Navigating the turbulence: Analyzing Potential Carbon Leakage in EU ETS Aviation Policy

Abstract

Aviation accounts for approximately 2.5% of global CO2 emissions. However, this seemingly low number is deceiving for several reasons. For one thing, it does not account for other warming effects of aviation, and further, it does not show the increasing trend in carbon emissions from aviation during the last decades. To reach global climate targets, policy adjustments for carbon emissions from aviation are more than likely to be needed. In this study, we investigate the climate policy for aviation in the European Union Emissions Trading Scheme (EU ETS). More specifically, we examine the potential carbon leakage that can arise from removing the free allocation of emission allowances (EUA) for the aviation sector in the EU ETS by 2026. To narrow down the scope of the study, we only analyze how the policy change would affect demand changes for three charter destinations from Landvetter Airport, Gothenburg, and the potential carbon leakage that could arise because of the demand changes. For the analysis, we use a regression model, containing time series data on number of passengers and fuel costs as a proxy for ticket prices, to estimate how variations in ticket prices affect demand for each destination. Using the estimations together with predicted future costs of EUAs, we find a reduction in demand of 10 to 20% in 2026. To illustrate the potential carbon leakage, we employ four different scenarios of travel substitution to a destination that is not affected by increased costs from EUAs, namely Antalya, Turkey, and find a leakage of 1.7 to 6.9 million kg CO2.