Assessing the equity impact of the EU emission trading scheme on an African airline

© Chikage Miyoshi Cranfield University
Dr Chikage Miyoshi
Centre for Air Transport Management
Cranfield University
22nd April 2015
1
Assessing the equity impact of the European Union
Emission Trading Scheme on an African airline
Institute for Transport Studies, University of Leeds

Agenda
3
Ø  A Single Market o Global Aviation and its Dilemma in
International Climate Negotiations
Ø Assessing the equity impact of the European Union

* Benefit of ‘ Air Transport’ ?
* Negative effect?

5
Approaching environmental issues
Economic
Socio cultural
Political consideration

Sustainable development
•  Social Cost = Private Cost + External Cost
Air Pollution
Accident
Wild life, Nature
Noise
Waste
Green House Gas
Fuel /energy
Labour
Facilities
Administration
•  Social Benefit = Private Benefit + External Benefit
Profit Value of time
Less accident
Peace
Working opportunity
Happiness
8

Further
development:

9
Environment is the key
Increase
capacity
and
demand

Minimise
nega1ve
externali1es
and
cost

&

Maximise
beneﬁts

10
Strong Policy Driver
1992 1997
"   United Nations Framework Convention on
Climate Change
"   Entered into force in 1994 signed by 166
countries, 196 parties in 2014.
"   Combat: GHG emissions
Global warming
Climate change
"   Ratified by 176 countries, has been ratified 192
of the UNFCCC parties in 2014
"   Entered into force in 2005
"   Achieve a reduction of 5% of 1990’s GHG
emissions in 2012
To stabilise GHG concentration in the atmosphere
To promote sustainable technologies to grant an environmentally less
harmful economic growth

•  Annex I countries –recognised as industrialised countries and
economies in transition (EIT)
Annex I countries- developed countries to pay cost of
developing countries
11
Without Canada
(in 2011)
40 countries and the EU accounted for 61% of GHG in 2009
Japan, Canada,
Russia would not
take the post 2012.

•  An international agreement linked to the United Nations Framework
Convention on Climate Change
•  It sets the binding targets for reducing greenhouse gas (GHG) emissions.
•  An average of 5% against 1990 levels over the five year period 2008-2012
•  The end of the first commitment period of the Kyoto protocol in 2012
Adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16th
February 2005
The Kyoto mechanisms Monitoring emission targets
Excluding international aviation
Kyoto Protocol
12
• Emission trading
Assigned Amount Units (AAUs)
• Clean development mechanism (CDM)
Certified Emission Reduction (CER)
• Joint implementation (JI)
Emission Reduction Units (ERUs)

The Kyoto mechanisms
Kyoto Protocol
13
• Emission trading
Assigned Amount Units (AAUs)
• Clean development mechanism (CDM)
Certified Emission Reduction (CER)
• Joint implementation (JI)
Emission Reduction Units (ERUs)
Every country has been assigned an amount of Assigned Amount Units (AAUs).
These units are calculated in tons of CO2 equivalent (CO2-e).
To ease the accounting of the sixe different GHG, offending gases are weighted
by their global warming potential.
c.f. EUA : European Union Allowance

2003 ‘The Future of Air Transport White paper’
2006 ‘The Stern review’
2006 ‘The Future of Air Transport Progress Report’
2007 ’Towards a Sustainable Transport System’-Supporting Economic
Growth in a Low Carbon World’
Aims to maximise the overall competitiveness and productivity of the national
economy and to reduce transport’s emissions of GHS, with desired outcome of
avoiding climate change
Focus on the aviation emissions
UK Government Policy for transport

In Europe
"   Cap & trade system
"   30 countries involved
"   Started in 2005
"   Objective: 21% reduction by
2020 compared to 2005
"   Encourage investments in clean
and green system
"   11,500 installations of heavy
emitters, representing 42% of
Europe GHG (only CO2).
European Emission Trading Scheme
Individual and independent of any binding protocol under the UNFCCC
The EU ETS does not cover the Global GHG emissions.

Directive 2008/101/EC to include aviation
The EU ETS (Emissions Trading Scheme)
Proposal for a directive of the European parliament and of the
council, amending Directive 2003/87/EC so as include aviation
activities in the scheme for greenhouse gas emissions
allowance trading within the Community’
http://ec.europa.eu/environment/climat/aviation/index_en.htm
More information:
European Commissions
16

•  Phase I ran from 1 January 2005 to 31 December 2007 and was a 'learning
by doing phase';
•  Phase II ran from 1 January 2008 to 31 December 2012 and includes
revised monitoring and reporting rules, more stringent emissions caps and
additional combustion sources;
•  Phase III, which runs from 1 January 2013 to 31 December 2020, brings
major changes including, harmonised allocation methodologies and
additional greenhouse gases and emission sources.
How does the EU ETS work?
17
•  Companies exchanges units of EUA(European Union Allowance)
•  The EU ETS allows firms to bank and borrow allowances
between years within a trading phase.
•  Firms can cover a short position by using previous unused
units(banking) or by using permits allocated to following years
(borrowing)

18
EU-ETS time line
"   Learning
phase
"   Carbon price
"   NAP
"   Free allocation
"   10% less
allocations
"   1st Kyoto
commitment
period
"   Free allocation
"   More sources
"   20% less emissions in
2020 compared to
2005
"   Each year: 1,7% less
allowances
"   More GHGs and
sources

The EU ETS
0
20
40
60
80
100
120
140
160
180
200
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Phase IIPhase I
Auctioning
Reserve
Historical base Monitoring
Carbonemissions
Free allowance
Phase III
97%
95%

21
Carbon tax or ETS
Source: World Bank (2014)
US30 billion in 2013

•  Significant share of
vehicles
•  But significant growth of
aviation
•  And the further growth is
forecasted by the
Government
Source: Defra(2007)
Balance between the
air travel growth,
economy and
environment
Why aviation?
22

Global sectoral approach for aviation industry required
IATA, 22 September 2009
The Copenhagen Climate Negotiations (COP 15) , December 2009
ICAO ‘High-level Meeting on International Aviation and Climate Change’
7-9 October 2009
• Aviation should be treated as a separate sector rather than by country
• The global solution trough ICAO is the best way to reduce remissions
• US support at ICAO meeting is critical
Towards Post-Kyoto

•  A global agreement on climate change by 2015
•  The Durban (COP 17)platform: the international agreement by 2015 and
implementation in 2020
•  Further mechanism include. Carbon market and finance
Doha COP 18, November December 2012
The 39th Session of the ICAO Assembly , 2016
The 38 th Session of the ICAO Assembly’, September to October 2013
Post-Kyoto
The amendment of the Kyoto Protocol from 2013 to 2020
•  A global MBM scheme by 2015 for decision in 2016

•  Annex I countries –recognised as industrialised countries and
economies in transition
Annex I countries- developed countries to pay cost
of developing countries
25
Canada withdrew in 2011
Japan and Russia are
out from the second
commitment.

STOP the clock on the EU ETS
26
EU suspends aviation inclusion in ETS for international flights
The 38th ICAO assembly (24th September-4th October 2013)

1 kg Jet Fuel = 3.156 kg carbon
27
Source: ICAO (2013)
Traffic Growth and fluctuation

1 kg Jet Fuel = 3.156 kg carbon
28
Fuel and Carbon emissions

Volatile Carbon price
29
EU ETS Phase II and the first Kyoto Commitment
Oversupply in
CERs and EUAs

0
50
100
150
200
250
300
350
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Index(1986=100)
RPK (all regions)
Average stage distance flown(kms)
Fuel (g)/pkm
Total fuel consumption per year (tonnes)
Total fuel consumption per ATK
Source: Miyoshi and Mason (2009)
Fuel consumption increased by 4% p.a
Fuel efficiency improved by 2% p.a
Fuel efficiency trend-AEA airlines

Marginal abatement cost curve
£ tonne CO2
32
CO2 tonne saved
-£100
£300
Carbon price

33
Assessing the equity impact of the European Union

34
The first multi national emission trading scheme
Motivation: The EU ETS including aviation
Many regulatory issues and objections under the Chicago Convention and the
Kyoto Protocol, ratified countries have different responsibilities and roles based on
whether they are Annex I country or Non-Annex I country.
‘ Stop the Clock action’ in November 2012 and ‘ Decision’
in 2013
A global MBM ( market based mechanism) led by ICAO in 2016 and will be
implemented in 2020.
De minis consideration ( a developing country contributing less than one per
cent of global aviation emissions.
The EC proposed to amend the 2003 ETS Directive
in February 2014

35
•  Airlines’ network and reconfiguration
( Albers et al., 2009: Derigs and Illing, 2013)
Previous studies
•  The additional costs and effects on fares
( Scheelhaase and Grimme, 2007; Scheelhaase et al, 2010; Morrell, 2007;
Yuen and Zhang, 2011)
•  The impact on airlines industry and macroeconomic activity
( Anger, 2010)
Only minor impacts on costs, networks, and emission reductions for
European airlines ( Derigs and Illings, 2013) and US carriers (Malina et
al, 2012)
For Non- Annex airlines, it is crucial to discover how to engage and
make use of the EU ETS(Zhang and Wei, 2010)
It is effective only if aggressive measures are implemented
(Degres and Illing, 2013;Sgouridis et al, 2011; Verspermann and Wald, 2010)

36
To measure the equity effects of the aviation EU ETS
on a non-Annex I country’s airline by comparing it
with airlines in Annex I country.
Research Objective
All itineraries via London (LHR)- and Johannesburg(JNB) in 2011
British Airways (BA), Virgin Atlantic Airlines(VS), South African Airlines (SA)
and others
Assumption: the original ETS system design
Case 1 : the actual fleet strategy by airline in 2011
Case 1 : BA and SA change aircraft to efficient fleet
Limitations: only one route is analysed. Network and revenue
managements are more complex and dynamic.

37
Methodology and data used
Step 1: Model 1: estimate emissions by airline
Step 4 Model 3: estimate consumer welfare change
by group due to the impact of the EU ETS
Step 2: estimate the additional cost on fare by
airline
Step 3 Model 2: estimate the market share
change by airline, which is caused by fare
increase due to the EU ETS
Data used:
OAG (2012)
PaxIS (2012)
UK CAA (2012)
BADA 3.6(2006)

38
Methodologies and data used

The more refined tier 2 methods
LTO cycle CO2 emissions
calculation
Aircraft type
Stage
length
Altitude
Aircraft type
Cruise cycle
Fuel Consumption
calculation
BADA aircraft
performance data
table
Cruise cycle CO2 emissions
calculation
EEA
Emissions
data
Inventories
Guide book
The Total CO2 emission
On each route
Source: Miyoshi and Mason (2009)
Fuel consumption and emission Calculation methodology

40
Methodologies and data used

41
NECTAR 2014 Cluster 1 meeting on Networks
𝑃𝑛𝑖 =
exp⁡( 𝑉𝑛𝑖 )
∑ exp⁡( 𝑉𝑛𝑗 )𝑗∈𝐶 𝑛

𝑉𝑛𝑗 = 𝛽1 𝑇𝑖𝑚𝑒 𝑛𝑗 + 𝛽2 𝐹𝑎𝑟𝑒 𝑛𝑗 + 𝑆𝑡𝑜𝑝𝐷𝑢𝑚𝑚𝑦 𝑛𝑗 + 𝜀 𝑛𝑗

𝜂 𝐹𝑎𝑟𝑒 𝑖
𝑃 𝑗
=
δ𝑃 𝑗
𝛿𝐹𝑎𝑟𝑒 𝑖
∗
𝐹𝑎𝑟𝑒 𝑖
𝑃 𝑗
= (1 − 𝑃𝑖) ∗ 𝐹𝑎𝑟𝑒𝑖 ∗ 𝛽 𝐹𝑎𝑟𝑒

𝜂 𝐹𝑎𝑟𝑒 𝑖
𝑃 𝑗
=
δ𝐹𝑎𝑟𝑒𝑖
𝐹𝑎𝑟𝑒𝑖
∗ 𝐴𝑀𝐸

∆𝑊𝑖𝑗 = − ' 𝑃𝑖𝑗
1
𝐶𝑖𝑗
𝑗
−
1
2
'(𝑃𝑖𝑗
0
− 𝑃𝑖𝑗
1
)𝐶𝑖𝑗
𝑗
+
1
2
'(𝑃𝑖𝑗
0
− 𝑃𝑖𝑗
1
)𝐶𝑎𝑟𝑏𝑜𝑛𝑖𝑗
𝑗

Model 2
Model 3
where =1,2,3 ; j∈C_n are alternatives in the choice set C for individual n ; Pni is the
probability of the individual n choosing airline i on the route; and Vni is a deterministic utility
for the j alternative of individual n.
where 〖Fare〗_i is the attribute of the i alternative; and β_Fare is the
estimated coefficient of the fare. In addition, the elasticity of fares can be
obtained by average marginal effects (AME) of fare change as below.
where ∆W_ij is the welfare change of individual passenger i on airline j,P_ij is the
probability an individual passenger i taking a trip with airline j,C_ij is the cost of carbon
charges on the trip by passenger i with airline j,; 〖Carbon〗_ij is the cost of carbon
damage on the trip by passenger i on airline j , 0 denotes ‘before the ET ETS’ and 1
denotes ‘after the EU ETS’.

42
All London (LHR)- Johannesburg(JNB) routes

Number
of

departures

Per
year

Number
of

seats

supplied

Per
year

Number
of

passengers

carried

Per
year

Seat

Configuration

Number
of

passenger

on
flight

Average
load

factor

Average
fare

JNB-‐LHR

(USD)

Average
fare

LHR-‐JNB

(USD)

British
Airways
(BA)
728
255,528
195,482
351
269
0.77
1,433
1,538

Virgin

Atlantic
(VS)
365
127,118
92,354
348
253
0.73
930
956

South
African
Airlines
(SA)
677
192,841
132,256
285
195
0.69
918
1,043

Source: Traffic data (UK CAA, 2012) and average fare (IATA, 2012)
Main players ( BA :42% and SA :38%)

43
Data and assumptions used

Aircraft
type
Seat

Block
fuel

(kg)

Number
of

departures

Per
year

Capacity
Share

(%)

Case
1

(The
current

Fleet)
in
2011

BA
B747
337
104,728
728
41%

SA

A330-‐200
222
55,714
259
15%

A340-‐300
253
63,644
167
9%

A340-‐600
317
81,679
252
14%

VS

B747
451
104,728
116
7%

A340-‐600
308
74,706
249
14%

Case
2

(
Expected

fleet)

BA
B787-‐900
250-‐290
48,366
728
41%

SA

A330-‐200
222
55,714
259
15%

A340-‐300
253
63,644
167
9%

A340-‐600
317
74,706
252
14%

VS

B787-‐900
250-‐290
48,366
116
7%

A340-‐600
308
74,706
249
14%

Note: case 1 is based on the actual aircraft type used in 2011. Case 2 is based on the assumptions that BA and VS
switch aircraft type from B747 to B787-900.

44
Additional cost per passenger by airline

Additional
cost
per
passenger

Low
Medium
High

€7
per
tonne
€15
per
tonne
€30
per
tonne

Case
1

BA
5.5
11.7
23.4

VA
3.9
8.4
16.8

SA
3.9
8.3
16.7

Case
2

BA
-‐0.2
-‐0.4
-‐0.8

VS
2.0
4.3
8.7

SA
3.9
8.3
16.7

BA’s carbon cost is the highest in
case 1, however, they can obtain
the additional carbon when their
fleet is renewed.

45
The equity effect change by airline and routeCarbon
price

Case

Carriers

LHR-‐JNB
(the
South
bound
route)
JNB-‐LHR
(the
North
bound
route)

Market

share
(%)

Before
ETS

Market

share
(%)

After
ETS

Carbon
cost

per

passenger

(USD)

After
ETS

Carbon

saving
per

passenger

(USD)

Consumer

welfare

change

per

passenger

(USD)

Market

share
(%)

Before
ETS

Market

share
(%)

After
ETS

Carbon
cost

per

passenger

(USD)

After
ETS

Carbon

saving
per

passenger

(USD)

Consumer

welfare

change

per

passenger

(USD)

Low

(€7
per
tonne)

1

BA
46.5
47.9
5.3
0
-‐5.33
46.5
48.2
5.3
0
5.31

VS
22
19.7
4.38
0
-‐4.26
22
20.1
4.34
0
-‐4.39

SA
31.5
31.4
3.91
0
-‐3.91
31.5
31.7
3.9
0
-‐3.91

2

BA
46.5
46.5
-‐0.18
2.8
3.01
46.5
47.1
-‐0.18
0.66
3.01

VS
22
20.8
2.14
1.0
-‐1.16
22
21.2
2.13
0.22
-‐1.15

SA
31.5
31.4
3.91
0
-‐3.91
31.5
31.8
3.9
0
-‐3.91

Medium

(€15
per
tonne)

1

BA
46.5
49.5
11.0
0
-‐11.07
46.5
50.2
11.07
0
-‐11.04

VS
22
16.7
11.1
0
-‐10.8
22
17.9
10.6
0
-‐10.68

SA
31.5
31.2
8.4
0
-‐8.4
31.5
32
8.39
0
-‐8.39

2

BA
46.5
46.4
-‐0.39
6.1
6.45
46.5
46.5
-‐0.39
6.05
6.44

VS
22
19.5
4.89
2.3
-‐2.65
22
22.0
4.34
2.04
-‐2.3

SA
31.5
31.2
8.4
0
-‐8.42
31.5
31.5
8.35
0
-‐8.35

High

(€30
per
tonne)

1

BA
46.5
52.4
20.8
0
-‐20.9
46.5
52.3
20.8
0
-‐20.8

VS
22
12.2
30.3
0
-‐29.5
22
13
28.5
0
-‐28.9

SA
31.5
31
17.0
0
-‐16.9
31.5
31.1
16.9
0
-‐16.9

2

BA
46.5
46.3
-‐0.79
12.5
12.9
46.5
46.4
-‐0.79
12.14
12.9

VS
22
17.0
11.2
5.3
-‐6.1
22
17.4
10.96
5.16
-‐5.9

SA
31.5
31
16.9
0
-‐17.0
31.5
31.2
16.9
0
-‐16.9

46
The results: LHR-JNB with low carbon price(€7 per tonne)
Small difference for both carbon
cost and welfare
Case 1 ( the actual data in 2012) Case 2 ( BA and VS fleet change
after the free allocation)

47
The results: LHR-JNB with Mid carbon price (€15 per tonne)
Difference among airlines becomes larger.
Case 1 ( the actual data in 2012) Case 2 ( BA and VS fleet change
after the free allocation)

48
Findings
•  Fuel-efficient aircraft and passengers on both Annex-I and non-Annex I
airlines could benefit from reductions in fuel consumption and CO2 emissions.
•  a fleet renewal strategy provides significant benefits in terms of carbon costs.
However, this strategy requires a large amount of investment and time. The
burden of fleet renewal could be much larger for some non-Annex I airlines
compared to Annex I airlines due to capital and financial access, including higher
discount rates charged to non-Annex I airlines.
•  The economic instrument is effective. However, it is very limited unless the
carbon price is very high.
a more restrictive system design (Vespermann and Wald, 2011). Therefore, more
aggressive regulation is required (Derigs and Illing, 2013).

49
Policy proposals and the further study
•  There are some equity gaps between the Southbound and Northbound routes
as well as between Annex I and non-Annex I carriers. This aspect also should be
considered with regard to changing the system or implementing the global market
mechanism in the future. The carbon price should be higher for an effective
mechanism, but the equity difference will be greater among airlines and
passengers.
•  One way of moderating the equity gap between Annex I and non-Annex I
airlines could be a fairer distribution of revenue from the EU ETS. Under
the general EU ETS legislation, the current distribution methods are unclear
on where revenue goes and how it is spent within the EU. One option could
be transparent and direct redistribution to each participant, which
would compensate for equity issues among airlines and countries. This
issue needs to be analysed in any further research.

Thank
you
so
much
indeed

50
Chikage
Miyoshi

E-‐mail:
c.miyoshi@cranﬁeld.ac.uk

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http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp_rpt_83a.pdf
Transportation Research Board (2010 ). Airport Cooperative research Program (ACRP), Report 28, Marketing
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http://www.aci-na.org/static/entransit/acrp_marketing_airports_3-10-10.pdf
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Guidebook on preparing Airport’s Greenhouse gas Emission Inventories
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