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Aviation and Emissions Trading

by nanne Wed Aug 3rd, 2005 at 06:10:53 PM EST

About a week ago the Financial Times ran a story on the inclusion of airlines in Europe's emissions trading scheme. Whether this was really news can be questioned. What is certain is that the FT did a poor job reporting it.

The FT got a look at the preliminary plans drawn up by the European Commission, from which it drew the news that the measure may end up costing the consumer up to 9 Euros a ticket.

This was called a 'pollution penalty'. But it is nothing of the kind.

The news that the European Union would try to solve the issue of aviation and climate change by including the airlines in emissions trading was reported two months ago in the EUobserver (now, like the FT article, behind the payment wall). And it could have been seen coming much earlier.

The reasons why this is the only available avenue for the EU to take are twofold. First, it is the only politically feasible solution. Second, it is the best solution.

Other measures to tackle this issue range from a lot harder to agree on to politically impossible. Under the  current treaties, a tax on kerosene or a surcharge on airline tickets would require unanimity among the 25 member states to be agreed upon. Tax harmonisation is an especially sensitive topic in EU politics, and a proposal made by the Commission during the '90s to instate a comprehensive fuel tax has already died a silent death. Meanwhile, old-fashioned command and control measures would meet heavy resistance by the airlines, and tend to come at a higher cost to society. Tackling the issue at the national level is also not an option, logically, things like a fuel tax need to exist on both ends of a line, and evasion of both airlines and passengers to airports over the border can become a threat.

What interested me, then, were the precise details of the Commission's plans. But on these the FT doesn't have much, except the expected cost. Worse, because of the title of the report, some people thought that this was actually a tax.

Emissions trading is different from taxation, if only for the simple reason that the government doesn't get any money out of it; the rights in the European scheme are handed out free of charge. The argument that the effects of emissions trading are similar to taxation has been made by conservatives in the debate around the McCain-Lieberman bill in the US, and has the backing of the Congressional Budget Office. But it's wrong.

A 'downstream' emissions trading scheme of the nature of the European scheme results in a different incentive structure than a fuel tax, because of which it can have more bang for buck. Fuel inputs are only one side of the equation, and taxing them leaves out solutions on the other side. This effect is especially pronounced in the case of aviation. A study by the German 'Oeko Institut' has shown that carbon dioxide emissions probably account for less than half of the climatic impact of aviation (other impacts include cloud formation), and that when measures fixate on these emissions, the result could actually be an increase of the impact.

The inclusion of the airlines will require some changes in the European scheme too, or a semi-independent scheme for aviation with a different weighting of rights. That is required at any rate, as a tonne of carbon dioxide emitted at cruising altitude has a considerably higher impact than the same amount emitted at ground level. What matters most is that the cover of the measure is comprehensive and that there are no restrictions on trading between the different sectors.

The cost of this all will then be determined on the market for emission rights. And no, the companies won't pay (a lot) for it, they'll base their costs on the market price of the emission rights, pass those on to the consumer and get a windfall profit in the process, as they got the rights for free. There are some real costs for the companies, which arise if there is a shortfall. How big those are depends upon how the sector develops.

But that doesn't really matter. Because of this measure, the price of an airline ticket will have come a little bit closer to covering the real cost of flying, and more importantly, the effort to reduce greenhouse gas emissions will intensify.

Thanks nanne. My earlier post on the topic was indeed pretty short on details and I am grateful that you provide this commentary.

As you may have read on other threads, the "real cost" of things is a pretty big preoccupation on this site, and I fully agree with you that this scheme would be a good idea. The question that remains is at what levels to set the initial emission rights, and whate rate of decrease, if any, is imposed.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Aug 3rd, 2005 at 06:51:04 PM EST
You're welcome.

The emission rights should be allocated in proportion to the sector's current contribution to the total climatic impact and the decrease necessary to meet the Kyoto target, or at a higher rate of decrease. This is because the abatement costs for industry are lower than for other parts of the economy.

But the allocation will be decided upon by the individual member states, and they are free to allocate as they choose as long as it is consistent with meeting their obligation under the EU's burden sharing agreement on Kyoto (the EU has committed as a whole to Kyoto and worked out the individual burden of the member states internally). Whether the member states will choose for the most optimal solution is indeed an open question.

by nanne (zwaerdenmaecker@gmail.com) on Thu Aug 4th, 2005 at 09:11:31 AM EST
[ Parent ]
Excellent diary, thanks for posting it, and thanks for the link to the Oeko Institut report.

Can I just ask you to expand a little on this?

There are some real costs for the companies, which arise if there is a shortfall. How big those are depends upon how the sector develops.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Aug 4th, 2005 at 02:20:30 AM EST
Thanks. On the cost for the airlines, the scheme will allocate a limited number of emission rights to them, which they have to turn over to the government for each unit of greenhouse gas emitted. The units will be measured as a tonne of CO2 equivalent (at ground level). When they have a shortfall of rights the airlines have to implement measures to reduce their emissions, or buy emission rights on the market. How soon the airlines will experience a shortfall depends upon the initial allocation of rights, and upon the amount to which the sector grows.

There are also some administrative costs, but these are negligible. I know from a medium-sized power company that they had about one FTE for the preparation including consultation with the government and all that, and less for actual trading.

by nanne (zwaerdenmaecker@gmail.com) on Thu Aug 4th, 2005 at 08:42:17 AM EST
[ Parent ]
FTE meaning Full Time Equivalent meaning one admin job? (Assume I'm stoopid, you won't be far wrong ;-))
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Aug 4th, 2005 at 08:55:47 AM EST
[ Parent ]
Indeed. (If yr stoopid it hasn't shown yet :-))
by nanne (zwaerdenmaecker@gmail.com) on Thu Aug 4th, 2005 at 09:13:35 AM EST
[ Parent ]
I'm on a good day.

On the growth of civil aviation: some forecasts are "enthusiastic", by which I mean foresee strong growth over the coming years/decades (after the post-9/11 downturn); others consider rapid growth was for the early decades of the sector and we will now see a plateau effect (ie pretty much stable activity from now on).

If you have a crystal ball, what do you see in it?

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Aug 4th, 2005 at 10:05:34 AM EST
[ Parent ]
Airline tickets are still amazingly cheap, I don't know why people don't fly more. Possibly because they like to have their car with them.

Now I don't know much about the aviation sector, but I think that with the growing integration of the internal you will see more business-related travelling. And on frequent business routes, low cost carriers can jump in. So I think you'll see quite a bit of growth, particularly in eastern Europe. Some of this growth can be averted by working on the trans-European rail network, meaning that there's a cause for the budget here as well (another obsession of mine).

The real growth, of course, will be in Asia.

Good, that's enough uninformed speculation for today :-)

by nanne (zwaerdenmaecker@gmail.com) on Thu Aug 4th, 2005 at 01:13:51 PM EST
[ Parent ]
You mention airlines, would this have any effect on personal aircraft? I imagine their CO2 output is negligible compared to the large fleets, but are aircraft manufacturers going to be pushed for better mileage/emission controls? Or is it so small as to not be worth the effort?
by toad on Thu Aug 4th, 2005 at 11:11:08 AM EST
[ Parent ]
I haven't looked at the Commission's plans, of course, but the current emission trading scheme only covers large industrial installations and for practical purposes it's impossible to include personal aircraft. It might even be difficult to include small carriers. The only effects the measure will have are spin-off effects.

Aircraft makers are going to be pushed for more fuel efficiency simply by the higher fuel prices. In terms of engine design, this can lead to higher emissions of other harmful gases, such as NO(x), which might eventually merit setting some common standards which apply to all jet aircraft. Taken on their own, I don't think we'll see any regulation of personal aircraft, the market is probably too small.

by nanne (zwaerdenmaecker@gmail.com) on Thu Aug 4th, 2005 at 01:31:57 PM EST
[ Parent ]

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