The Diffusion of Cleaner Vehicles in Co2 Emission Trading Designs

The paper investigates how a system of emission trading can stimulate the diffusion of cleaner vehicles. We start from cross-sectoral energy efficiency investment opportunities that are found in data on CO2 emissions during the production and the use of cars and trucks. We therefore elaborate the introduction of tradable certificates that are allocated or grandfathered to manufacturers that provide vehicles (and other durable goods) that enable their costumers to reduce their own CO2 emissions. Manufacturers can then sell these certificates on the emission market and use the revenues to lower the price of their cleanest vehicles. This mechanism should partially overcome the price difference with less efficient cars. When the new allowances are taken from the pool of grandfathered emissions, total emissions remain the same but the lower average emission reduction cost reduces the total cost of climate protection policy