Simulating deep CO2 emission reduction in transport in a general equilibrium framework: The GEM-E3T model

- Comprehensive modeling of transport decarbonisation in a CGE framework: GEME3-T model.
- Assessment of transport decarbonisation finds small negative impacts on the EU GDP.
- Negative effects due to higher levelized cost of transport in the transition period.
- Production of new technologies, fuels and infrastructure will favour economic growth.
- Efficient financing of increased capital spending and infrastructure is critical.

Transport sector restructuring to achieve deep GHG emission cuts has attracted much attention because transportation is important for the economy and inflexible in greenhouse gas emission reduction. The aim of this paper is to simulate transition towards low carbon transportation in the European Union until 2050 and to assess the ensuing macroeconomic and sectorial impacts. Transport restructuring is dynamically simulated using a new transport-oriented version of the computable general equilibrium model GEM-E3 which is linked with the PRIMES-TREMOVE energy and transport sectors model. The analysis draws from comparing a reference scenario projection for the EU member-states up to 2050 to alternative transport policy scenarios and sensitivities which involve deep cutting of CO2 emissions. The simulations show that transport restructuring affects the economy through multiple channels, including investment in infrastructure, the purchasing and manufacturing of new technology vehicles, the production of alternative fuels, such as biofuels and electricity. The analysis identifies positive impacts of industrial activity and other sectors stemming from these activities. However, the implied costs of freight and passenger transportation are of crucial importance for the net impact on GDP and income. Should the transport sector transformation imply high unit costs of transport services, crowding out effects in the economy can offset the benefits. This implies that the technology and productivity progress assumptions can be decisive for the sign of GDP impacts. A robust conclusion is that the transport sector decarbonisation, is likely to have only small negative impacts on the EU GDP compared to business as usual.