The transport sector presents particular challenges given complexities in capturing revenue, and the multiple actors involved. Both private and public transport is in need of decarbonisation and restructuring to align with a 1.5°C world. Transport accounts for 32% of energy use globally but only 3.7% of its energy mix is RE. It also sees far less climate policy than the power sector.[i]
Net-zero transport will be delivered by system redesign, not solely technology switching and electrification. Redesigning transport systems to enable self-powered mobility and encourage public transport use will reduce demand for private cars. This will require transformative urban planning which reduces travel distances and makes sustainable transport the most convenient choice.[ii] This will enable decarbonisation, reduce inconvenience of transition for consumers and reduce use of cars. This will also have significant co-benefits; reducing air and noise pollution, reducing transport costs for consumers, and improving health and wellbeing.
Green and scale down private transport
While system redesign can reduce use of private transport, demand for private mobility will remain. Decarbonisation technologies for private transport, electric vehicles (EVs), are now competitive with internal combustion engines (ICEs) on a full lifecycle basis. However, government will still need to support their uptake to overcome consumer reluctance. Tax incentives can bring down the upfront cost of EVs, bringing this closer in line with that of ICEs. Strategic development of the charging network to enable widespread EV use is also crucial.
These enabling factors need to be supported with clear phaseout dates for ICEs, . This gives a clear signal to investors, manufacturers and consumers of the need to switch to EVs. The UK set its 2030 phaseout date in 2020 – setting phaseout dates early allows time for transformation of investment flows. The IPR RPS finds that new fossil fuel light duty vehicles should be phased out by 2030-2045 globally, depending on the national context.
Ministries will also need to remove incentives on ICEs, such as tax exemptions on diesel consumption, or lowered fuel duty.[iii] Such subsidies distort the market and this spending should be channelled to support customers with EV purchase – an important example of environmental tax reform, see Fiscal policy – reorient flows.
In addition, pricing mechanisms on fuel could also factor in fossil fuel externalities, either in addition to carbon pricing or as an alternative in countries where economy-wide carbon pricing is not present/possible.
Green and scale up public transport
Public transport needs to be both scaled up, to reduce private transport reliance, and also be decarbonised.
Green public procurement can be used to shift public transport investment to green. Procurement programmes can enable local governments to consider the total cost of ownership, levelling the playing field with fossil-based transport options with lower upfront costs. [iv] Procurement programmes can also help boost investment in sectors that are under development, as long-term offtake agreements will provide demand certainty and boost investor confidence – hydrogen, green steel. Central government mandates for green transport procurement can ensure sufficient speed and ambition of procurement.
National or supranational governments can provide subsidies to local authorities to invest in green public transport. This can also ensure just transition by enabling investment in low-income regions with a smaller tax base. Municipal green bond issuance can be used to fund this. These are issued by states, cities or other subnational actors. Transport is a common focus of green muni bond issuance, with mass transit authorities some of the largest green muni bond issuers.
Central governments can work to improve municipality creditworthiness and reduce investment risk by centralising and ring-fencing revenue collection and establishing financing mechanisms to cover revenue shortfalls from user fees. [v] This can improve the credibility of subsidy and payment schemes and generate investor confidence.
To fund expansion of public transport, the ministry of transport can use land value capture. This is a set of mechanisms to monetise the increase in land value in the catchment area of new transport infrastructure. It involves selling land or retail space above public transport infrastructure (bus depots, train stations etc). This model can enable investment by authorities that lack sufficient tax base to fund significant capex, or ensure more predictable income from the investment than passenger fares.
While many metro systems operate at a loss, Hong Kong’s Mass Transit Railway (MTR) is self-sustaining. Under the ‘rail plus property’ model, MRT is granted land development rights at stations and depots on a new rail line. It partners with developers to build properties and receives a share of the profits. MTR also pays the government a land premium. This model reduces investment risks for the government, keeps transport affordable, and enables condensed urban planning.[vi] Therefore, land value capture models can also help deliver sustainable urban development.
Enable decarbonisation of hard-to-abate transport
Heavy duty transport, shipping and aviation are emissions-intensive hard-to-abate sectors. Policymakers can support their decarbonisation with the policies outlined in Decarbonise industry for hard-to-abate industry.
Specifically in air transport, mandates for sustainable aviation fuel can be used. In the UK, a mandate will apply from 2025, with 10% of jet fuel to be SAF by 2030.[vii] While mandates can pose difficulties and promote incremental change or inefficiencies and so are not suggested for all hard-to-abate industries, aviation is one where they can be of use. A mandate, with strict criteria to prevent use of unsustainable biofuels and promote use of green hydrogen-based fuels, can help generate demand and provide investor confidence.
As these industries are even earlier in the transition pathway than other hard-to-abate sectors, without clear decarbonisation pathways, governments should focus on funding R&D and encouraging early stage investment in innovative technologies.
These sectors have not been included in some carbon taxation regimes due to carbon leakage concerns. Including all transport in carbon pricing will help ensure their cost and competitivity better reflects their environmental impact. This can encourage technology switching, for example rail transport for overland aviation.
[i] REN21, 2022. Renewables 2022: Global Status Report, https://www.ren21.net/reports/global-status-report/
[iv] Climate Finance Leadership Initiative, 2022. Unlocking Private Climate Finance in Emerging Markets, https://www.gihub.org/resources/publications/unlocking-private-climate-finance-in-emerging-markets/
[v] Climate Finance Leadership Initiative, 2022. Unlocking Private Climate Finance in Emerging Markets, https://www.gihub.org/resources/publications/unlocking-private-climate-finance-in-emerging-markets/