Using Economic Instruments to Address Emissions from Air Transport in the European Union

Abstract

Air transport has become a vital component of the global economy. However, greenhouse-gas emissions from this sector have a significant impact on global climate, being responsible for over 3.5% of all anthropogenic radiative forcing. Also, the accrued visibility of aircraft emissions greatly affects the public image of the industry. In this context, incentive-based regulations, in the form of price or quantity controls, can be envisaged as alternatives to mitigate these emissions. The use of environmental charges in air transport, and the inclusion of the sector in the European Union Emissions Trading Scheme (EU ETS), are considered under a range of scenarios. The impacts of these measures on demand are estimated, and results suggest that they are likely to be minimal—mainly due to the high willingness to pay for air transport. In particular, in the EU ETS scenario currently favoured by the EU, demand reductions are less than 2%. This may not be true in the longer run, for short trips, or if future caps become more stringent. Furthermore, given current estimates of the social cost of CO2 as well as typical EU ETS prices, supply-side abatement would be too costly to be encouraged by these policies in the short term. The magnitude of aviation CO2 emissions in the EU is estimated, both in physical and monetary terms; the results are consistent with Eurocontrol estimates and, for the EU-25, the total social cost of these emissions represents only 0.03% of the region's GDP. It is concluded that the use of multisector policies, such as the EU ETS, is unsuitable for curbing emissions from air transport, and that stringent emission charges or an isolated ETS would be better instruments. However, the inclusion of aviation in the EU ETS has advantages under target-oriented post-2012 scenarios, such as policy-costs dilution, certainty in reductions, and flexibility in abatement allocation. This solution is also attractive to airlines, as it would improve their public image but require virtually no reduction of their own emissions, as they would be fully capable of passing on policy costs to their customers.