Understanding the Relationship Between Aviation Economics and the Broader Economy

There are several administrative approaches to reduce aviation's impacts on climate change. One market-based measure of particular interest to governments worldwide is cap-and-trade, which is also referred to as “emission trading." Beginning in 2012, the European Union is planning to include aviation in its emissions trading scheme. In the US Congress, various climate bills have been under consideration, such as the American Clean Energy and Security Act (“Waxman-Markey Bill”), which is a variant of a cap-and-trade plan and requires a 17 percent emissions reduction from 2005 levels by 2020.

Emission trading is based on a cap on the amount of an emitted pollutant and the allocation of allowances, which represent the right to pollute. The number of allowances is reduced over time, according to the initially defined reduction objectives. Companies that emit fewer pollutants than they are allocated can sell the excess to other companies that need more. The trade of allowances thus leads to a reduction of the pollutant by those companies and industries, where the abatement costs are lowest. This approach is therefore more efficient compared to a uniform reduction of emissions across all industries.

Project 31 analyzes the effects of a potential introduction of a cap-and-trade policy in the aviation industry. Analyses are conducted through the joint application of the Aviation Environmental Portfolio Management Tool, in particular the APMT Economics module, and a global model of economic growth and greenhouse gas emissions, the MIT Emissions Prediction and Policy Analysis (EPPA) model. Where the EPPA model's outputs provide information on the world economy, changes of greenhouse gas emissions and the expected cost of carbon, APMT Economics focuses on the airline industry, and provides outputs such as operating costs of airlines, demand, or airline fleets. Further detail will be added to the assessment once the EPPA model is developed to represent the aviation sector.

While the project has focused initially on the implications of a cap-and-trade policy, the tools will also enable the study of a variety of other mitigation options where understanding the behavior of the broader economy is important for understanding the response of the aviation sector — for example, the extent to which mandates for renewable fuels in one sector can influence price and availability in other sectors, or the relative economic efficiency of sector-based regulations and standards versus broader economy-wide measures.

Anticipated outcome -- The assessment of different implementation scenarios of cap-and-trade in aviation, and the economic and aviation related impacts, is complete and offers interesting insights. Under one set of assumptions in our analysis, aviation emissions between 2012 and 2050 increase by 97 percent under a cap-and-trade policy, compared to 130 percent in a scenario without climate policy. Another key finding is that, under some combinations of modeling assumptions, climate policy reduces average fleet efficiency, as increased air fares reduce demand and slow the introduction of new aircraft. Further tool development is envisaged to evaluate other research questions involving aviation environmental policy, such as the introduction of alternative jet fuels.