Existing fuel taxes play a major role in determining the welfare effects of exempting the transportation sector from measures to control greenhouse gases. To study this phenomenon we modify the MIT Emissions Prediction and Policy Analysis (EPPA) model to disaggregate the household transportation sector. This improvement requires an extension of the GTAP data set that underlies the model. The revised and extended facility is then used to compare economic costs of cap-and-trade systems differentiated by sector, focusing on two regions: the USA where the fuel taxes are low, and Europe where the fuel taxes are high. We find that the interplay between carbon policies and pre-existing taxes leads to different results in these regions: in the USA exemption of transport from such a system would increase the welfare cost of achieving a national emissions target, while in Europe such exemptions will correct pre-existing distortions and reduce the cost.Abstract in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change website (http://mit.edu/globalchange/www/).Supported by the US Department of Energy, Office of Biological and Environmental Research [BER] (DE-FG02-94ER61937); the US Environmental Protection Agency (X-827703-01-0); the Electric Power Research Institute; and by a consortium of industry and foundation sponsors.