Economic Analysis MBO’s C/B review of Market Based Options for Reduction of CO2 from Aviation Presented by Hans Pulles

Measures Emission related levies (taxes and charges) Emissions trading Fuel/en-route tax Fuel/en-route charge with re-channeling proceeds Revenue neutral en-route charge Emissions trading Closed, open Auctioning, grandfathering Voluntary measures

Targets Target 1 - reduce 2010 emissions to 95% of 1990 levels Target 2 - 50% reduction in projected emissions growth between 1990 and 2010 Target 3 - 25% reduction in projected emissions growth between 1990 and 2010

RTK’s and Global Fuel Burn (relative to 1998) 25% } } } 50% growth } 5%

Mechanisms and Approach

General effect of a MBO It raises (fuel) costs to the airlines General assumption: Costs are passed on to consumer Airlines will raise fares and freight rates Increased prices will have effect on demand Average global fare elasticity -0.7 with regional differentiation -0.5 to -0.9

General effect of a MBO (continued) Based on economic criteria airlines will shift to more modern aircraft (better fuel efficiency) Autonomous fuel improvement 1%/pa for newly purchased aircraft Other possible effects: accelerated technology development (manufacturers response or supply side effect)

General effect of a MBO (continued) Other possibilities: use funds from charges for early retirement older aircraft ----> re-channeling proceeds of charges purchase emission rights from non aviation sources ----> Emission Trading

Analysis Results obtained with the AERO-modelling system

General conclusions Demand effect is dominant over technology improvement Exception in re-channeling cases With open emission trading the main reduction is achieved by trading

Conclusions Results roughly the same for: Fuel taxation En-route CO2-modulated tax Closed trading system Voluntary agreements that reach the targets

Reduction in traffic demand (expressed in % of total 2010 RTK’s) 25% 50% 5% Kyoto

Reduction in traffic demand (expressed in % of total 2010 RTK’s) 25% 50% 5% Kyoto

Reduction in traffic demand (expressed in % of total 2010 RTK’s) 25% 50% 5% Kyoto

Conclusions Detailed Analysis Kyoto targets: High costs/demand implications Open trading only viable option, money leaves the aviation sector For less stringent targets a fuel/en-route charge where the proceeds are re-channeled become viable, but complicated to implement

Conclusions Detailed Analysis (continued) For even more relaxed targets a revenue neutral en-route charge are effective as well. Regionally applied measures have less environmental benefits, a chance of distortions in the competition between airlines and increased permit prices