Economic development is becoming increasingly sensitive with regard to environmental implications. Transport sectors – road, rail, air and water – are crucial to the growth and development of an economy. These sectors use heavy inputs of energy from petroleum products, coal and thermal electricity and are subject to various policy distortions including a complex tax regime. The key objective of this paper is to evaluate gains to the economy when the delivery of transport services becomes relatively efficient through removal of tax and other policy distortions. Such an analytical exercise is implemented using a computable general equilibrium (CGE) model of the economy within the framework of input–output flow matrices. The results show that the economy gains through improved efficiency of transport sectors. There are corresponding gains in trade and output. The real returns to the factors of production, viz. land, labour and capital, register increase. Positive scale effects are observed for the manufacturing sectors, particularly for heavy users of transport services. Enhanced efficiency of transport services lowers demand for energy in the economy. The analysis shows that increased efficiency of transport sectors leads to welfare gains in an environment friendly manner.