A global carbon offset scheme could add less than $2 to a one-way fare between Paris and New York
Fri 2 Aug 2013 – Meeting the aviation industry’s carbon-neutral growth target from 2020 could add as little as $1.50 to $2 to the price of a transatlantic one-way ticket in 2030, estimates a report by Bloomberg New Energy Finance (BNEF) and Environmental Defense Fund (EDF). Their analysis shows that surplus offset credits already available in the world’s carbon trading systems could, in principle, meet just under 50 per cent of the industry’s potential need for the 2020 to 2050 period. As long as governments adopt tough criteria to ensure their environmental integrity, the cost of credits to the aviation industry would represent less than 0.5 per cent of international aviation revenue, or roughly a quarter to a third of what airlines bring in from ancillary revenues such as checked bags and snacks.
With the aviation industry recently reinforcing its goal of carbon-neutral growth from 2020 (CNG2020) through a global offset scheme and the controversial issue under discussion at ICAO ahead of its triennial Assembly next month, the authors of the report – Annie Petsonk, International Counsel for EDF and Guy Turner, Chief Economist at BNEF – have analysed what it might cost the sector in the 2020-2050 period.
To estimate the size of the emissions gap that will need to be bridged in order to achieve CNG2020, the authors base their findings on a recent analysis carried out by Manchester Metropolitan University (MMU), which showed a cumulative shortfall in international aviation emissions over the 2020-2050 period of between 6 billion and 17 billion tonnes, depending on efficiency improvements from technology and operational measures. Under a moderate scenario for growth, the range is 8 billion to 14 billion tonnes, with a central estimate of around 10 billion tonnes.
Offsetting this growth should not be expected to pose a problem for the industry, says the report. There are four main potential sources that could be used to provide emissions units to meet its goals:
- Emission allowances from national or regional cap and trade programmes, such as those operated in Europe (EU ETS), New Zealand, California and Quebec, with other countries considering or planning such schemes such as China, South Korea, Mexico, Kazakhstan, South Africa and Brazil;
- Emissions allowances created under the Kyoto Protocol at the national level, although there is uncertainty as to whether existing allowances will come into future emissions trading schemes;
- Credits from UN-registered emission reduction projects (CDM and JI), although not all of these credits will be available to the aviation sector; and
- Credits from voluntary offset projects – BNEF estimates that by 2020 there will be around 360Mt of surplus voluntary credits that could potentially be used by the aviation sector.
Assuming environmental integrity concerns can be addressed, BNEF estimates, excluding the surplus emission allowances created at the national level under the Kyoto Protocol, the remaining sources total a maximum available supply of up to 4.4 billion tonnes by 2020, just under a half of the anticipated 10 billion tonne demand. This supply is what is likely to be left unused, based on historical and expected credit generation and compliance use in the existing UN, EU ETS and voluntary markets, and does not include the potentially substantial new supply of carbon units to meet additional demand.
As the authors point out, what ultimately matters is the price paid for these offsets. Today, the different types of carbon allowances and credits have different prices, which are likely to rise over time as the surplus of banked allowances is gradually drawn down and more jurisdictions impose emissions caps.
Analysis by EDF shows the unit cost of offsets increasing from about $4-6/tonne in 2015 to around $25-33/tonne in real terms by 2050. Taking the 8-14 billion tonnes shortfall range over this period and under two different potential emission reduction requirement scenarios for existing and newly-formed cap-and-trade programmes outside the aviation sector, the annualised cost of CNG (in 2015 prices) through to 2050 would be between $1.8bn and $4.6bn per year.
Citing IATA figures, the report says the global aviation industry had sales of around $680 billion in 2012 and, on the basis that international flights make up around 60% of the total, international revenues would be some $408 billion. Assuming airline revenue grows broadly in line with emissions, the authors estimate international airline revenue in 2035 – the mid-point to 2050 – would be around $1.2 trillion in today’s prices. Assuming an annualised cost of the offsetting scheme of around $5 billion over the period, this would therefore represent less than 0.5% of international aviation revenue.
Compared with ancillary revenues of $27 billion collected in 2012 for services such as checked bags, extra legroom and snacks, the cost of CNG to the international sector would be roughly a quarter to a third of what airlines bring in from these revenues.
“These costs are clearly small, to the point of being trivial compared to other costs of running airlines,” says the report. “The net effect on the airlines themselves, however, will be even less as these additional costs will most likely be covered through higher ticket prices.”
The authors calculate that CNG2020 would add between $1.50 and $2 to the price of a one-way fare from Paris to New York in 2030 and between $10 and $20 in 2050 in real terms. This is based on an assumption that cost of offsetting by the industry beyond 2020 is spread evenly across all routes, existing and new. Assuming no change in the costs of flying the Paris-New York route, the costs of CNG2020 in today’s prices would therefore represent an increase of between 0.3% and 0.4% on the ticket price in 2030 and between 2% and 4% in 2050.
“This analysis demonstrates just how affordable a market-based mechanism can be in limiting carbon emissions,” commented Petsonk. “While aviation’s formidable technological ability can help reduce its carbon footprint, our analysis shows the critical role that high-integrity, low-cost reductions in other sectors can play in meeting the industry’s goal of carbon-neutral growth from 2020. As governments in ICAO consider how to address aviation’s contribution to climate change, this should give them the confidence to move ahead with a market-based mechanism for carbon-neutral growth.”
Turner believes the widespread availability and low cost of carbon credits could enable the industry to take on more ambitious targets.
“These findings show that the international aviation sector can control its CO2 emissions relatively cheaply by using market-based mechanisms,” he said. “The small cost and the ability to pass any costs through into ticket prices should encourage the international aviation sector to accelerate and deepen its emission reduction pledges. More ambitious emission reductions now look much more doable than mere stabilisation from 2020.”
‘Carbon Neutral Growth for Aviation – At What Price?’ report
Environmental Defense Fund
Bloomberg New Energy Finance
MMU – ‘Bridging the aviation CO2 emissions gap: why emissions trading is needed’ report
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