Transportation and Emission Trading - A CGE Analysis for the EU 15

Transportation, the second largest contributor of CO2 emissions, is not part of the European Emission Trading System. Since transportation is subject to national environmental instruments, this causes differences in marginal abatement costs, and hence, results in economic inefficiencies. We analyze the welfare effects of including transportation in the European emission trading system in a static multi-region CGE model of the EU 15. Our results show that the inclusion road transportation provides a high welfare gains for Europe. Including aviation leads to smaller welfare gain. Concerning water transportation, our analysis indicates the importance of carbon regulation of maritime shipping for international trade