Through legislation and executive order California has committed itself to a policy of reducing its greenhouse gas emissions. This paper will examine the transport sector part of these policies and their economic impact and contrast them to similar policies prevalent or proposed for the EU. The paper begins with a review of existing legislation and how this legislation fits within the US federal system. There is a potentially very different legal framework for the control of automobiles and other greenhouse gas sources. The federal issues have been the subject of important Supreme Court and District Court decisions and there is still live controversy as to the ability of California to regulate by itself. While the CA regulations are being litigated, the Senate has passed automobile regulation as stringent as California and the EU is considering very similar legislation. The efficacy of CA regulation depends upon the number of other states that adopt, as all states are linked together in the CAFE standards. Similarly, the cost of compliance depends upon the adoption by other states, by Canada, and by the EU.
Next we review the issues of carbon intensity of fuel. Here there are again both federal and state initiatives. Lastly we analyze the alternative fuels and existing fuels based upon the marginal, as opposed to average carbon content of the fuels. Trade in fuel is a very important part of the carbon accounting and it is very difficult for the importer (CA or the EU) to ascertain the provenance on the fuel it buys. Hence oil from shale and sand or ethanol made with coal energy can easily undo the supposed carbon gains from changing fuel mixes.