such as emission pricing). We consider how these partly overlapping climate regulations interact, and what are the effects on economic welfare, abatement costs and emissions. Our focus is on Norway, where high taxation of conventional fossil-fuelled cars has paved the floor for another pillar of climate policies: promotion of electric vehicles (EVs) in private transport.

We combine the modelling and features of increasingly ambitious EV and climate policies (exemplified by the Norwegian policy), detailed modelling of EV technologies in private transportation and overall electrification of the economy, in an economy-wide consistent framework.

We find that, for the case of Norway, combining a specific EV target with a cap on emissions through a uniform carbon more than doubles the welfare costs, compared to only capping emissions by a uniform carbon price. As the total cap for emissions from the non-ETS sectors is the same in both cases, less abatement is needed from other non-ETS sectors when households contribute more to emission reduction through increased use of EVs. Hence, the most expensive abatements in other sectors can be avoided. This transforms into a lower emission price for the whole non-ETS segment: the carbon price is about half of that in the cap-only scenario. In short, the lower emission price benefits all other non-ETS sectors at the expense of households. Yet, the total costs to the society are greater due to high costs in private transport, even though the most expensive emission abatements in the non-ETS production sectors are avoided. The welfare cost more than doubles and the GDP loss is twice as large as that observed in the cap-only scenario. This implies that the economy becomes less efficient in reducing the emissions with overlapping policies.

Until now, Norway has been an international leader in decarbonising private transportation, with its generous support schemes and relatively high share of EVs. Our findings suggest that the cost of interacting and partly overlapping regulations in electrification of Norwegian private transportation is high, but the costs may be even higher or potentially lower in another national context. The effects of the interacting regulations and especially the EV policies depend on a range of factors and conditions prevailing in the national context: the degree of the initial electrification of the society, the share of electricity in household energy use, the electricity production and grid capacity and investment needs.

Still, even though the magnitude of the effects depends on country-specific conditions, the key conclusion remains: a combination of partly overlapping policies increases the abatement costs, since the additional EV policy puts the most efficient emission abatement policy—uniform carbon price—partly out of action.

The article is available here: The Road to a Low Emission Society: Costs of Interacting Climate Regulations | Environmental and Resource Economics (springer.com)