The Swedish road transport sector relies almost completely on fossil fuels. In 2007, as much as 96 percent of the total sales of fuels was made up of petrol and diesel, while at the same time the share of total emissions of greenhouse gases in Sweden that came from road transports amounted to close to 30 per cent. Sweden is by no means worse off than any other European country in these respects. In order to address the questions of high oil dependence and CO2 emissions the European Commission has proposed a reinforcement of the legislative framework, with a 10 percent minimum for the market share of biofuels in 2020. Furthermore, the proposed target is binding for the member states, unlike the current voluntary target of 5.75 percent by 2010.
More than doubling the usage of biofuels in only a bit more than a decade will most likely not be possible without policy interventions. One of the most important policies in place in Sweden today to promote biofuels is a tax exemption on these fuels. The tax exemption is however a costly measure resulting in more than a 1.3 billion SEK reduction in government revenues each year. The size of this foregone revenue of course increases with the increase in usage of biofuels. Much due to this the Swedish Energy Agency together with the Swedish Environmental Protection Agency have suggested that the proposed 10 percent target should be met by introducing a binding quota system for the sales of biofuels, while at the same time abolishing the tax exemption. This thesis investigates the short run effects of this proposal on the market for fuel. Since a large part of the thesis is dedicated to constructing the simple partial equilibrium model used for the policy analysis, the development of the model can also be seen as an objective in itself.
The analysis shows, just as economic theory would predict, that using price incentives as a policy intervention in the market for vehicle fuels (tax exemption) to increase the usage of biofuels, leads to uncertainty in weather the target will be met or not. Whether or not the policy measure is cost efficient depends on how, and in relation to what, the cost efficiency is measured. As it is interpreted in this thesis, the tax exemption is indeed a cost efficient measure to increase the usage of biofuels. Furthermore, the thesis shows that were the go...
