Transport and Climate Change

Chapter 3: Cost-effectiveness and the current UK Government approach to cutting transport carbon emissions

3.1 In this chapter, we begin by considering briefly some of the issues relevant to understanding the cost-effectiveness of transport measures in reducing carbon emissions and summarising the existing literature on this topic. We then review the Government's current approach to reducing transport carbon emissions, before identifying four observations that suggest there is scope for improving on the current approach.

Measuring the cost-effectiveness of action to reduce emissions

3.2 The Stern Review described climate change as the greatest and widest-ranging market failure ever seen (HM Treasury, 2006). In identifying what needed to be done to correct this failure, the Review highlighted how:

• mitigation should be seen as an investment, where the costs can be kept manageable by taking the right action at the right time to avoid far greater negative impacts over the longer term; and
• action is needed to deliver progress in three key areas - technological development, carbon pricing and behavioural change. The clear implication is that failure to move on all three fronts could significantly increase the cost of mitigation.

3.3 These insights place particular significance on identifying cost-effective measures, which give the best return in terms of tonnes of carbon saved for the cost incurred. Policy makers have a key role in ensuring that the costs and benefits of potential abatement opportunities are assessed thoroughly and that any carbon reduction strategy seeks as far as possible to prioritise implementation of measures according to their cost-effectiveness. The process of measuring the cost-effectiveness of measures to cut transport-related carbon emissions throws up a number of basic issues:

• Apart from its impact on carbon emissions, a measure may have a range of costs and benefits that can be expressed in monetary terms, some direct and others ancillary (NAO, 2006). Direct costs can include the up-front costs of purchasing a car or ongoing maintenance of the vehicle; ancillary impacts may include the effect that using the vehicle might have on air quality or traffic congestion. There may also be other nonquantifiable impacts, such as those on security of supply; social inclusion and equity; competition and innovation; or on biodiversity and regeneration;
• The calculations also require assumptions to be made about a range of factors, such as the cost of different technologies and how they might vary over time, the future price of oil, or how the demand for transport responds to changes in income and prices. Different base assumptions can generate significantly different results in terms of the cost-effectiveness of potential measures to cut emissions;
• When considering cost-effectiveness, we also need to know what we are willing to pay to save a tonne of carbon, in order to decide whether it is worthwhile. Estimates of the 'social cost' of carbon quantify the impacts on health, environment and the economy caused over time by each tonne of carbon emitted. Such calculations are subject to considerable uncertainty, but, where measures cost more than the social costs they would normally be ruled out, unless there are other, strong reasons for pursuing them. The central estimate used by Government and in transport appraisal by the Department for Transport (2006d) was £70/tonne carbon in year 2000 prices, and increases in real terms by £1 per year according to the year the emissions are released, with a sensitivity range of £35-140. The Government committed to producing by the end of summer 2007 revised guidance on the appropriate figure to use in line with the Stern Review^[1]; and
• There should be a robust methodology not just to compare the cost-effectiveness of different options to reduce transport-related carbon emissions, but also to compare transport measures with non-transport ones, in order to identify the lowest-cost package of measures across the economy as a whole. In reality, of course, policy makers will also, among other things, have an eye on the practicality and public acceptability of possible measures, individually and as a whole. While this is understandable, it is also important that the decision-making process that weighs these different factors should be well informed and transparent.

Existing literature on cost-effectiveness of transport measures

3.4 CfIT commissioned a review of the technical literature on the cost-effectiveness of different measures to reduce transport-related carbon emissions (Anable and Bristow, 2007). A clear finding of the review, which looked at UK and overseas studies, was the wide variation in estimates of measures' carbon savings and cost-effectiveness (see Exhibit 3.1). One Dutch study (Kampman et al., 2006) concluded that different studies 'cannot generally be combined and compared because the assumptions and methodologies differ so much. Choosing the most cost-effective pathway for society to combat global warming is therefore difficult with present knowledge'.

3.5 Notwithstanding the difficulties in comparing the results of different studies, the review of the existing technical literature did suggest some significant common themes:

• Adoption of technology-focused options for reducing transport carbon emissions (e.g. through changes in vehicle or fuel specifications), while potentially capable of delivering cuts in emissions at scale, can often be relatively expensive when pursued in isolation over a short period and can face challenges in implementation;
• Promotion of measures focused on encouraging behaviour change (e.g. in choices about how or even whether to travel) can in some cases and in principle appear relatively cost-effective, but can also depend in practice on millions of separate decisions by individual transport users with little guarantee of consistent and sustained behavioural adaptation to deliver carbon reductions;
• The expectation is that packages of measures, involving combinations of policies addressing technological change, pricing (e.g. through the use of taxes) and other measures to encourage behaviour change (e.g. improved information), could deliver savings greater than the sum of their parts. However, there is as yet no evidence in the literature on the cost-effectiveness of carbon saving measures to this effect. Government estimates of the cost of the Voluntary Agreement (VA) included supportive fiscal measures - without which presumably the costs would have been higher. Otherwise studies by Hickman and Banister (2006) and Bristow et al. (2004) explore the potential of broader policy packages to deliver carbon savings, but do not examine cost effectiveness; and
• There appears to be a significant gap in quantitative analysis of the cost-effectiveness of potential carbon abatement options in some areas of transport, for example in relation to aviation and shipping.

Exhibit 3.1 Difficulties in comparing measures of cost-effectiveness The variation in estimates of potential carbon savings and the cost-effectiveness of measures to be found in the technical literature can partly be explained by uncertainty, but also significantly by differences in methodology. These include differences in: starting points, baselines and start/end dates - more recent studies naturally tend to contain more up-to-date data that may reflect, for example, slower than anticipated progress in policy implementation, or they vary with respect to assumptions on the success or failure of existing policies; scope - by geography, or in terms of the range of costs and benefits included, or in terms of purpose and focus. Some studies examine the effects of specific policies prior to or after implementation, others examine routes to achieving target reductions in CO2, while others are focused on different impacts such as air pollutants or oil consumption; the degree of implementation - for example, whether road speed limits are set at 70 mph, 55 mph or 50 mph and how extensively they are applied across different parts of the road network; key assumptions about the way people respond to measures - for example, the assumed response to price signals, or whether demand is fixed or changes over time; assumptions with respect to the costs of technological developments over time; definitions of cost-effectiveness and cost-benefit analysis; the use of different discount rates, currencies and indicators for tonnes of carbon or CO2 or energy; and in costs per tonne of oil equivalent, per gigajoule etc. The key differences among studies are probably the range of costs and benefits included, the extent to which demand is assumed to respond to changes, and assumptions made on the future prices of new technologies. Sources: Anable and Bristow, 2007.

3.6 In addition to the existing body of work on the cost-effectiveness of specifically transport-related measures to reduce carbon emissions, there are also several reports that have looked at what might constitute cost-effective responses to climate change from an economy-wide and/or global perspective over time.

3.7 Common among these analyses is a view that there are significant opportunities for carbon abatement across the economy, many at potentially manageable cost. They also highlight that transport-related measures have an important role to play, but that in the medium term there is more scope to deliver cost-effective carbon reductions in other sectors of the economy. Three analyses in particular are worth highlighting:

• The Stern Review (HM Treasury, 2006) concluded that the potential for significant short-term cost-effective abatement in the transport sector was limited, but in the long-term it is much higher. Cost-effective reductions in the short term will come from improvements to oil-based transport vehicles, biofuels and behaviour change. Road transport and certainly air transport will still be largely oil-based by 2050. Despite any improvements, growth in the sector will mean it will be one of the last sectors to bring its emissions down to below current levels;
• McKinsey developed a cost curve of global abatement opportunities over the period to 2030. This analysis compared 'business as usual' projections for emission growth against the cost of possible approaches to reduce emissions. The study focused upon measures that would cost €40 (£27) per tonne CO2 equivalent (€147 or £99 per tonne carbon) or less in 2030. It found almost three-quarters of the potential to reduce emissions come from measures that are not reliant upon new technologies (e.g. nuclear power, hydropower, better insulation in buildings). Cost-effective reductions in transport to 2030 are seen to come from improvements to oil-based transport vehicles and biofuels (Enkvist, 2007); and
• The report of the third working group of the IPCC (2007c) on mitigation of climate change establishes that, compared to a global baseline for the transport sector and assuming a price for carbon of $100t/CO2 eq. ($367 per tonne carbon or £184), the transport sector can contribute around 9% of the global potential to mitigate GHG emissions by 2030. Whilst the report acknowledges a role for transport demand management, savings are attributed only to vehicle efficiency and biofuels - and both in roughly equal proportion. Because of a lack of evidence, the IPCC analysis excludes heavy-duty vehicles, shipping, 'high-occupancy passenger transport', and the non-CO2 emissions from transport. Hence the policies assessed relate almost exclusively to car passenger transport. Overall, the IPCC concludes that mitigation in this sector faces constraints such as consumer preference and the lack of policy frameworks, and that market forces alone (including rising fuel costs) are unlikely to lead to emissions reductions.

3.8 A further, particularly relevant piece of analysis is the economy-wide 'MARKAL-Macro' modelling carried out for the UK Government (updated to support the 2007 Energy White Paper (EWP) (DTI, 2007a) to identify how the UK could meet future energy demands at least cost to society. By looking at carbon reduction opportunities in transport and non-transport sectors, comparing a 'business as usual' scenario to 2050 with scenarios assuming constraints on carbon emissions in the future, the model provides a framework for evaluating alternative technology pathways and futures (see Exhibit 3.2).

Exhibit 3.2 MARKAL scenario modelling of future transport emissions The MARKAL-Macro model uses different assumptions about (among other things) future oil prices, energy demand, and costs of technological options in areas such as power generation, business and domestic energy use, and domestic transport (international aviation and shipping are excluded from the model): Projections entered into the model show the transport sector would experience the greatest increases in service demand of all sectors. Overall vehicle kilometres rise 50% between 2000 and 2050, with vans by 100% and domestic aviation by 550%; In the base case ( where the economy is not constrained to cut carbon by 60%), the transport sector is transformed by petrol and diesel hybrid vehicles introduced in a range of modes from 2020, and buses, lorries and vans move to hydrogen after 2030. Take-up of biofuels in the base case is limited to that mandated under the RTFO. The domestic aviation sector sees the least technological change owing to the limited technology substitution options; In the 60% carbon-constrained case, there is very little technological change in aviation, but the introduction of hybrid vehicles is accelerated in the medium term. Biofuels play a more important role (20% by 2050) but are constrained by resource availability. Perhaps unexpectedly, hydrogen is less prevalent in this scenario as, unlike in the base case where it is produced from fossil fuels, it is carbon-neutral in the constrained case and therefore more costly and produced at a lower level; and The findings show a continuing role for diesel, petrol and aviation fuels in 2050. Sources: Strachan et al., 2007.

3.9 A major outcome from the modelling is that transport measures could make a significant contribution towards a cost-effective, economy-wide move to cut carbon emissions by 60% by 2050, falling possibly by as much as 45% against 2000 levels by the end of the period^[2]. In the short to medium term (up to about 2020), the model indicates that technological developments in transport would do little more than offset the rise in carbon emissions that would otherwise have occurred due to growing demand for transport. More cost-effective opportunities for net carbon abatement would be realised in other sectors such as energy, industry, residential and services, as the economy moves towards its long-term target (see Figure 3.1).

Source: DTI, 2007a (Chapter 7, p237), Central scenario, 2030+ trajectory. Energy includes electricity generation and upstream oil and gas production. Data provided by Strachan et al., 2007.

3.10 However, as with all economy-wide analyses, the results of the MARKAL-Macro need to be treated with caution, as modelling such as this is beset with difficulties and uncertainties, and is dependent on the range of base assumptions used. Much rests on assumptions about technology availability, efficiency and cost, all subject to considerable uncertainty, particularly for technologies, such as hydrogen and fuel cells, which are still in their infancy.

3.11 Among its limitations are that the model is focused on technological possibilities for the abatement of emissions and is limited in its consideration of demand-side policy and behaviour change. The only role behavioural change plays in the model is in response to costs (including the implicit carbon price) whereby the model can choose either to reduce demand or to improve the efficiency of a given mode such as by switching fuels. For instance, the model cannot accommodate mode shift, nor can it accommodate a change in the size distribution of cars in the market through, for example, 'downsizing' caused by a change in purchasing patterns towards smaller vehicles. In addition, the base year is 2000, not 1990 - a significant issue for transport, as its emissions were some 6% greater in 2000 than 1990^[3]. Assessment appears to focus exclusively on carbon reduction and monetary costs, with little or no consideration of other influences or impacts including lifestyle preferences, equity effects, and impacts on innovation and competitiveness. It is also not obvious how far measures are considered as mutuallysupporting packages (with the potential for improved cost-effectiveness) rather than as individual actions. But the insights provided by these economy-wide analyses together and the technical literature focused on the cost-effectiveness of transport interventions specifically provide an extremely useful context for considering the current Government approach to reducing carbon emissions from transport in the next section.

Current Government policies for reducing transport-related carbon emissions

3.12 The package of policy measures favoured by the Government to cut transport emissions was set out in 2000 as part of a Climate Change Programme (CCP) (DETR, 2000). The 2004-06 Climate Change Programme Review (CCPR, Defra, 2004) culminated in the revised CCP (Defra, 2006a) and policy evaluations have been updated in the recent Energy White Paper (EWP) (DTI, 2007a). The CCP includes the following key elements:

• Voluntary Agreements (VAs) since 1997-98 to reduce average sales-weighted new car fuel emissions, among the EC and the European, Japanese and Korean automobile producers. The original target for emissions from the tailpipe for European manufacturers was 140g CO2/km by 2008-09. Progress has been made, but there is now widespread acknowledgement that the target will not be met;
• Package of measures (in the UK) to support the VA, comprising reforms to vehicle excise duty (VED), company car tax, and labelling on car CO2 emissions:
• For cars registered on or after 1 March 2001, a system of VED bands exists based on the CO2 emissions rating of the vehicle. Duty ranges from £0 in band A (less than 100g CO2/km) to £300 in band G (over 226g CO2/km). The 2007 Budget reduced the band B rate to £35, removed the diesel differential, increased band G to £300, with a further increase to £400 in 2008, with minor adjustments to other bands; and
• Company car tax has been based on CO2 emissions since 2002. These reforms have made significant changes to the company car market. In 2001, new company cars emitted over 2 g CO2/km more than new private cars (179 g CO2/km compared to 176.5g CO2/km); but by 2005, this had reversed, with new company cars emitting some 5g CO2/km less than private cars (167g CO2/km compared to 172 g CO2/km)^[4].
• EU successor to the Voluntary Agreements. The CCP envisaged a successor to the current agreement that would deliver similar levels of progress as seen under the current VAs. In the UK, this would equate to reaching a level of 135g CO2/km by 2020. Analysis for the Energy White Paper looked at a wider range of scenarios more commensurate with the 130g CO2/km by 2012 recently put forward by the European Commission. The UK Government has expressed its wish to see a long term target set of 100 g CO2/km, although no date for this target has yet been defined;
• UK Renewable Transport Fuels Obligation, requiring suppliers to ensure a share of their sales is from biofuels, rising in stages to 5% by 2010-11. Companies who miss this target can buy surplus certificates from those who exceed it, or pay a penalty. Both a duty discount and the RTFO are implemented at the pump, with biofuels receiving a rebate of 20 pence per litre to encourage their take-up and development. The Government wants the level of the obligation to rise above 5% after 2010, conditional on the development of robust carbon and sustainability standards, new fuel quality standards at EU level, and costs to consumers being acceptable (DfT, 2007c)^[5];
• 10 Year Plan (10YP)/Wider transport measures/Smarter Choices - including a sustainable distribution strategy in England, improvements to local public transport and a range of soft or 'smart' choices such as school travel plans; and
• Sustainable distribution (in Scotland) - freight is a minor part of the programme with specific carbon savings allocated to this policy in Scotland and an unspecified element of the savings from wider transport measures.

3.13 The Climate Change Programme also refers to the fuel duty escalator, introduced in 1993 at a rate of 3% above inflation, then increased to 5% in 1995, and again to 6% in 1997. Although scrapped in 2000, as fuel duty remained higher than it would have been had the policy never been implemented, it is still considered to be contributing to carbon reduction targets worth 1.9 MtC per annum in 2010. The 2007 Budget included an announcement of with-inflation increases in duty to 2009 (HM Treasury, 2007).

3.14 The potential carbon savings from each policy instrument in the programme are regularly re-estimated by Government as underlying modelling assumptions change in the light of experience and new evidence. Table 3.1 shows the savings attributed to each measure, totalling 10 MtC by 2020, using the most up-to-date published figures.

Table 3.1: Expected carbon savings from transport measures in the CCP

	2010	2015	2020
Voluntary Agreements package (includes supporting fiscal measures e.g. VED, CCT)	2.3[6]	3.1	3.6
Successor to Voluntary Agreements (based on a target of 135 g CO2/km by 2020)	0.3	1.1	1.8
Fuel duty escalator (1993-2000)	1.9	1.9	1.9
Renewable Transport Fuels Obligation (gross savings based on 5% of fuel sales by 2010 target)[7]	1.6	1.6	1.6
Sustainable distribution in Scotland	0.1	0.1	0.1
10 Year Plan/Wider transport measures[8]	0.8	0.8	0.8
Smarter Choices (low intensity)[9]	0.2	0.2	0.2
Total CCP	7.3	8.9	10.0

Source: Note these figures are the most up-to-date published estimates of potential carbon savings for each instrument compiled from Defra, 2006b and 2007a and DTI, 2007b. Totals do not sum due to rounding.

3.16 In addition to the emissions savings identified above, further developments have been outlined both within and separate to the Energy White Paper (DTI, 2007). However, these policy areas either do not have carbon savings attached to them or cannot be regarded as currently 'firm and funded', and so the savings attributed to them are not included in the graph^[10]:

• If aviation were included in the EU Emissions Trading Scheme (EU-ETS), assuming a cap at 2005 emissions on projected 2020 levels in line with the current Commission proposal, this is projected to save 0.3 MtC by 2020 relating to domestic UK flights only, with a further 4.4 MtC accounted for by international departures (Defra and DfT, 2007). It is anticipated that only a small proportions of these emissions savings will come from reduction measures within the aviation sector itself, as opposed to reductions purchased through credits generated elsewhere.
• If the RTFO were extended to 10%, this would save an additional 1 MtC by 2020 (DTI);
• The Energy White Paper also repeated the Government's commitment to pursue the inclusion of shipping and surface transport in the EU-ETS (DTI 2007a);
• In 2006 a new communications campaign (Act On CO2^[11]) was launched, covering eco-driving and purchasing. This highlights to consumers that they can contribute to tackling climate change without compromising on the type of car they drive - both by driving in a more fuel-efficient way and by purchasing a lower-carbon vehicle within a given class;
• A new Low Carbon Vehicle Innovation Platform will provide up to £30 million for UK industry-led demonstration and collaborative R&D projects from 2008-09 onwards; and
• Air passenger duty (APD) was doubled with effect from 1 February 2007 estimated to save around 0.75 MtC per year by 2010-11 (HM Treasury, 2007).

Emissions projections

3.17 Altogether, the impact of these policies (if delivered successfully) means that emissions from domestic transport will be around 22% lower in 2010 than they would otherwise have been^[12]. The overall effect of the programme of measures will be to stabilise transport emissions at broadly 2005 levels by 2020, as savings in the transport sector are expected to offset the growth that would otherwise occur (see Figure 3.2).

Source: Figures pre-2005 from DTI, 2006; forecasts from DTI, 2007a, Table 4.2, p12. Figures for transport exclude "off road" and savings from inclusion of aviation in EU ETS.

Observations on cost-effectiveness and the Government's approach to reducing transport carbon emissions

3.18 We note that the National Audit Office has reviewed the cost-effectiveness analysis in the CCP as a whole, concluding that it was both appropriate, sufficiently reliable for the purpose and an improvement on the analysis in 2000 - though we also note the NAO's view that fiscal measures were not subject to the same quality assurance processes as technical measures (NAO, 2006).

3.19 But our review of the priorities for reducing transport-related emissions, informed by the relevant existing literature highlighted earlier in this chapter, throws up four significant observations about the cost-effectiveness of the Government's current approach:

• The transport element of the Climate Change Programme appears to rely significantly on relatively expensive measures to deliver reductions;
• There are question marks over the ability of major elements of the programme to deliver reductions;
• The lack of emphasis on measures to encourage behavioural change represents a significant missed opportunity; and
• The role that measures related to international transport can play as part of a wider cost-effective response to tackling emissions remains unclear.

The transport element of CCP appears to rely significantly on relatively expensive measures to deliver reductions

3.20 Figure 3.3 uses cost data from various Government studies to compare the cost effectiveness of current or potential policies in the CCP, plotted against the size of emissions reduction expected from each measure^[13]. The only measures included in current policies are the RTFO at 5%, the extension of new car efficiency to 135 g CO2/km, as well as the lingering effects of the now-abandoned fuel duty escalator. The assessments of policies related to sustainable distribution, smart choices, extension to the RTFO to 10% and successor to the VA to 104 g/km each relate to intensification of current activity.

3.21 This diagram must be treated as purely indicative and should be read in conjunction with the supporting documentation by Anable and Bristow 2007 (available from www.cfit.gov.uk). By reporting the average cost per unit of carbon reduction over the lifetime of the policy, the single cost-effectiveness figure conceals the fact that costs may change over time (e.g. as technological know-how increases) and does not reflect the total amount of carbon saved or how soon carbon reductions are made (NAO, 2006). It is also important to note that the different cost estimates include different ancillary impacts and are taken from different studies with different base years.

3.22 However, the diagram does suggest that, with the exception of the Fuel Duty Escalator, the measures in the programme are expected to deliver significant savings in emissions (i.e. different versions of the Voluntary Agreement and RTFO) appear relatively expensive. They are more expensive than the mid-range social cost of carbon (c £90/tonne in 2007 prices) used in appraisal by DfT (though not as much as the cost referenced in the Stern Review) and certainly more expensive than the smaller-scale measures in the programme. While movement towards the higher RTFO target would seem to mean adopting a less cost-effective commitment than the present one, there do appear opportunities to lower the cost of the original Voluntary Agreement on cars by aiming for a tighter carbon target but over a longer period of time^[14].

3.23 The heavy reliance on seemingly relatively expensive carbon abatement opportunities in transport, however, begins to make more sense when these options are set in the context of the Government's wider analysis of economy-wide options for cutting emissions. Figure 3.4 reproduces a chart from the Energy White Paper that compares the costeffectiveness of a range of current and possible measures to reduce carbon emissions across the economy as a whole to 2020. It shows the successor to the Voluntary Agreements and RTFO extension as broadly mid-range of the options evaluated in terms of cost per tonne of carbon saved. However, as indicated above, these cost-effectiveness valuations need to treated with some caution.

Source: DTI, 2007a, Chapter 10, p286.

There are question marks over the ability of major elements of the programme to deliver reductions

3.24 The figures in Table 3.1 earlier indicate that, by 2020, 70% of reductions would come from technology policies, 19% from measures associated with carbon pricing^[16] and 11% due to policies to promote behaviour change (including sustainable distribution) - see Figure 3.5.

Source: Note these figures are the most up-to-date published estimates of potential carbon savings for each instrument compiled from Defra, 2006b and 2007a and DTI, 2007b.

3.25 Aside from the issue of whether placing such emphasis in the short to medium term on one of the three key Stern areas for action is likely to be consistent with the most costeffective approach to reducing emissions, there are two reasons to question how far some key policies can actually deliver the emissions anticipated:

• The current debate about the successor to the Voluntary Agreements has been prompted by the extremely likely failure of the current voluntary approach to deliver on the 2008 targets. In the face of slower than anticipated progress, successive versions of the UK CCP have downgraded projections of savings from the VA to be secured by 2010 - from 4 MtC (DETR, 2000) to 2.3 MtC in the latest figures (Defra, 2006b); and
• The figure used to indicate emissions savings from the RTFO (see Table 3.1) is a gross number, which follows the methodology for allocating emissions to individual member states. By failing to account for carbon emitted during the production of biofuels imported from abroad for use in the UK, it potentially overstates the net global reduction in emissions. From previous Government estimates, it would seem the net figure for carbon savings from this measure is only around two-thirds that of the gross figure.

The lack of emphasis on measures to encourage behavioural change represents a significant missed opportunity

3.26 Figure 3.3 highlights simultaneously the relative cost-effectiveness in their own right of programmes primarily focused on promoting behaviour change (e.g. smarter choices and promoting sustainable distribution) and the minor contribution which they are expected to make in terms of carbon saved compared with other interventions.

3.27 The positive economic benefits to society arising from implementing these programmes should in themselves prompt more active consideration about extending and intensifying their adoption. As Chapter 4 will highlight, we believe there is significant additional scope for cost-effective carbon reduction through this route. To take one example, work commissioned by CfIT suggests that nearly a fifth of the fuel used in UK distribution could be saved by the sharing of best practice (McKinnon, 2007).

3.28 Equally, as indicated in Chapter 2, experience suggests there is a risk that the benefits of carbon saved through technological advances will be offset without complementary measures to change purchasing and user behaviour, or counteracted by other disbenefits. By way of example, estimates of the cost of the VA take into account the effect that higher fuel efficiency has in lowering the cost of driving and so increasing car usage - yet they do not include the increased congestion or air pollution this might cause (DTI, 2007a), though doing so could increase the costs by a factor of 2 to 4.

3.29 The use of price to reinforce behaviour change can be a contentious option, as experience with the fuel duty escalator would suggest. In some cases, such as road pricing, the particular design of a price measure can work against the objective of reducing carbon emissions: studies have indicated how revenue-neutral implementation of road pricing could actually serve to increase emissions (Grayling et al, 2004; Glaister and Graham, 2005; SMF, 2007). But, equally, the strong cost effectiveness associated with the fuel duty escalator, and the positive impacts which company car tax reform have had in delivering carbon reductions, suggest that use of well-designed fiscal measures in this field should be actively considered (see Chapter 4).

The role that measures related to international transport can play as part of a wider cost-effective response to tackling emissions remains unclear

3.30 The CCP (2006) and transport chapter of the Energy White Paper (2007) both refer to policies regarding emissions from aviation and shipping, but how such measures fit within a wider cost-effective programme to reduce emissions is unclear. This is underlined by the relative paucity of published figures on expected carbon abatement from these two sources, and the relative lack of figures relating to these sectors in our review of existing analyses of the cost-effectiveness of transport measures.

3.31 We recognise the limitations in this field posed, in particular, by the international dimension to these modes, such as the absence of an agreed convention on attributing emissions from international air movements by country, and acknowledge the current small contribution made by air travel to total UK emissions, even including some element of international movements (see Chapter 2).

3.32 The prevailing wisdom is that in the short-to-medium term a significant net reduction in aviation-related emissions is relatively expensive compared with other possible measures, because of a combination of little likely fundamental change in aircraft design and the use of kerosene for propulsion, slow churn in the aircraft fleet and growth rates in the demand for air transport. However, a continuation of the current high level of oil prices, which have tripled since the 1990s, will provide a significant additional incentive for airlines to economise on fuel and invest in new fuel-efficient aircraft.

3.33 But, given anticipated growth in future emissions from air travel, we feel that more focus should be given to clarifying the cost-effectiveness and scale of contribution that measures in this area could make to the total UK programme of carbon reductions. The Government's 2003 aviation White Paper (AWP, DfT, 2003a) and associated emissions forecasts for aviation emissions (DfT, 2004a) forecast that passenger growth, unconstrained and catered for in full, would double by 2020 and almost quadruple by 2050 compared to levels in 2000 (Table 3.2)^[17]. This would result in a substantial increase in carbon emissions from approximately 9 MtC at present to central estimates of 14.9 MtC in 2020, and 17.4 MtC in 2050, taking into account:

• all international departures from UK airports as well as domestic air transport movements (passenger and freight);
• a significant fall in the passenger growth rate - 6% p.a. in the years preceding the White Paper (DfT, 2006b) - to about 3.8% p.a. between 2000 and 2020 and around 2% thereafter, reflecting increased market maturity;
• 'best guess' technological and operational improvements over this period^[18].

Table 3.2: Aviation and total UK emissions

	Passenger numbers (mppa)	Average growth rate p.a. (%)	Emissions from UK aviation (domestic + intl.) (MtC)	Total UK CO2 (domestic but not intl.) (MtC)	Combined total CO2 (incl. intl. aviationc) (MtC)	Aviation as % of combined total (%)
2000	180a	3.8%	8.8b	149.8b	158.0	5.6%
2020	379	2.2%	14.9	n/a	n/a	n/a
2030	480	1.7%	17.7	100.4	116.8	15.2%
2050	670		17.4	65.8	81.6	21.3%

Source: ^aDfT, 2006a (Table 2.1); ^bDefra, 2007b; all remaining forecasts published in EAC, 2004 (p19) based on DTI, 2003 and DfT, 2004a; ^cnote: international shipping emissions not included.

3.34 If the total budget is expanded to include departing flights and the 60% target is applied to this new total, aviation on its own is set to account for around 15% of total CO2 emissions in 2030 and 21% in 2050 (see Table 3.2). Sensitivity testing on key parameters, such as the cost of flying and economic growth, shows that even with substantially higher costs (some scenarios, for example, assume passengers will face an additional carbon charge based on the Government's own central value for the cost of carbon and phased in from 2010 to 2020) or slower economic growth, the trajectory for air travel is still strongly positive. It should also be noted that these forecasts do not include possible additional non-CO2 impacts on climate from aircraft or from other sources (see 2.9 above), and that other papers published since the White Paper (Owen and Lee for Defra in 2006, and The Tyndall Centre for Climate Change Research in 2005) have concluded that aviation will have a much more significant impact on UK emissions than suggested by the DfT (largely because of their use of higher future growth rates and lower rates of fuel efficiency improvements).

3.35 Table 3.2 needs to be treated with caution, as it risks giving a distorted pictured by reflecting a broadly 'business as usual' rise in aviation emissions when emission trends from all other sectors of the economy instead are assumed to have changed significantly to deliver a 60% reduction. However, the scale of emissions under official forecasts represents a significant additional element to the UK's future carbon footprint, which is absent from the future scenarios generated by the MARKAL modelling. Taken together with the lack of figures relating to international shipping, these omissions highlight the difficulty for the Government of establishing what represents a cost-effective, economywide package of measures to achieve a "true" reduction of UK emissions of 60% by 2050.

Conclusions

3.36 Establishing the cost-effectiveness of transport measures to reduce carbon emissions can be a complex affair, as witnessed in the wide variation in estimates of the impacts of measures that emerges from much of the technical work in this field. An initiative to bring greater consistency, clarity and coverage to the way in which cost-effectiveness is assessed would help policy makers reach effective decisions about priority options.

3.37 Some common themes arise from the body of work in the UK and abroad on the costeffectiveness of transport measures to cut carbon-based emissions. Measures focused on technology can deliver scale reductions in emissions but can also be relatively expensive; measures focused on behavioural changes can appear relatively more costeffective but depend on multiple decisions by individuals, with no guarantee of delivery.

3.38 A number of global and/or economy-wide analyses suggest that transport has a major role to play as part of an economy-wide set of cost-effective measures to reduce carbon to 2050, but that the significance of that role compared with the contribution of other sectors grows after about 2020.

3.39 However, the methodology behind such analyses has its limitations, and so the insights generated need to be treated with caution. Apart from the uncertainties arising from any exercise that needs to make base assumptions and looks over the long term, a key issue is the focus of such analyses on the merits of different technological options, with little attention given to the potential of measures framed specifically to encourage behavioural change.

3.40 The impact of the main programme of Government policies to tackle transport emissions means that carbon from transport will be 22% lower in 2010 than it would otherwise have been. The overall effect of the programme, if successful, will be to stabilise transport emissions at broadly 2005 levels by 2020.

3.41 We are concerned that the transport element of the Climate Change Programme (CCP) appears to depend heavily on relatively expensive measures to deliver emissions savings. Estimates of the cost-effectiveness of policies to deliver emissions at scale suggest that many of these measures are significantly more expensive than the mid-range social cost of carbon adopted by Government.

3.42 There are question marks over how far major components of the programme can deliver reductions in practice. Experience on the Voluntary Agreement, for example, has seen steady but insufficient progress to improve the carbon efficiency of new cars sold in the UK.

3.43 With 70% of the carbon emissions in the CCP due to be delivered by technology, we believe there is a missed opportunity to capture greater cost-effective carbon savings from transport and 'lock in' the positive impacts of technological advances using measures to encourage behavioural change through fiscal and non-fiscal means.

3.44 The role that measures related to international transport can play as part of a wider cost-effective response to tackling emissions remains unclear. The modelling used by UK Government to review cost-effective options for carbon abatement across the economy does not cover international aviation and shipping.

3.45 In view of these issues, we believe there are significant risks to the Government's ability to deliver transport emission savings as part of a coherent, cost-effective and economywide response to mitigation.

3.46 There is therefore a case for identifying measures that can deliver greater and more cost-effective ways of reducing transport carbon emissions. We believe that the case is even stronger, given that there are challenges facing the delivery of carbon abatement opportunities in other sectors and the strengthening scientific evidence pointing to the need for larger carbon reductions to be delivered more quickly than currently anticipated in the Government's approach.

3.47 The following chapter sets out recommendations for improving on the current set of policies to reduce transport carbon emissions in the UK.

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1: Stern reviewed a number of valuations of the social costs and recommended a methodology to calculate it. The revised guidance from the Government will reflect this.
2: This appears to be a greater reduction than that achieved by the residential or service sectors. However, this would not be the case if 1990 had been used as the base year as these other sectors had already begun making significant reductions in emissions between 1990 and 2000 whereas transport had not.
3: According to Defra (2007b) total domestic transport emissions were 31.8 MtC in 1990 and 33.6 MtC in 2000.
4: SMMT, 2006.
5: Until September 2007, the DfT are consulting on carbon and sustainability reporting within the renewable transport fuel obligation. See: www.dft.gov.uk/consultations/closed/rtforeporting/.
6: Of which vehicle excise duty is 0.15 MtC and company car tax is 0.50 MtC.
7: This figure follows the internationally agreed methodology for allocating emissions to individual states, which prevents global double counting of emissions. As such it does not take into account the carbon emitted during the production of biofuels that are produced abroad and used in the UK. When this is taken into consideration, the net global reduction in CO2 emissions is around 1 MtC per annum.
8: Estimates available for 2010 only, assumed constant to 2015 and 2020.
9: In the supporting analysis to the EWP (DTI, 2007b), 0.2 MtC was reallocated to the transport sector from 'local authority policies'. We have clarified these as pertaining to smart measures implemented beyond that included in the 10YP. See Chapter 4 for further explanation of policies regarded as smarter choices.
10: It could also be argued that the successor to the Voluntary Agreement is also not 'firm and funded'. However, the Government attaches carbon savings to this measure in the CCP baseline.
11: www.dft.gov.uk/ActOnCO2/.
12: On the basis that emissions in 2020 are projected to be 35.9 MtC after savings from the CCP and EWP of 10 MtC (DTI, 2006b).
13: All costs and benefits are brought to present day values using standard discounting techniques.
14: The analysis for the Energy White Paper (DTI, 2007a) used two different estimates to illustrate the uncertainty in technology cost estimates. The alternative analysis by TNO suggests costs may be lower (implying a benefit of £85/tC saved with historical rates of progress, or £36/tC for more rapid fuel efficiency improvements (reaching 104 g CO2/km in the UK 2020) - compared to £105/tC and £151/tC for Ricardo. We have used the Ricardo estimates in our own calculations, as these were based on the UK context. See Anable and Bristow (2007) for a discussion.
15: Not all bars in the chart correspond to policies being taken forward. The chart illustrates the potential for carbon savings and their cost-effectiveness.
16: Although the impact of VED and Company car tax is not separately analysed after 2010 and the savings are included in 'technology' instead.
17: Figures for the rate of growth of air freight are not provided by the DfT. In 2004, air freight rose in the UK by 7.9% (Eurostat, 2006). Industry forecasts that cargo traffic growth will increase 6.2% per year for the next 20 years (Cairns and Newson, 2006).
18: These comprise 15% fuel efficiency improvement between 2000 and 2030, with a further 25% savings occurring between 2030 and 2050, and 10% savings arising from the optimization of air traffic management from 2010 onwards.

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