Chapter 5: Aviation and the EU Emissions Trading System

This chapter considers the application of climate mitigation policies to the aviation sector with reference to the inclusion of aviation in the EU Emissions Trading System (EU ETS). Assessments of the possible economic impacts of including aviation in the EU ETS are reviewed and an impact analysis using the macroeconometric E3ME model is conducted.

The aviation sector is a significant and rapidly increasing source of GHG emissions. Because international policy measures have not been agreed, the EU has incorporated aviation in the EU ETS. It is therefore important to consider the possible economic effects of the ETS on the aviation industry and the wider economy.

The paper describes the approach used by the EU to include aviation in the EU ETS. Assessments of economic impacts have been made, but have often been limited in their approach. The paper complements the existing literature by including an economic analysis using the E3ME macroeconometric model of the EU that covers 41 industrial sectors including aviation.

Microeconomic and macroeconomic assessments show the economic impacts of including the aviation sector in the EU ETS are small. The negative impacts, if any, on EU GDP and the air transport sector’s economic output are less than 0.1% and 1% respectively. Distortions in competition, both between countries and industrial sectors, are therefore likely to be small.

In the long term (beyond 2020), including aviation in the EU can be seen as a positive move. If and when aviation is fully included in the EU ETS, and when the cost impacts of GHG emissions through permit prices are made evident, it is anticipated that airlines will start monitoring and reducing their GHG emissions by investing in new, less carbon intensive technologies.