ABSTRACT
Consideration of possible industrial responses turns out to be important when we classify the effects of ETS into the direct impacts and indirect impacts. Note that the policy objective of reducing emissions can be achieved either directly through increasing the cost of air travel and thereby suppressing the demand, or indirectly through inducing further emission reduction measures initialized by the aviation sector (carriers, airports, aircraft manufacturers, etc.) trying to lower costs and restore demand by improving fuel and other operating efficiencies. When estimating the effects of certain emission reduction policy, therefore, we need to investigate both the direct and indirect impacts induced by the reactions of various players in the aviation industry. Figure 17.1 shows the paths through which the climate change policies affect the economy and environment at the aggregate level. For a particular air travel market, usually a route, other subtle issues, such as the strategic interactions among airports and airlines and airline competition, will also influence the effectiveness of climate change mitigation policies, which are not depicted in Figure 17.1. As can be seen from the figure, the path of the direct impacts is straightforward and it is relatively easy to quantify and analyze these effects based on the status quo of the airline industry prior to the implementation of any emission policy, since no potential reactions from airlines and airports are taken into consideration. A number of studies, both journal articles and research reports, have investigated and estimated the direct impacts. These studies, mostly empirical, assume that factors such as airline flight frequency, aircraft fuel efficiency, network structure and competitive environment remain unchanged. As a result,
emission control policies simply impose an extra cost on airlines, which then pass the additional cost onto the passengers by raising fares. Owing to the inherent heterogeneity of each carrier’s strategy (e.g., business model), operation (e.g., route and hub airport selection, fleet mix) and performance (e.g., emission efficiency), the amounts of fare increase differ among the carriers. This will in turn induce a new distribution of passengers and lead to changes in competitive positioning among airlines and airports. Note that even though the airline/airport reactions are not considered, the demand loss on a certain route for a particular airline may be attributed not only to its own price elasticity, but also to the substitution effects of other transport modes, alternative destinations and routes, as well as competing airlines. Finally, unlike the direct impacts, the indirect impacts are much more subtle and difficult to analyze. This is due either to the lack of data as GHG emission policies were not mandatorily applied in the aviation industry until recently, or to the complexity of the issue itself as emission policies can trigger strategic behavior and interaction among the actors (airlines, airports, etc.) at various linkages as depicted in Figure 17.1. As a result, studies on the indirect impacts are relatively rare. We organize our literature review along the lines of the direct and indirect impacts. Furthermore, given the global character of climate change, unilateral implementation of GHG emission policies may lead to airline competition, tourist distribution, transport modal shift and other issues. These issues, together with the effectiveness of unilateral policies in terms of emission reduction, will also be examined in our review. Finally, emission trading and emission taxation are two major climate-change policies that are widely implemented or proposed by various sectors. In aviation, as both policy types may be considered as de facto fuel price increase (Brueckner and Zhang, 2009) and both can, theoretically, achieve the same level of emission reduction provided appropriate policy designs, papers looking at either the impact of taxation or the impact of ETS are considered in this survey.1 Table 17.2 lists major studies reviewed in our survey; it also summarizes airline reactions and policy implementation environments covered in these papers. The possible (direct) reactions to emission policies by airports, aircraft manufacturers and air navigation operators will not be examined further in this survey, however.
