Browsing by Subject "fuel price"

Finland has set ambitious goals to reduce road transport emissions. One of these goals includes halving emissions from transport by 2030 compared to the 2005 levels. Another goal is the carbon-neutrality target of 2035, in which the transport sector plays an important role as well. Achieving these targets requires efficient instruments. A possible instrument which can be used to reduce transport emissions sufficiently is emission trading. The possibility of creating a national emission trading system for the transport sector to reach Finland’s targets regarding emissions is the focus of this thesis. Establishing an emission trading system would likely have effects on the fuel price. I present the theoretical background before modelling these effects. Understanding how the fuel market works and how emission trading would affect it is crucial before analysing the impacts by modelling. The role of the price elasticity of demand in determining the change in the fuel price is highlighted. The existing literature has studied the topic of emission trading for transport extensively and points out three important design elements: the inclusion of the transport sector, the allocation of permits, and the point of regulation. These elements are discussed using previous studies on the topic. Furthermore, many studies highlight the possible distributional effects an emission trading system could cause. Exploring the currently operational emission trading systems around the world gives real-life examples of the different design elements and how distributional effects could be corrected in practice. When modelling the effects of emission trading on the fuel price, the value for the price elasticity of demand can be estimated using meta-analysis. For the meta-analysis, I selected 28 previous studies. The weighted average for the short-term elasticity is found to be -0.1607. For the long-term elasticity, the value is found to be -0.448. Using Monte Carlo simulations and the values obtained from the meta-analysis, it is possible to calculate the average changes in the fuel price and in the emission permit price, and also illustrate the uncertainty arising from the fact that the actual price elasticity of demand is not known. For emission reductions of 0.6 megatonne, the total change in the fuel price by 2030 is calculated to be 0.34 euros per litre. This means that the emission permit price would be approximately 204 euros per tonne of CO2 in 2030. In addition, other possible instruments as well as other emission reduction target values are modelled in the analysis. Finally, I discuss the design elements in more detail. An upstream system with auctioning would be an efficient option for the design of an emission trading system. In addition, I discuss the interaction of emission trading with other instruments and the possible EU ETS for transport. Last, I present limitations and some topics for future research.