Macroeconomic Effects of Climate Policies on Road Transport: Efficiency Agreements Versus Fuel Taxation for the United Kingdom, 2000–2010

This paper reports a study modeling climate policies in the United Kingdom for road transportation over the period 2000 to 2010. Estimates of the effects of fuel-economy policies are introduced into the energy-demand equation for transport in a top-down dynamic econometric model of the UK economy with 50 industrial sectors, MDM-E3. This allows estimation of the effects of the reduced energy use for the transport sector on demand (both in the United Kingdom and in the export markets). The model is solved as a counterfactual for 2000 to 2005 and as a projection for 2005 to 2010 in a series of scenarios that compare voluntary agreements in fuel economy improvements with UK fuel taxes giving the same reduction in CO₂ emissions. The systemwide final energy reductions are estimated to be 2.9 million tons of oil equivalent, or 1.8%, of total final demand for energy by 2010. Voluntary agreements (VAs) were found to yield positive macroeconomic effects, with small increases in GDP and employment and small reductions in general inflation. In contrast, fuel taxes set at a level to achieve the same amount of CO₂ reductions raise prices and lower gross domestic product (GDP) and employment. If fuel duties are recycled in the economy, reducing income taxes, then the undesirable macroeconomic impacts of fuel duties can be largely eliminated. To the extent that VAs are viewed by vehicle manufacturers as a substitute for mandated fuel economy improvements, it is possible to compare the relative effects of standards and taxes in the light-duty transport sector in reducing CO₂ emissions.