SAF Quotas Beat CO₂ Taxes in the Aviation Sector
ResearchZEW Study Shows: Market Structure Determines the Costs and Impact of Climate Policy
Decarbonising air traffic is expensive, but essential. A new study by ZEW Mannheim and Bauhaus Luftfahrt shows: Under realistic market conditions, where air carriers have strong market power, mandatory quotas for sustainable aviation fuels (SAFs) are more advantageous from an economic perspective than CO₂ taxes. SAF quotas can dampen ticket price increases, accelerate the introduction of alternative fuels and effectively curb emissions. However, a combination of EU emissions trading with an SAF quota, while it has an effect in Europe, is not sufficient to meet the global climate targets of the aviation sector.
“Our findings show that the market structure is central to the evaluation of climate policy in aviation,” says study co-author Professor Sebastian Rausch, head of ZEW’s Research Unit “Environmental and Climate Economics” and professor at the University of Heidelberg. “Where airlines have market power, SAF quotas can correct climate policy and competition distortions.” Dr. Anna Straubinger, scientist in the same research unit and co-author, adds: “Global reduction in emissions being equal, an SAF quota causes significantly lower welfare costs than a CO₂ tax – and the increase in ticket prices is much more moderate. It would therefore make sense to apply stricter global standards and a strong focus on sustainable aviation fuels and to adopt a climate policy that systematically considers market power in the aviation sector.”
SAF quota slows price increases and curbs costs
The study compares globally effective CO₂ taxes and SAF quotas with a detailed simulation model of global air traffic, which depicts network and low-cost carriers operating under imperfect competition. In this model, airlines can adjust their flight offerings and the mix of fossil kerosene and SAFs. Under perfect competition, a CO₂ tax would be the most cost-effective instrument.
Where airlines’ market power comes into play, however, results are different. The analysis shows that in this case a CO₂ tax leads to considerably more expensive tickets and inefficiencies are increased because of market power. On the other hand, an SAF quota acts like a levy on the total quantity of fuel consumption and as a subsidy for SAFs: The quota increases the proportion of SAFs, stabilises demand and reduces emissions at lower economic cost.
For the EU, the study shows how emissions trading and SAF quotas for flights from EU airports markedly reduce emissions in European air traffic. Nevertheless, these measures have only limited effect as they only apply within Europe. In view of the strong growth in passenger numbers, ambitious global rules are needed to stabilise emissions at least at the 2019 level.
High-quality certificates can reduce costs
The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) plays a key role here. This initiative is the only global instrument to date for reducing emissions in the aviation sector and aims to achieve the ambitious voluntary commitment by airlines to offset emissions that exceed 85 per cent of the 2019 level. Its climate impact depends crucially on the quality and pricing of CO2-offsets. High-quality certificates help reduce emissions relatively cheaply, while low-quality offsets weaken the incentive to use SAFs and entrench the dependence on fossil kerosene.
CO₂ pricing not always an advantage in sectors difficult to decarbonise
The study findings have important implications for the design of climate policy in sectors that are difficult to decarbonise. These are currently responsible for 40 per cent of global greenhouse gas emissions and are therefore key to achieving climate targets. “If there is market power in an industry and at the same time the substitutability of fossil fuels is particularly small because of the existing technological limitations – such as in the steel, cement, chemical and aluminium industries as well as in shipping – a climate policy that relies on technology or fuel regulations is not necessarily inefficient compared to CO₂ pricing,” Rausch explains.
