Environmental change and policy airline industry.
(a) Discuss the implications of environmental change and policy responses to the change for the airline industry.
Role of Aviation on Climate Change
Aviation has experienced rapid expansion as the world economy has grown and is projected to grow by ~5% per annum till 2015. Based on data collected in 2005, Lee, et.al (2009) calculated that aviation caused ~4.9% of total man-made carbon emissions which was higher than reported in Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report. Total aviation emissions have increased, because the increased demand for air transport has outpaced the reductions in specific emissions from the continuing improvements in technology and operational procedures. The “hub-and-spoke” networks adopted by major airlines also contribute to increase in noise pollution in the surrounding areas and further increase in total emissions of GHGs as this indirectly required the travelling passengers to detour. (Hanlon, 2007)
Aircraft emits gases and particles which alters the concentration of atmospheric greenhouse gases (GHG), including carbon dioxide (CO2), Ozone (O3), and methane (CH4); trigger formation of condensation trails (contrails); and may increase cloudiness-all of which contribute to climate change. (IPCC, 1999)
Impacts of Policies and Measures in Aviation Emission
IAOC addressed ranges of mitigations ranges from the purely technological to the purely behavioural as well as combinations of both technological and behavioural options. There are number of policies, measures and instruments that have been used to trigger the implementation of mitigation options for reducing aviation emission. (Cited http://www.icao.int/icao/en/env/ClimateChange.htm, 28 Feb 2010). ICAO activities on aviation emissions are part of the overall UN initiative of taking action on climate change.
My analysis is focus on five (5) nos of common measures adopted by aviation players in response to the policies and measures for reducing aviation industries and the impact of each measure on the airline cost and ticket prices.
1. Regulations
International aviation emissions are currently excluded from Kyoto Protocol, instead, it specified that reducing or limiting emissions from CO2 should be done through ICAO. Aircraft are required to meet the environmental certification standards adopted by the Council of ICAO which includes aircraft and engine emissions and aircraft noise emission standard.
ICAO stringency requirements have "pushed" engine emissions reduction technology. To meet the increase in the stringency of the aviation emission standard, all players in the aviation sectors are adopting a cross industry Four Pillar Strategies by IATA that is focused on technological developments, R&D, open sky network, effective operations, efficient infrastructure and positive economic measures. (Cited http://www.enviro.aero/WhatWeAreDoing.aspx, 28 Feb 2010).
2. Taxation and charges
Organisation for Economic Cooperation and Development (OECD) wrote in their ‘Globalization, Transport and Environment' (2010) that technological innovations are unlikely to reduce an increase in GHGs emission from aviation due to expected increase in aviation demand - but the rate of technological progress will depend on the extent to which the sector faces prices on the GHGs it emits. Thus, policies directly related to emissions or fuel use will be more effective. Fuel taxation on aviation industries remains as unpopular measures because fuel consumption in international aviation is only to a small extent burnt in the air space of the country where the fuel was purchased (Kageson, 2001).
Instead of fuel taxation, some countries levy air passenger duties which indirectly increase the ticket prices as well as reduce number of passengers. However, this effect depends on the elasticises of the demand. The fare elasticity's for leisure air travel are generally higher than premium travellers as vacation travellers are more flexible in their actions (destinations, flight times). Increasing premium prices and reducing economy fares would thus be expected to increase revenues. (Morrell, 2009). Shorter routes generally exhibit higher fare elasticities and more competitive, because other modes of transportation become viable options.
Some countries, such US introduce aviation carbon taxes. In the case of aviation, a carbon tax would most likely be implemented through a tax on fuel, related to its CO2 content. According to Kageson (2001), enforcing CO2 taxes on aviation would depress long-term fuel demand by around 20%. Forsyth (2008) supported the view of increased of carbon cost would affect airlines' variable costs and might lead to higher fares if the carbon costs were fully passed-through to passengers. He also noted that the extent of pass-through of cost depended on the structure of the market - pass-through was limited when no firms exit the industry, but fares could rise by more than carbon costs if there was exit.
An airline can choose to offset all its emissions such an airline will have higher costs than airlines which do not offer offsets, and it will have to charge higher fares, thus risking its competitiveness. Some airlines opt to offer their passengers the option of offsetting their emissions, at a price. Normally only a small proportion of passengers are willing to pay extra for a carbon offset, Qantas reported took up rate of 1% in 2008 compared to average 12% for Jetstar passengers. (Cited http://www.theage.com.au/business/jetstars-carbonoffset-program-soars-ahead-20080127-1ogg.html, 28 Feb 2010). For the case of charter and low cost carriers, they tend to impose all the incremental charges to the passengers because these markets are highly competitive and consequently have small profit margin.
3. Tradable Permits
In 2007 ICAO has endorsed the concept of an open, voluntary emission trading system as market-based measures for aviation emission reduction. ICAO urged Member States not to apply an emissions trading system on another state's airlines ‘‘except on the basis of mutual agreement between those States''. (Cited http://www.icao.int/icao/en/env/ClimateChange.htm, 28 February 2010)
Emission Trading System (ETS) was general agreement on the value of emissions trading, together with the reduction of emissions at source and operational measures. This would include setting an overall cap on aviation CO2 emissions and allow airlines to buy and sell the permits. Some countries are begun to adopt this options such as Australia, New Zealand and European Union is planning to include aviation in its Emissions Trading Scheme from 2012.
In most countries ETS has paid more attention in direct emission of GHGs and permit requirement is levied on fuel usage. With carbon taxes or requirements to purchase permits, airline will face higher fuel prices and will result in a cost increase to the airline. And the airlines will seek to preserve their profitability by passing the higher costs on to their passengers. If permit prices were higher, impacts would be proportionately higher. In a trading scheme, airline would have incentive to switch to abatement measures if the permit price is higher than abatement cost.
Forsyth (2008) highlighted that the introduction of a carbon tax or ETS, whether permits are free or not, could affect the competitive balance between international airlines. Singapore Airlines wrote in their ‘Environmental Report' (2008-2009, pp.3) that the emerging regional and domestic ETS could impose significant costs on airlines and have a crippling impact on airline competitiveness due to situation whereby different schemes exist in a multitude of emission trading zones. According to Morrell (2009), in the context of EU ETS, all airlines (EU and non-EU) would incur additional costs from purchasing emissions permits. These costs would lead initially to lower profits. All carriers could pass on the additional costs to the passengers in higher fares in the same way as fuel surcharges, but in highly competitive markets they may prefer to absorb the costs in lower profits or to reduce other costs (such as labour) further to compensate. Reduced profits would also lead to a less ability to invest in more fuel efficient aircraft and more competitive products. This would reduce their ability to compete with non-EU carriers in the future. Non-EU carriers would have less hit on profitability since the EU markets will probably account for a small part of their total revenues.
In the short term, carriers may try to absorb part of the tax to retain competitive edge thus reducing the airlines' profits. In other word, competition in market is likely to remain unchanged regardless of market structure. In the long term, in competitive and oligopolistic markets, there will be some exits from markets and exit is more significant in oligopolistic markets. The exit helps to reduce competition in the market, enabling the remaining airline to raise the fares to restore profitability. This picture is consistent with the long run experience of the airline industry (Forsyth, 2008).
For the case of free permits to airlines, it may create incentives for airlines to remain in markets, thereby keeping prices lower in pursuit of market share. If airlines do not factor in the full opportunity cost of permits into their decisions, airline prices will be less than marginal social costs and the ETS will be less efficient than it would be if permits
4. Voluntarily Agreements
Thalmann and Baranzini (2005) agreed that voluntary agreements have been increasingly implemented in many countries as a means to achieve environmental and social objectives. Countries in Europe formed a single sky network under Single European Sky program, which was aimed to unionized fragmented European skies thus helping reduce queues to take off and land, more chance for timely arrival and at same time achieves safer and greener flying, while creating more capacity. This program could save up to 10% of CO2 from aviation. (Cited http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1002&format=HTML&aged=0&language=EN&guiLanguage=env, 1 March 2010)
5. Incentives and Subsidies (include R&D)
Tax incentives can be used to induce airlines to reduce their emissions. Forsytr (2008) suggested that corporate tax treatment of depreciation can be change to make it more attractive to airlines to have newer fleets. Since newer aircraft are less emissions intensive, this would have the effect of reducing emissions.
Subsidies in bio-fuels may offer some incentives for aviation to explore of usage bio-fuels as alternative to jet fuel in aviation. Increasingly there is more R&D on this field such as joint research of Airbus with Qatar national entities to develop second generation of bio-fuels for aviation use. Airbus believes bio-fuels have the potential to significantly reduce carbon emissions. http://www.airbus.com/en/corporate/innovation/innovation-articles/inovation-items/?tx_ttnews[tt_news]=2126&tx_ttnews[backPid]=783&cHash=d6dbbd2613
Conclusion
Deregulation and growth in aviation sector and hub-and-spoke method of operation has tremendously increased emission of GHGs. IAOC has developed a range of standards, policies and mitigation measures to address aircraft noise and engine emissions.
Market based options such as taxation, emission charges or ETS are crucial in allowing aviation to pay for emissions reductions in more polluting industries or to encourage alternative technology energy.
With carbon taxes or requirements to purchase permits, airline costs will rise and the airlines will seek to preserve their profitability by passing the higher costs on to their passengers. However, in highly competitive market, carriers may try to absorb part of the tax to retain competitive edge and they will be more encouraged to opt for abatement measures such as fleet renewal strategies, aerodynamic design, operational measures, etc in order to reduce fuel consumption thus reducing emission.
