Impact On The Aviation Industry Economics Essay

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Air travel has important impacts on planetary clime with few options for cut downing the impact in the close hereafter. Although there is research and development to present betterments in the sector, there is a demand for an interim program. The European Community ( EC ) motivated by the rapid growing of the air power industry and related impacts to climate alteration has decided to include the sector in the European Union Emissions Trading Scheme get downing in January 2012. Extenuation policies are considered to be necessary in order to alter travel behavior every bit good as induce operational, infrastructural and technological alterations in the air power industry. The consequence of these betterments it is believed will take to lower environmental impact.

There is an increasing demand for air transit worldwide, and the part of the air power industry to climate alteration relation to other sectors is projected to increase in the hereafter. As a consequence, turning public and political forces are likely to go on to aim air transit to cut down its green house gases emanations. The greatest challenge for policy shapers and primary industry stakeholders is to diminish air power nursery emanations while prolonging comfy rider mobility and maintaining comfortss for time-sensitive lading. There is besides a demand to run into future demand for air conveyance in developing and emerging states.

This paper researches the assorted policies for cut downing planetary C emanations, and examines options to the stringent planetary C revenue enhancement as proposed by the EU. These include:

Technological efficiency betterments

Operational betterments

Infrastructural betterments

Use of alternate beginnings of energy

Airline corporate societal duty

Carbon-offset programmes

It besides delves into the grounds that have led to reluctance from assorted major economic powers to following the EU ETS ‘ policies, and high spots alternate domestic programmes that challenge the EU ‘s place and inflexibleness with respects to planetary conformity.

This paper aims to reply inquiries associating to the viability and effectivity of the EU ‘s current place on the C revenue enhancement strategy, given turning international resistance. It besides tries to analyze the EU ‘s current place and understand whether it is the logical and appropriate response to the state of affairs, every bit good as get lucidity on the justification as presented by the resistance.

In order to understand the planetary position, two research methods were used to either aid validate and support secondary research or place disagreements. These aided in bring forthing new possibilities in the survey and besides facilitated in finding the importance and feasibleness of the current place of the C revenue enhancement strategy, and whether the European Union ‘s place is so a rational and suited response to the state of affairs.

Although the strategy is already in topographic point with many air hoses holding adopted it since the beginning of 2012, there is uncertainness with respects to the methodological analysis and the monitoring facets of such a strategy. Recommendations seek to present a comprehensive construction that sets a clear way to be followed which is easy sustainable and would assist to supervise the advancement towards a greener hereafter.

It suggests a short term program based on Porter ‘s Hypothesis, followed by acceptance of the IATA ‘s Four Pillars in the average term and a long term program based on expected air hose corporate societal duty, continued invention and C beginning plans.

Table of Contentss

Table of Figures


Carbon dioxide: Carbon dioxide

Central time: Consumer Sovereignty Test

EC: European Commission

EEA: European Environment Agency

Environmental protection agency: Environmental Protection Agency

ETS: Emissions Trading Scheme

Europium: European Union

EU ETS: European Union Emissions Trading Scheme

GHG: Greenhouse Gass

IATA: International Air Transport Association

International civil aviation organization: International Civil Aviation Organisation

IEA: International Energy Agency

MBM: Market-based Measures

United nations: United Nations

UNFCCC: United Nations Framework Convention on Climate Change

Soviet union: Union of Soviet Socialist Republics


The Economicss and Politicss of Climate Change

Climate alteration poses a changeless challenge to policy shapers. It is wholly different from the daily concern of intercession in the economic system to rectify market turbulences. There are many lending factors which are characterised by major and multi dimensional uncertainnesss, created to a big grade by both production and ingestion activities. There is a demand for international cooperation on an alone graduated table in order to undertake the assorted elements of the issue ( Helm, 2005 ) .

Environmental economic sciences is in its babyhood and requires considerable reappraisal and development with many conservationists believing that clime alteration goes beyond being merely a scientific job. The decision is that there is a demand for conventional economic sciences to see it from a moral position and happen a new attack. Thus it is often argued that sustainable development, go forthing future coevalss at least every bit good off, if non better than the present coevals, necessitates, foremost the accomplishment of a stable degree of nursery emanations, and so a gradual and uninterrupted procedure of decrease ( Helm, 2005 ) .

This logical thinking initiated the laying of the foundation of the Framework Convention on Climate Change in 1992 and set in gesture a procedure which produced the Kyoto Protocol in 1997. Targets were fixed and allocated for the period 2008-2012, as a first phase in what was envisaged to be a lasting procedure of dialogues, understandings, and enforcement ( Grubb, 2003 ) . An component of flexibleness was built into the marks, to be farther extended in subsequent dialogues[ 1 ].

The debut of such policies has unsurprisingly caused a strong and contradictory reaction from politicians and economic experts likewise. In add-on to holding a divergent reaction, scientists thought that the Kyoto Protocol was excessively mild and, this was substantiated when major power and largest emitter of nursery gases, the USA opted out of the programme ( despite being a principal designer of the Kyoto Protocol ) ( Helm, 2005 ) .

Climate alteration is defined by three chief constituents – the marks, the instruments and the institutional constructions. Sing the aforesaid constituents research workers Hepburn and Helm believe that there are several optimum inquiries: What is the most favoured way of cut downing C emanations? Which policy instruments, or combination of instruments – revenue enhancements, licenses, and command-and-control are likely to be most efficient within the political restraints? How could institutional agreements and constructions be designed to ease international understandings and believable planetary climate-change policies? ( Hepburn, 2009 )

The European Union Emissions Trading System ( EU ETS ) , launched in 2005 can be considered a basis of the EU clime policy, pulling the attending of many policy shapers and research workers, in Europe every bit good as other parts of the universe. The EU ETS is one of the largest environmental markets in the universe, covering 30 member provinces and over 11,500 workss from electricity to burning, coke Fe, steel, cement, calcium hydroxide, glass, ceramics, brick, refineries, and paper and mush industries. The ETS sectors ‘ CO2 emanations account for about 40 % of entire nursery gas emanations in the European Union ( Venmans, 2012 ) .

Aviation ‘s part of nursery gases is an estimated 11 % . For more than 15 old ages, the EU has been seeking planetary understanding through the United Nations ( UN ) in peculiar through the International Civil Aviation Organisation ( ICAO ) to undertake air power ‘s increasing part to greenhouse gas emanations. The EU remains committed to the many-sided procedure of making a planetary understanding within ICAO. ICAO is the right topographic point to progress planetary action on steps, including market-based steps, to turn to the clime alteration impacts of international air power and the EU strongly supports this work. The EU welcomes ICAO ‘s ongoing and intensive work programme in 2012. It continues to constructively prosecute to the full with ICAO to happen a solution, and wants in peculiar to prosecute with all States that are willing to work together to happen a comprehensive planetary solution ( ICAO, 2007 ) .

The EU has a combined population of over 500 million people, working together with a common attack to implement a policy to cut down air power emanations. This is portion of a comprehensive bundle of policy steps, and this mechanism could function as a edifice block for future planetary action.

Carbon Leakage and its Impact

Carbon escape every bit defined in context of annex B/non-annex B states[ 2 ]in the Kyoto Protocol corresponds to the addition in nursery gases ( GHG ) in non-abating states due to execution of a clime policy in some states that abate GHG emanations. It is the planetary consequence of a local policy ( EY, 2008 ) .

The application of the EU ETS chiefly focuses on ground-based emanations beginnings. The inquiry in that country is whether production activities from Europe can be relocated to other parts of the universe, in response to one-sided and rigorous clime policies in the EU. The consequences of such resettlement would be an addition in the emanations someplace else in the universe, and the margin of the EU ETS would go narrower, greatly diminishing its effectivity. This therefore does n’t turn out to be the most effectual manner of cut downing emanations. The production sector being the largest subscriber is the appropriate topographic point where emanations need to be eliminated and where there are several executable ways in which action can be taken in the close hereafter. Aviation follows in a close second.

Figure 1 below helps to exemplify the assorted sectors lending to the bulk of planetary C emanations:

Figure: Sectoral Share of CO2 Emissions in the EU

Literature Review

Addressing Aviation Emissions

Aviation contributes to climate alteration at regional and planetary degrees through a assortment of emanations, including C dioxide, N oxides ( taking to ozone pollution ) , H2O vapor, particulate affair ( carbon black ) , and other pollutants. Scientists estimate that in 2005 all these types of air power emanations accounted for about 5 % of the human consequence on planetary temperature rise. The EU ‘s emanation trading strategy regulates merely CO2 emanations from air power ( Leggett, 2012 ) .Emissions of C dioxide ( CO2 ) are about half of air power ‘s consequence, or about 2 % -3 % of the sum.

Carbon Leakage in the Aviation Sector

Climate alteration is an pressing job and 1 that is of import to EU politicians and to their components. The EU is committed to transforming Europe into a extremely energy-efficient and low nursery gas-emitting economic system. The European Union has made a steadfast independent committedness to cut downing the nursery emanations to every bit low as 20 % of the 1990 degrees by 2020 ( Delbeke, 2010 ) .

International air power is virtually exempt from any signifier of clime policy, even though the emanations from this sector are quickly turning. In 2006, the European Environment Agency ( EEA ) prognosis that the emanations from EU international air power would turn by 150 % in the period between 1990 and 2012. This entirely would more than countervail the decrease marks under the Kyoto Protocol. There has been virtually no advancement with respect to modulating these emanations in the international community, and it is non covered by the Kyoto Protocol either. In an attempt to interrupt this tendency the EU has decided to include air power as portion of its enterprise to extenuate clime alteration.

In the air power sector, C escape can non straight be controlled or contained by the closing or resettlement of “ workss ” to outside the EU. Due to assorted restraints of bing traffic rights system and national ownership limitations, it is non realistic for European-operated houses to relocate their operations elsewhere. Aviation comprises merely around one-tenth of the overall EU ETS ( EY, 2008 ) . Globally C dioxide emanations from the air power sector have been increasing quickly and the prognosiss suggest that this tendency will go on. By 2020, planetary international emanations are projected to be about 70 % higher than 2005 degrees. International Civil Aviation Organisation ( ICAO ) forecasts that emanations could turn farther by 300 % by 2050.

One of the Fastest Turning Beginnings of Emissions

Although fossil fuels account for about three fourths of all the C emanations, the air power sector ‘s dependance on this as its primary fuel beginning seems likely to go on for the foreseeable hereafter. Few options have been discovered and most of them are in the nascent phases of research and development.

Aviation besides combusts fuel, and produces 2 % -3 % of the planetary, human-related sum. To set this in position in footings of state emanations sums, this is about the same as all the CO2 emanations from Germany and Korea combined. Global air power emanations have been lifting faster than all combined dodo fuel emanations. The ICAO estimates that CO2 emanations from the air power industry have about doubled from 1990 to 2006. Past and hereafter projected emanations growing within the sector is greatly influenced by two antagonizing forces: enlargement in air power services and bettering efficiency.

Expansion of Air Transport Demand: In recent old ages with the debut of assorted low cost bearers at that place has been an enlargement in demand for air power services. Economic growing, globalization, falling air menus ( after accounting for rising prices ) , liberalization of air service markets, and the desire for rapid conveyance have driven demand for passenger travel and lading conveyance. Both rider and lading traffic have grown much more quickly than economic growing over past decennaries. From 1999 to 2009, bearers saw a 4.3 % mean one-year growing in revenue-passenger-kilometres ( RPK ) , while lading cargos saw a 2.6 % one-year mean growing despite economic failing at the terminal of the decennary ( ICAO, 2009 ) .

Fuel Efficiency and Emissions per Passenger Mile: Improved fuel efficiency has helped maintain air power emanations in cheque. Emissions would be higher if non for improved fuel efficiency in the commercial air power industry. U.S. domestic air operations reduced their fuel strength ( energy consumed per passenger-mile carried ) by 41 % between 1990 and 2008-more than any other manner of rider transportation-and U.S. air hoses ‘ international air rider operations reduced fuel strength by 24 % ( BTS, 2008 ) .

Other Assorted Improvements: Improvements in aircraft design with improved air traffic direction which reduces holds and minimises inefficient routing of aircraft, usage of alternate fuels including biomass-based fuels, could besides perforate the air power market with benefits for emanations and energy security.

As the EU and other states implement Torahs to diminish other major beginnings of GHG emanations, air power emanations will go on to lift in absolute footings and as a portion of entire planetary GHG emanations. This is the primary ground for the EU desiring to turn to the sector in its comprehensive clime alteration policy bundle.

The Purpose of the EU ETS Legislation

Understanding the EU ETS

The EU ETS is a “ cap and trade ” programme[ 3 ]. Under this strategy the European Union plus Iceland, Liechtenstein, and Norway have set a cap, or a maximal measure, on one-year C dioxide ( CO2 ) emanations from major industrial beginnings. The construct as envisioned by the EU seems moderately straightforward. Each single beginning is given or must buy a measure of “ allowances ” or permits to breathe one metric ton of CO2[ 4 ]. At the terminal of each twelvemonth, each beginning of emanations must describe on a figure of allowances at least equal to its emanations for the twelvemonth. If the beginning does non supply information for sufficient allowances, it must pay a all right. Over clip, the emanations caps will worsen and fewer allowances will be issued, coercing CO2 emanations to worsen every bit good to the enacted degrees of the cap. Finally, the EU foresees auctioning all allowances instead than giving a part free to emission beginnings ( Leggett, 2012 ) .

The EU ETS has come up with a methodological analysis to understate conformity costs and give some flexibleness to emanations beginnings. In order to do this system successful, it allows emanation allowances to be traded. Although the system is non complicated, there is much opposition to it because most parties involved think it is rather boring and cumbrous. Emission beginnings have allowances allocated to them. If a beginning has more allowances than it needs, it may sell the surplus to another beginning that needs it more every bit long as the entire cap is n’t exceeded. This sale can be carried out by utilizing the services of an allowance agent through an allowances market where the monetary value for these allowances is preset. If a beginning can cut down one metric ton of emanations at a cost lower than the monetary value of an allowance, the EU ETS gives it a net income as an inducement to farther cut down emanations and sell allowances. It besides motivates concerns ( e.g. , engineering companies ) to develop and deploy new, lower-cost agencies to cut down emanations.

Aviation: Relatively Large Sums among Many Small Emissions Sectors

Demand for air travel took a marked hit during the fiscal downswing that started in 2008 and has persisted in subsequent old ages. However in the last twosome of old ages at that place have been seeable marks of recovery and exponential growing forecasted for the hereafter with the debut of many low-priced bearers offering cheaper services and making fight ( FAA, 2012 ) . This has a direct correlativity to an addition in C emanations from the sector. The EU has late reported that approximately 3 % of CO2 emanations come from civil air power activities, although the portion coming from EU and non-EU airdromes is much smaller. The concern of the EU with associating to air power emanations is magnified because from 1990 to 2010, although there was a decrease in the overall CO2 emanations in the EU by approximately 5 % , air power emanations rose by 80 % . Emissions from air power have been turning faster than those from any other sector. They are projected to go on to lift because of additions in air travel and air-cargo cargos ( Leggett, 2012 ) .

The EU has a multipronged attack to undertaking GHG emanations within the air power industry, set uping steps that are reciprocally acceptable both internationally and to their member provinces. As mentioned earlier, the EU ETS is one of several policies working towards cut downing C escape within the industry. Other instruments include, The Clean Sky Joint Technology Initiative which is a public partnership between the European Commission and the Aeronautical Industry. The purpose of Clean Sky is to rush up technological discovery developments and shorten the clip to market new and cleaner solutions tested on full graduated table demonstrators, therefore lending significantly to cut downing the environmental footmark of air power ( Clean Sky, 2012 ) . Under the Single European Sky and the SESAR programme ( Individual European Sky Air Traffic Management Research ) , there is research and development being done towards constructing a more efficient European air traffic direction system ( SESAR, 2012 ) .

An extended survey conducted by Ernst and Young in coaction with York Aviation in 2007 and so once more in 2008, identified assorted scenarios of C escape happening in the air power sector and hence helped to construct the instance for inclusion of the sector as portion of the EU ETS strategy from 2012 ( EY, 2008 ) .

For 8 % of riders geting in the EU from non-EU beginnings and non-EU finishs, there is an chance to short-circuit the EU and wing to their concluding finish via a non-EU way station. This could be someplace in the Middle East, which faces no EU ETS cost.

For airdromes between EU and non-EU, rider and lading traffic could be lost, to air hose operators offering connexions at hubs that are close to the boundary lines of the EU. These hubs face lower ETS costs. In such a scenario, there will be increased competition between direct long draw paths and indirect paths via a hub outside the EU.

There is 25 % of rider traffic generated by non-EU occupants going into the EU for leisure ( non-business travelers ) . This sector of air power comprises of riders who are extremely monetary value medium and are likely to exchange their leisure travel to non-EU finishs.

From intra-EU markets, an addition in C emanations, the cost of which will be passed on the client may coerce riders to seek other manners of conveyance which are either non capable to the EU ETS or which face lower ETS costs.

Cargo operators could take to alter their routing and add a way station outside the EU in order to cut down the distance that is covered by the EU ETS.

The air power industry is extremely reliant on a individual fuel beginning and a individual engineering. Due to this world and with few options for permutation most air hoses runing in Europe and utilizing newer aircraft, still face a challenge due to a cost construction that is chiefly driven by the monetary value of fuel.

Though the EU ETS is anticipating bing air power programmes to assist to decelerate the growing of emanations, EU states have jointly addressed the demand to take planetary action to hold greater impact on the overall decrease of air power emanations. In peculiar, the EU has pressed for common criterions to be adopted through ICAO for CO2 emanations for new aircraft, and for compulsory planetary market-based steps ( MBM ) . MBM could include an emanations fee or emanations trading system.

Commissariats for Aviation in the EU ETS

Effective January 1, 2012 all air hoses going to, from and within the EU will be integrated into the ETS which will add a new sector to the bing 1s already concerned with the strategy. In 2012, the EU ETS will crest air power emanations at 97.5 % of the mean 2004-2006 emanations on flights covered by the strategy. The cap will so diminish to 95 % of historical emanations for 2012-2020, and may be farther reduced beyond 2020 pending EU reappraisal. These allowances will be grandfathered at 85 % . The EU ETS has agreed to relieve certain types of flights from the rigorous cap-and-trade strategy, including military air power ; hunt & A ; rescue flights ; province flights transporting 3rd states ‘ caputs of province, caputs of authorities, and authorities curates ; and patrol flights.

Besides exempted are operators that meet de minimis standards[ 5 ]. Due to this standard, there is a opportunity that 100s of U.S. aircraft operators may be excluded from the EU ETS because they fly below the de minimis standards.

For 2012 the expected decreases from the application of the EU ETS to the air power sector are 27.9 million metric tons[ 6 ]. Given growing in air power emanations, over the period up until 2015, the emanation cumulative decreases are expected to be 176.4 million metric tons[ 7 ].


ICAO has for a piece recognised the function that market based steps can play on accomplishing environmental ends with flexibly in a cost effectual mode. ICAO foremost endorsed the demand to turn to the impact of the air power industry on clime alteration in 2001. ICAO ‘s attack to cut downing emanations has been unconventional. It has long been seeking to countervail emanations growing in air power through decrease in other concern sectors by agencies of an unfastened system, mentioning this attack as more attractive. This is due to a high growing in the demand prognosis in the air power market and the limited figure of cost effectual suspension options within the sector.

In 2004, ICAO States nem con agreed to “ to integrate emanations from international air power into Contracting States ‘ emanations merchandising systems ” ( ICAO, 2004 ) . The EU decided to follow this as portion of its statute law. Inclusion of air power in the EU ETS was foremost proposed in 2006, and came into force in 2009. The statute law was developed, negotiated and adopted with complete transparence. Although initial stairss were taken towards developing a planetary program to undertake the effects from air power on clime alteration, a discovery has yet to be achieved between the ICAO and States represented with respect to a consensus on common ends and steps to turn to the issue.

The EU ETS aims to implement the system on the industry from January 2012 onwards wants to accomplish three cardinal elements through the ICAO ( Delbeke, 2012 ) :

The first is that what is agreed on market-based steps in ICAO should present environmental benefits in footings of emanations decreases, equal to or beyond those delivered from the steps presently in topographic point in 3rd states and in the 30 states using the EU emanations trading system.

Second it is of import to see whether market-based steps involve revenue enhancements, levies or emanations trading, the system adopted by ICAO or applied by States must be standardised for all air hoses. Non-discrimination is one of the most of import rules of international air power jurisprudence, and should be to the full respected. ICAO must avoid making any distortive consequence for air hoses runing in a planetary competitory market place.

Third, a robust worldwide system should incorporate marks and steps for ICAO member states.

The EU ETS and International Legislation

Airlines are capable to the EU ETS regulations and statute law for all flights being operated to and from EU airdromes. Although there are restraints on the activities of flights that arrive and depart from EU airdromes, the EU so far contains no statute law on how aircraft should be operated either within or outside EU air space. The attack adopted by the EU is based on the entire emanations for a given flight. This is a important parametric quantity for all flights geting and going from EU airdromes.

This attack is really EU particular and even though the ICAO had identified an attack based on nationality as “ infeasible ”[ 8 ], there has been much resistance to both the United Nations Framework Convention on Climate Change ( UNFCCC ) and the EU ETS from states like the United States, China, Russia, Australia and India.

The United States

Today U.S airlines carry more traffic per gallon of jet fuel than of all time before. Between 1978 and 2011, fuel efficiency has improved 120 per centum and this has resulted in about 3.3 billion metric metric tons of C dioxide nest eggs ( Airlines for America, 2012 ) .

The state of affairs in the United States is really pressing. Bing responsible for a one-fourth of the planetary green house gas emanations, even though it merely has a mere 4 % of the planetary population, makes it a changeless for clime alteration. In the United States climate alteration policy is included in the broader position of developmental alteration which includes other issues like the relief of poorness, investing in people and stable economic establishments. The United States has an Environmental Protection Agency or the EPA. The EPA is taking a figure of stairss to turn to the challenge of clime alteration. EPA collects assorted types of nursery gases emanations informations and paths emanations tendencies continuously seeking to place chances for cut downing emanations and increasing efficiency. Although it has several governmental and non-governmental administrations turn toing the assorted clime alteration issues in the state, the EU still believe that U.S. air hoses need to be under their horizon with respects to carbon emanations. The EU has decided to take a tough base on the affair, because it claims that there is no concrete grounds of similar ordinances being enforced at the domestic degree in the US.

The EU ETS has found few fans in the U.S. Senate which is presently sing doing it illegal for air hoses to follow with the new regulation and hence seting the load on the common revenue enhancement remunerator for the mulcts that accumulate when in misdemeanor of the new EU jurisprudence ( GMF, 2012 ) . This could increase the revenue enhancement remunerator ‘s measure by about $ 22 billion over the following 8 old ages ( GMF, 2012 ) . The United States is inexorable that any ordinance with respects to the air hose industry must come from the ICAO. It believes that the EU ETS statute law, established for a fruitful cause, is in misdemeanor of several international legalities with regard to the national sovereignty of a state.

All the resistance from the US is simply a force per unit area tactic to spread out the ETS to a planetary platform. It has in no manner reduced their attempts to back up the EU. In a recent senate hearing on the affair, the United States agreed to back up the EU in its enterprises to command C emanations in the air power industry, and emphasised that there was a demand to work together with other states to develop statute law at a planetary degree. It wants to set up a strategic partnership on air power issues, given a positive path record with programmes such as Open Skies and Aviation Safety understandings.


In 2010, China embarked on one of the largest enterprise in clime economic sciences, to set up a national C emanation trading system by 2015. China ‘s economic growing makes it one of the universe ‘s largest emitters. This ace economic system is making a degree where maintaining up with the energy demand will progressively present serious challenges ( Han, et al. , 2012 ) . China today histories for about a one-fourth of planetary nursery gas emanations and about half of one-year emanations growing ( Steckel, et al. , 2011 ) . Such tendencies are expected to go on, with the International Energy Agency ( IEA ) gauging that about half the growing in planetary CO2 from now until 2030 will come from China. China has made economic growing one of its top most domestic precedences, but in stead of such a determination, it faces serious energy and climate security quandary ( Hallding, et al. , 2009 ) . This rapid economic growing has created a scope of jobs for China, from economic instabilities, to environment and resource restraints, the biggest challenge being climate alteration.

Since the debut of the EU ETS and the inclusion of the air hose industry into the strategy since January, 2012, China has put up much resistance to the system. Like the US, China excessively claims that the strategy infringes on their sovereignty and breaks the footings of the Chicago Convention[ 9 ]. China has besides claimed that the strategy violates the UN ‘s clime alteration understandings which proclaim that developing states should hold lower costs of such regulation than developed 1s. The EU vehemently disagrees with such a statement reasoning that its strategy applies to companies, non states, for whom there is no such allowance ( The Economist, 2012 ) .

To counter the EU ETS, China has continued to prosecute the way of outlining a national statute law on clime alteration and insists that its air hoses will non follow with EU ETS ordinances. The China Air Transport Association, which represents the state ‘s air hoses, estimations that the strategy will be them 800 million Yuan ( ~ $ 123 million ) in 2012 and three times more by 2020. Beijing published a bill of exchange clime alteration jurisprudence, which includes warnings of possible relatiative actions. The first bill of exchange of this statute law was passed in mid-March 2012. If the jurisprudence passes, emanations criterions will be applied across all sectors. China believes that the new national program will relieve its air hoses from inclusion as the EU ETS does non necessitate states with comparable national clime alteration policies or tantamount steps to take part in its strategy.


India, on the other manus, despite being one of the universe ‘s largest developing economic systems merely ratified the Kyoto Protocol[ 10 ]in November 2002. Bing a developing economic system comes with its luggage – go forthing C footmarks. India has frequently been accused of being reactive instead than proactive counterpart its place on clime alteration. India ‘s primary statement is that since GHG emanations are linked to economic activity, economic growing will needfully increase GHG degrees from the current low degrees. This statement is valid, but climate alteration will hold an inauspicious impact on India ‘s precipitation forms, ecosystems, agricultural possible woods, H2O resources, coastal and marine resources, and general wellness ( Walsh, et al. , 2011 ) .

In India, where domestic demand makes up three quarters of the national economic system ( Damodaran, 2011 ) , the fiscal downswing of 2008 had small consequence on the growing of the economic system. Emissions continued to increase in 2011 by 6 % to two billion metric tons of CO2, doing India the 4th largest emitter in the universe, good in front of Russia ( Olivier, et al. , 2012 ) .

India is manner behind on any national statute law with respects to cut downing C emanations in the air hose industry and hence battles to do a good plenty instance to be eliminated from the EU ETS strategy.

Soviet union

Russia has been a party to the UN Climate Convention since 1994 and their function became indispensable for the Kyoto Protocol to go lawfully adhering in 2004 ( Buchner & A ; Dall’Olio, 2005 ) . Since has been playing an of import function in determining the many-sided model on clime alteration policy ( Henry & A ; Sundstorm, 2007 ) . The Russian Federation accounted for 16.4 % of 1990 C emanations in 2009. Despite the terrible economic downswing of the 1990s, in 2011, Russia became the fifth largest emitter of green house gases after Europe, China, India and the United States ( Council of the European Union, 2010 ) , with one of the highest per capita energy-related CO2 emanations in the universe ( EEA, 2009 ) . Its per capita GHG emanations are about four times higher than those of China ( IEA, 2010 ) . Traveling back to the history of the USSR, there is a strong argument on whether there is a domestic policy in topographic point to undertake clime alteration. The Russian Federation and its predecessor, the USSR have been in dialogues with the UNFCCC for many old ages, and more late climate alteration has taken a head in Russia-European Union dealingss.

In 2009, the Russian authorities endorsed a bill of exchange clime program, which called for structural alterations in the state ‘s economic system to accommodate to planetary attempts on the affair and assist extenuate climate alteration. However, the bill of exchange policies have been criticised as they have been drawn up without any audience with either environmental or civil administrations. In add-on there is really small accent on a program to cut down CO2 emanations. A study released by the Finnish Institute of International Affairs ( FIIA ) , claimed that the Russian Federation was loath to follow a mark for C emanations, as it believed that addition is a natural portion of its economic growing. In 2012, while the EU vowed to implement the duties under the ETS, Russia like China urged its air hoses non to follow with the new ordinance. With no policy in the grapevine, Russia ‘s current place makes it easier for the EU to coerce conformity.


Australia produces less than 1.5 % of the universe ‘s planetary emanations. It is estimated that in the first six and a half old ages of Australia ‘s C revenue enhancement the authorities will roll up an estimated $ 71 billion. In comparing, the EU merely collected a mere $ 4.9 billion in revenue enhancement gross ( Get Carbon Policy Right, 2012 ) . The difference is that the revenue enhancement is designed to flux through the full economic system, and the authorities has structured it to guarantee that all Australians pay on all things they buy every twenty-four hours. The authorities will get down pricing one metric ton of C at Aus $ 23 in mid-2012, for the state ‘s largest emitters. The monetary value would be steadily increased by 2.5 per centum every twelvemonth until 2015 – The European Union ‘s strategy is the lone one globally that is significantly comparable. The authorities ‘s end is to cut pollution degrees to 5 % below their 2000 degrees – a decrease of 159 million metric tons a twelvemonth of C pollution and to implement a 20 % renewable-energy mark ( CEC, 2012 ) .

A instance survey of this is Quantas, Australia ‘s largest air hose which has taken the enterprise for cut downing C emanations since the last five old ages. Unlike other concerns in Australia the air hose has decided non to wait for authorities policies to set a program into topographic point. Quantas emits around 4 million metric tons of C per twelvemonth. A revenue enhancement of $ 25 per metric ton would intend a $ 100 million liability for the house. To avoid a repeating disbursal of this magnitude, the air hose has started to look into fuel efficiency and aircraft design to make non merely what is right for the environment but is besides a smart move from a concern position. Some betterments already put into gesture are exchanging to lighter providing carts in order to take down the entire onboard weight. However, Quantas believes that long footings steps will take a few old ages to implement, and acknowledges that the demand of the hr is to look into more fuel efficient aircraft and alternate aircraft fuels as a first step to assist take down the C footmark ( The Economist, 2011 ) .

Australia wants to follow in the footfalls of the European Union ‘s Emissions Trading System. The strategy which is documented as presently enforcing pollution quotas on over 11,000 makers and power companies has lead to the computation of a threshold of 21 % below 2005 emanation degrees by 2020. The EU has petitioned to acquire a replacement for the Kyoto pact, the historical instrument that regulates C emanations internationally and expires this twelvemonth. In Australia, in an attempt to derive public support for the revenue enhancement, the authorities made weighty grants on its original program by offering private families generous revenue enhancement interruptions and pension additions to countervail higher energy costs ( WSJ, 2011 ) .

The Australian Carbon Tax strengthens the inducement for the air hose industry to cut down emanations over the long term and finally go C impersonal, through action such as improvingA fuel efficiency and exchanging toA sustainable air power fuels ( Quantas, 2011 ) .

Primary Stakeholders

Having discussed the places of some of the largest economic systems on the EU ETS every bit good as their hereafter programs for execution of domestic clime alteration policies, it is of import to understand the impact of such statute law on four cardinal stakeholders of the air power industry. The client is the obvious receiver of any revenue enhancements levied on the air hose industry, doing the other three stakeholders – authoritiess, air hoses and aircraft makers simply participants at different phases of development and execution of any statute law.

Figure: The Stakeholder Relationship

Governments and Economies

The European Union has deemed it necessary to include non-EU air hoses in the attempt to assist forestall C escape. This issue has already attracted significant contention, with functionaries from opposing states showing dissent and uncomfortableness at the forced execution of one-sided ordinance on air power emanations. For illustration, presently a group of 30 states is working on developing a scheme to counter the ill-famed Brussels ‘ program ( Council of the European Union, 2010 ) with some authoritiess holding already prohibited their air hoses from take parting in the EU strategy.

There is besides fright of future revenge which could take the signifier of tit-for-tat revenue enhancements, limitations on traffic rights for European bearers, and prejudiced intervention for European aircraft makers. Recent studies suggest that the Chinese authorities has already blocked the chance of Airbus ‘ gross revenues to Chinese air hoses because of the authorities ‘s resistance to the EU policy.

The inclusion of air power besides has an impact on the trade in many states, in peculiar for exports to the EU, and this could hold terrible effects for the economic systems of many states. Developing states for illustration depend to a great extent on air cargo to merchandise both goods and services, particularly in the country of touristry.

While remaining diamond in its positions, it is of import to guarantee that the strategy does non acquire used as a tool for political additions, with authoritiess being tempted to do it a competition of volitions. The focal point needs to stay on clime extenuation and how best to accomplish this within the air power sector. In the long tally it will be of import for authoritiess and the industry to make some consensus, if any advancement is to be made on the affair. The air hoses do non necessitate to be isolated as clime criminal ; since they are being forced by their authoritiess non to follow with the statute law set by the EU. Until authoritiess globally decided to travel down the confrontational way, there were marks of a positive and constructive attitude towards acquiring the affair resolved in some quarters of the industry. However as things stand presently, it appears that authoritiess are more concerned with standing on a point of rule instead than the hereafter of the air power industry.


The air hoses are confronting the brunt of the EU ETS statute law. As per the statute law all air hoses must non merely get but besides “ resignation ” allowances for C emanations produced by their flights. The punishments for non subjecting, or late entry is a a‚¬100 all right per allowance. In add-on any deficit will hold to be made up the undermentioned twelvemonth. The EU has created emanations allowances for air power operators matching to 97 per centum of a benchmark calculated as the industry ‘s mean C emanations during the three old ages 2004-2006. In 2012, 85 per centum of these allowances are traveling to be allocated for free[ 11 ]( harmonizing to the air hoses ‘ several 2010 market portions ) . In theory, air hoses can remain within their “ restrictions ” by developing greater fuel efficiency, or by exchanging to biofuels, as these countries are non being counted for the intents of the strategy. In pattern nevertheless, there is a whole different narrative. The overall growing of the air power sector of about 5 % every twelvemonth and subsequent growing of emanations makes this theory implausible.

Surveies have shown that the EU ‘s strategy will add direct costs to the air power industry, although given the current degree of research and analysis these costs vary significantly and are inherently unstable, as they are greatly dependent of the province of the C market. For the air hose industry nevertheless, even though costs are ineluctable. The fortunate thing for the air hoses is that virtually all the costs can be passed on to the client. This will ab initio hold a little impact on profitableness, but the estimated rise in airfare is expected to be about 4 % . This will doubtless hold an impact on demand, but this beginning in demand can by mitigated by expected industry growing.

However, therefore far the air hoses have shown disapproval for the strategy, claiming that the statute law is unjust and several U.S. air hoses have so far unsuccessfully filed proceedings against it in the European Court of Justice. They believe that there are other steps like C countervailing programmes, better substructure and engineering, and alternate beginnings of energy steps which if exercised in a methodical mode can take to long term and sustainable consequences.

Aircraft Manufacturers

The Southern Cross of the EU ETS ‘s logical thinking for including the air power sector is to originate research and development into bettering aircraft and fuel efficiencies. For aircraft makers like Airbus and Boeing every bit good as aeroplane engine makers like Rolls Royce, Pratt and Whitney and Honeywell, the debut of the strategy every bit early as 2012 puts enormous force per unit area to introduce, and better current engineerings. For illustration, Airbus and Boeing already have orders from turning air hoses in China valued at $ 670 billion and 5,260 new aircraft by the twelvemonth 2031 ( Airfinance, 2012 ) for aircraft theoretical accounts already in the fabrication grapevine. New broad organic structure aircraft remain in strong demand as they offer 20 % fuel efficiency additions, but this demand is projected to scale merely station 2020. The air hoses ‘ are acute to lend to climate extenuation and are already in the procedure of replacing bing equipment with new, more fuel efficient aircraft which will take to lower fuel ingestion and therefore lesser emanations. Generally, an air hose can run an aircraft without replacing for 30 old ages, but in order to avoid any hit to profitableness and fight, air hoses may get down to rethink this scheme in the shorter term instead than wait for the long term to do such capital intensive alterations. The consideration to do is the trade off between higher fleet costs versus lower fuel costs. For illustration the estimation of a new B777-300ER could be some $ 120 million and a B747-400 about $ 75 million. Although these monetary values seem high, the trade off for renting these new aircraft can be equated as a 1 % salvaging in fuel cost being tantamount to a 5.5 % addition in aircraft price/rental. Fuel efficiency from the following coevals aircraft more than offsets the cost of new equipment.

Boeing Commercial Airplanes states that its freshly certified wide-body B-787 Dreamliner, the first big airliner to do extended usage of lightweight composite stuffs in its building, uses 20 % less fuel and produces 20 % less CO2 than the similarly sized Boeing B-767 ( Boeing, 2012 ) . Similarly, Airbus claims that its A350 aeroplane presently in development will accomplish fuel burn and CO2 emanations decreases of 25 % compared to its current long-range rival through usage of a lighter composite fuselage, improved engines, and an advanced wing design optimized for sail flight ( Airbus, 2012 ) . As air hoses bit by bit retire older aircraft and replace them with newer, more fuel efficient theoretical accounts, matching decreases in CO2 emanations may be achieved. The advanced technology constructs in the B-787 and A350 will mostly be limited to medium- and long-range operations. In the close term, short draw aircraft like the B-737 and A320 are expected to acquire more fuel efficient engines and some betterments in aeromechanicss, but these alterations are likely to give much smaller comparative decreases in CO2 emanations than engineerings for freshly designed aircraft.

Consumers ( Bloomberg, 2011 )

The EU ETS ‘s inclusion of the air power industry is non merely a acrimonious truth for the direct receiver of the revenue enhancement – the air hoses, but it besides intimidates the terminal user or the indirect receiver of the air hoses ‘ services – the client. The obvious consequence of imposing the revenue enhancement is to go through it through to the consumer by increasing the airfare. However, although the base on balls through cost is a straightforward computation, the extent to which the monetary value of C can be passed on through ticket monetary values is a topic of much argument. If air hoses have the ability to go through through the full costs of the C to the consumer, and if demand was comparatively inflexible, so the consequence would be that along with retrieving the out-of-pocket cost, there would be an extra “ chance cost ” of the free allowances. This would take to the air hoses doing a net income from the strategy instead than the strategy adding costs.

Most surveies conducted have assumed that go throughing the costs to the consumer would hold no impact on the demand for air hose travel. The alteration in demand might be little but is it undistinguished plenty to presume that it is non-existent?

There are several statements for and against the impact of close full base on balls through costs, with the purpose of seeking to expect the reaction of the client given assorted variables.

Arguments for full base on balls through cost:

Tickets priced at fringy cost instead than mean costs: Typically tickets are priced at the incremental cost of seting on that flight. The air power sector is traveling to be short on allowances, so hence ticket monetary values will include the cost of geting extra allowances on current paths. For new paths it would necessitate geting new allowances, and hence the full cost would be factored in taking to an out-of-pocket cost plus an chance cost.

The air hose industry is extremely competitory: Customers are likely to exchange over to rivals for little differences in monetary value. Previously this occurred less often, because of some air hoses with discriminatory airdrome slots, protected paths or airdrome Gatess doing them more attractive. But now with the Open Skies Agreement, this does non be, as lesser limitations come into drama.

The air hose industry is a low profitableness one: Being low profitableness means that the degree of base on balls through is a batch more than an industry which is at a healthier degree of net incomes where net incomes can be eaten into.

Arguments against full base on balls through cost:

Passing on all costs will cut down demand and therefore demand and gross: In an industry which already faces low degrees of profitableness, intuitively and increase in monetary value will cut down demand.

Gross vs. Net incomes: Contraction of gross is non a step of cost. Cost is measured by lost net income. This is tantamount to the direct soaking up of the costs of the EU ETS, as without cost base on balls through, higher costs would take to take down net incomes. Net incomes are reduced by a lessening in demand and gross. The net effects on net income of a decrease in demand from higher ticket monetary values on net income should non be greater than the out-of-pocket costs faced by air hoses from inclusion in the EU ETS.

Consumers need to be cognizant of the alterations that the EU ETS will do to their travel, but given the international competition in the industry, the base on balls through will non be important adequate to drastically impact consumer incomes.


For this paper two research methods were used in order to either aid validate and support secondary research or place disagreements and hence generate new possibilities in the survey of finding the importance and viability of the current place of the C revenue enhancement strategy, and whether the European Union ‘s place is so a logical and appropriate response to the state of affairs. Primary research methods used was through the usage of a study, and personal interviews with persons who have involvements in the air hose industry and are in some manner associated with happening a practical solution to the job of clime alteration. The two methods used were chosen because the questionnaires allowed for a better apprehension of consumer concerns ( the receivers of the pass-through costs ) while the personal interviews provided valuable industry penetration and helped in explicating actionable recommendations.

Primary Beginnings: Questionnaire

Design and Execution

Surveies are best suited for descriptive research. Companies undertake studies to larn about people ‘s cognition, beliefs, penchants, and satisfaction, and to mensurate these magnitudes in the general population ( Kotler & A ; Keller, 2012 ) . A study with 17 inquiries was designed to better understand the consciousness degree among consumers sing clime alteration policy in general, the inclusion of air hoses in the EU ETS statute law and their reaction to a possible addition in menus due to this new policy. The study was sent to a random sample with no consideration made for age or gender, but demographics were determined based on intent of travel, and airfare category most often used. The study was constructed utilizing reputable online package ( Qualtrics ) . All inquiries were closed ended and prejudice was minimised by carefully choosing merely a restricted figure of reply options to restrict the figure of possibilities. Unfamiliar nomenclature was explained in item to avoid confusion and any ambiguity for changing cognition of air hoses among the respondents. This methodological analysis helped to ease analysis and presentation of findings. Surveies were sent out electronically via electronic mail and societal networking web sites like Facebook.

Datas Analysis

Before making any information analysis, the responses were evaluated for completeness and consistence. Due to the little population size, and the border of mistake statistical analysis was deemed unneeded. Alternatively the attack used was more qualitative and was done to chiefly find sensitiveness to the capable affair in inquiry.

Primary Beginnings: Personal Interview

Design and Execution

A personal interview is a various research method and it implies some signifier of verbal brush. The intent of carry oning the interview is to acquire a better apprehension of the capable affair specifically through the eyes of the interviewee. The interviews conducted were semi-structured, informal and colloquial in nature. The chief subjects and subjects of treatment were pre-determined with flexibleness for follow up and repeat where necessary. Open ended inquiries were posed, and the replies provided were greatly valuable to finding the recommendations and decision of this paper.

Interviews were conducted via telephone with persons from the air hose industry, confer withing houses that work with the air hose industry and persons from the energy sector. Interviewees will stay confidential for the intents of this survey. Interviewee sentiments provided chances to research how these systematic policies will impact air conveyance costs, menus, net incomes and besides helped to decode whether such policies are in fact geared to accomplishing lower emanations in the long tally, or whether they were merely another controversial political tool.

Secondary Beginnings

There is a overplus of information about general policies with respects to climate alteration. In the recent yesteryear with the increasing force per unit area from the EU there have been legion journal articles, columns and documents on specific air hose policies with respects to climate alteration. The literature overview is an merger of resources from Business Source Complete which provided diary articles, appropriate periodicals, magazine infusions and imperativeness releases from governmental web sites, every bit good as environmental administrations. Academic mentions have been made to assorted writers read during the class of the M.B.A every bit good as outside experts on the topic. A few illustrations include – Michael Porter for applicable strategic theoretical accounts, every bit good as Philip Kotler and Kevin Keller ‘s theory relating to the appropriate building of questionnaires and the methodological analysis of how to carry on personal interviews.


Impact on Airlines ‘ Performance

The questionnaire conducted resulted in 157 responses from a population of persons who travel for concern, leisure and members of the air power industry. Respondents were categorised based on frequence of air travel and intent of travel – whether for pleasance, concern or both.

A direct impact of presenting an extra revenue enhancement which will enforce excess costs on the air hose operators is a lessening in profitableness. Profitability entails the ability to go through on the cost additions and/ or chance costs to the consumer in the signifier of airfare additions. These increased costs for the consumer lead to a possible lessening in demand for the air hoses ‘ goods and services, which will so do a decrease in C emanations by manner of fewer flights ( lessening in capacity ) to fit the alteration in demand. The caution nevertheless is whether this lessening in demand is big plenty to make the demand to schedule fewer flights.

Since 2005, when the European Union started C trading, the monetary value of C allowances was estimated to be between a‚¬0 and a‚¬30. However, in 2009 this monetary value was set at a‚¬14.5, and the EU estimates a mere 3 % – 4 % addition in menus in the hereafter ( Anger & A ; Kohler, 2009 ) . Such little additions in monetary value will really improbable cut down demand. It can hence be concluded that the inclusion of air power into the EU ETS will hold an undistinguished impact on demand.

Talking with experts from the industry by manner of personal interviews it was substantiated that although the costs of the new revenue enhancement will be passed on to the client, the magnitude of such a base on balls through cost will be limited and will non impact the demand for air hose services. A representative from a big air hose company claimed that the gross impact would be far lesser than if the company were to increase its hereafter investings in more efficient aircraft and aircraft parts, which would necessitate a major capital outgo and partial inspection and repair of the company ‘s concern program. It was mentioned that the air hose company would prefer to do the capital outgo in the long tally, where improved efficiencies were mensurable, and sustainable, instead than pay to purchase C allowances in the short term.

Of the 157 respondents, 46 % used air conveyance between two to four times a twelvemonth, and 39 % per centum travelled greater than four times, with 49 % utilizing air conveyance chiefly for vacations and leisure. Although 91 % of respondents believed that clime alteration policy was an of import issue, when the inquiry sing alternate manners of conveyance ( route or rail ) was besides posed to the respondents 69 % answered against doing a switch. This can be credited to the fact that for long-haul journeys, route and rail are non the most feasible options and in the instance of trans-Atlantic and trans-Pacific travel, non plausible. In the instance of short-haul travel although possible respondents believed that it was clip consuming. The above theory is farther confirmed and demonstrates the deficiency of alteration in demand when 61 % of respondents said that they would non cut down the frequence of one-year air travel in the event that there was a maximal fare addition of 5 % , which is above the European Union ‘s current estimation of 3 % .

Impact on Competitiveness

Although, it has been shown above, that an undistinguished addition in airfare due to an inclusion of the C revenue enhancement will hold small to no impact on demand, it is deserving observing that although overall demand might non be affected there is a likeliness that modest alterations in demand could take to an addition in the fight among air hoses, chiefly between low menu air hoses ( LFAs ) and full service air hoses ( FSAs ) . Research has shown that LFAs confronting an addition in menus due to the EU ETS, are likely to confront a diminution in demand. However, the addition in menu is inconsequential comparative to a consumer ‘s income as these “ replacement ” air hoses are on the lower terminal of the monetary value scope. In fact peculiarly in the instance of typically monetary value inelastic concern travelers, who are chiefly the feeders on long-haul FSA flights, it has been discovered that these clients frequently do exchange from winging with FSAs to utilizing more flexible services provided by LFAs in the event of monetary value fluctuations, therefore increasing the fight in the market.

A little company with a big proportion of concern travel claimed that in recent times with the addition in handiness of assorted options on frequented paths, it was non uncommon for their travel section to buy a ticket on a LFA. In his sentiment, for short draw flights LFAs are “ good plenty ” and flexibleness is frequently preferred over comfort.

Of the 157 respondents in this survey, there were a sum of 79 respondents from the sample who did some concern travel of which 13 % travelled chiefly for concern and 38 % travelled for both concern and pleasance. 60 % said that an addition in menu would non take to a lessening in their concern travel, but 75 % claimed that they would see exchanging to a low menu air hose in the event of fluctuations in monetary value that could perchance be caused by the debut of a C revenue enhancement. This consequence helps to confirm the decisions of earlier surveies and therefore confirm the thought that the EU ETS revenue enhancement could take to an addition in fight in the market.

Consumer Sovereignty or “ Passenger Sovereignty ”

The theory of consumer sovereignty explains how consumers drive market conditions under perfect market competition. The CST ( Consumer Sovereignty Test ) was first developed in 1995 ( Guning, 2009 ) and it used three factors to mensurate the theory:

Consumer Capability: This factor measures the freedom to do rational determinations.

Information: The handiness of accurate and utile information to do a rational determination.

Choice: Freedom to take and exchange to a rival if non wholly satisfied.

Consequences of several surveies have concluded that those who travelled more often were likely to be the best informed about clime alteration. It was nevertheless besides established that riders needed to be convinced that their personal actions can do existent parts to climate alteration. If air hoses are forced to follow with the EU ETS, the costs of conformity are most likely to be passed on to clients through increased menus. There is an apparent riddle, for those air hoses with successful C offset programmes. Many air hoses have expressed a public committedness to carbon countervailing based on external force per unit area to take greater duty for their C footmark. But will an extra EU ETS programme revenue enhancement lead to duplicate bear downing or a dual payment? There are two possibilities – if the EU ETS revenue enhancement is voluntary, so it will be similar to consumers who are buying an beginning. However, if the revenue enhancement is compulsorily enforced by the authorities, by manner of an addition in menu, consumers should be informed in a responsible mode.

39 % of the respondents in this survey travelled more than four times in the twelvemonth, and 53 % of the sum had heard about the EU ETS and the debut of a C revenue enhancement for the air hose industry every bit good as its part to climate alteration policy. Although 91 % agreed that battling clime alteration was of import when asked if they would prefer the C revenue enhancement to be a compulsory charge, merely 61 % claimed that they would prefer it being included as portion of the entire menu alternatively of volu