Economics should be open

November 26, 2008

15% reduction in trans-Atlantic aviation from carbon costs

Filed under: Carbon Trading — Tags: , , , , — howardchong @ 11:49 pm

So, the European carbon cap-and-trade system (ETS, European Trading Scheme) is strongly moving towards forcing all flights into and out of the EU  to participate; i.e. buy carbon credits. It doesn’t matter if they get allocated them for free, because this opportunity cost will be passed on. See 

What affect would this have on transatlantic travel?

Here’s a back of the envelope calculation that says this will decrease the number of flights across the atlantic by roughly 15%.  A round-trip from Boston Logan to London Heathrow is 3.2 Tons of CO2 (when including Radiative forcing, using the calaulator at Assume a carbon price of about $30/ton (rough estimate of prices, source: ECX).  That’s about a $90 price increase. Assume a $900 price on travel (Orbitz). That’s a 10% price increase. If you assume a price elasticity of 1.5, you get the conclusion of a 15% reduction in transatlantic airline travel.

I make no judgment whether this is a good or bad thing. I like cheap travel. But I also like the environment. The main principle is that if we’re going to force power plants to pay for carbon costs, then everyone should pay. There are no sacred cows that I think should be exempted.

The only other comment is that I think there are considerable loopholes that need to be addressed in implementing this policy. Does a non-stop from SF to Paris get charged for the full distance but a 1-stop with a stop in Boston get charged just for the Atlantic portion? What about 1-stops to Iceland? (This might be the perfect plan to bail out Iceland).

The other thing is that this means that airlines will need to cut back capacity by about 15%. This isn’t hard to do, they already react to changing fuel prices. But if they know this is down the line, this would be a reason to delay heavy investment in more planes.



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