By: Vicki Ekstrom, Joint Program on the Science and Policy of Global Change

Regional climate policies depend largely on fiscal strategies and can have spiraling effects throughout the globe, a new MIT report further proves in the January edition of the Journal of Transport Economics and Policy. The report — titled “Biofuels, Climate Policy, and the European Vehicle Fleet” — uses the European transportation system as a test case and shows the significant impact various fiscal policies can have on emission reductions.

“The effectiveness of climate policies in isolation might depend crucially on the fiscal rules and environment,” says Sebastian Rausch, a co-author of the study and a research scientist at MIT’s Joint Program on the Science and Policy of Global Change. “So if you want to think about effective emissions-reduction policies and climate policies you have to take into consideration their interaction with other mechanisms like taxes and tariffs.”

For decades, Europeans have relied on diesel to power their cars. While better for the environment, these drivers have traditionally chosen diesel because higher taxes on gasoline make diesel the cheaper alternative. But now, Europe is encouraging its drivers to consider greener options. The European Union has imposed a renewable fuel mandate that requires 10 percent of fuel to be based in renewable sources like biodiesel or ethanol by 2020.

But will the higher price tag that often comes with renewables cause the mandate to have a negative effect? The MIT researchers say no. Studying the system with and without the mandate, they find that the number of drivers using diesel and biodiesel continues to increase with time because of rising oil prices and a tax system that balances out the additional expense of using renewables.

“So fueling up with biodiesel would still be 69 cents a gallon cheaper than gas,” Rausch says, “and it has the added benefit of reducing European emissions by about 8 percent by 2030.”

The report further analyzes the impact of tax or tariff changes, in combination with the imposed mandate. As one might expect, when gas and diesel have an equal tax rate almost a quarter fewer drivers choose diesel by 2030. The renewable fuel mandate also does not have a large impact on emissions because more drivers turn to gas. But if biodiesel and ethanol tariffs are removed, Europe can achieve significant emission reductions — about 45 percent — as these renewable fuels become cheaper to import and use. At the same time, diesel vehicles would all but disappear as ethanol blends crowd out the diesel market.

Looking at a global scale, the report shows that while renewable initiatives can cut emissions within that country, they can also cause spikes in emissions in other countries — or what is known as “leakage.”

Rausch explains: “You’re still driving a fair amount of diesel vehicles, but the fuel to drive those vehicles now comes from Brazil and other countries because you’ve removed your tariffs. You don’t have to produce as much diesel in the EU, so your emissions there are little bit lower. But the countries now producing more fuel to import to the EU see higher emissions.”

But there is still a positive side, Rausch says: “Because there’s a switch in imports from diesel to biofuels, emissions do get reduced in other countries as well because biofuel production releases fewer emissions than diesel production.”

These fuel changes in Europe can have a “snowballing effect,” Rausch says. Along with “leakage,” there can be other consequences. If Europe evens out its tax system, for example, increased demand for gasoline in Europe would drive up gasoline prices outside of Europe and lower gas consumption and emissions in general.