Despite EU and national climate policies, CO2-emissions in the transport sector have grown steadily in the past decades, whereas many other sectors have managed to reduce emissions. Now that increasingly ambitious CO2-emission reduction targets are being discussed for 2020 and beyond, the pressure on the transport sector to contribute to reaching these goals is clearly increasing. One of the options for additional climate policy in road transport is CO2-emissions trading. The sector could, for example, be included in the EU ETS, or a separate trading system could be set up. The present report, that was commissioned by the Swedish Environmental Protection Agency (Naturvårdsverket), discusses these options. First, an overview is provided of the key literature published on this topic so far. Second, the potential drawbacks and benefits of combining this type of policy with a CO2 emission regulation for new passenger cars is assessed. Literature on emissions trading in road transport In the past years, various reports have been written on emissions trading in road transport. Some of these reports were broad, scouting studies; others went into somewhat more detail, focussing on specific options or effects. From these studies we conclude that emission trading could be an effective means to reduce CO2emissions in the road transport sector, if an upstream trading system is chosen, i.e. a system in which the oil companies are the trading entities. It is also concluded that a CO2 tax on fuel may have the same effect as an emissions trading system, at lower cost for the society, provided that the tax rate is set at the appropriate level. This measure may, however, face political difficulties. The societal costs of emission reduction are relatively high in the road transport sector. Consequently, if a separate trading system is set up for road (or surface) transport and the transport sector is required to reduce emissions by the same percentage as other sectors, then the price of emission allowances will be much higher than in the wider EU ETS. This could drive fuel prices up to a level that would be politically unacceptable. It also indicates that expensive measures are taken within the transport sector while cheaper measures within other sectors remain unused. If road transport is included in the EU ETS, total costs of emission reduction are reduced and the price increase of fuel remains limited. However, this may lead to an increase of the price of allowances which may have a negative impact on competitive power of companies exposed to international competition, and lead to CO2leakage to countries outside the EU. This impact seems to be relatively low at lower levels of CO2 reduction, but may increase as the cap is tightened further. Various means to reduce this impact are identified in the literature. Combining emissions trading with fuel efficiency regulation for vehicles A solution to some of these problems might be to combine emissions trading with fuel efficiency regulation for vehicles*. Fuel efficiency improvements in passenger cars are a relatively cost-effective measure to reduce emissions, with significant CO2 reduction potential. However, due to temporal myopia of car buyers, this measure is insufficiently addressed by price incentives created by emissions trading. Fuel efficiency regulation might thus • promote R&D and innovation efforts of the car and engine manufacturers, • lower the costs of emission reduction in transport and • weaken the negative effects of inclusion of transport in the EU ETS for other sectors. Furthermore, fuel efficiency regulation can be introduced on a shorter timescale than emissions trading. At the same time, an emissions trading system can be complementary to fuel efficiency regulation, as it can alleviate a number of disadvantages of regulation. • It can increase the efficiency of CO2 mitigation in road transport, since it promotes all available mitigation options. • It offers certainty about the achieved emission reductions, and • it has no rebound effect. Furthermore, once it is implemented, it can achieve emission reduction in a relatively short term. Recommendations As emission trading has a number of advantages, compared to more specific climate policies in road transport or to a CO2 tax, we recommend to consider this policy option for the road transport sector when analysing and deciding on future policies for CO2 mitigation. We also recommend to look at whether other combined policy options, including taxation, may help improve effectiveness and efficiency of climate policies in the sector. 

* For the sake of discussion, we focus here on passenger cars.