Brother, can you spare three cents (for the climate)?

Posted Monday, 3 October 2016, 10:04

Optimism is growing for a potential deal at ICAO’s 39th Assembly this week on a global market-based measure (MBM) to price carbon emissions from international aviation. Under the system, carriers would be required to offset emissions from growth in international traffic above 2020 levels (carbon neutral growth). The International Air Transport Association (IATA), which represents international airlines in policy dialogues worldwide, has pressed ICAO for the system, even while it estimates that it may cost the airlines between $4 and $12 billion US in 2030. Why would industry be so enthusiastic about a system that will cost it so much money?

The easy, and optimistic, answer is that growing political and consumer awareness about the significant climate impact of flying is pushing airlines to do the right thing. A more cynical observer, however, might wonder how the cost of the system, which is focused on mitigating growth using offsets rather than through actions to directly reduce aircraft emissions, compares to the underlying problem it’s meant to address; namely, the social costs of aviation carbon. Those are significant: Recall that if you are an upper-middle-class professional who travels for work (eh hem), flying may be your dominant source of CO2 emissions, particularly if you otherwise aspire to a low-carbon lifestyle.

To get a handle on this question, we compared the expected costs of ICAO’s offsetting system to the estimated climate damages associated with international aviation emissions from 2021 to 2035, the current period of the MBM. CO2 emissions were estimated from ICAO projections, with the fraction offset (about three-quarters of growth, or one-quarter of total traffic through 2035) drawn from the current (30 Sept 2016) voluntary and mandatory commitments shown here. We assumed climate damage costs starting at $42 per metric tonne of CO2 in 2020, associated with a 3% discount rate as estimated by US EPA. Pegging offset costs is trickier because ICAO has provided little guidance on criteria for what would be allowed under the system. Here we assume that the current cost of emission futures for the EU ETS, the world’s most prominent carbon trading market, of about $5.60 US per tonne of CO2 , increasing 4% per year in real terms forms a reasonable baseline for the cost of future offsets.

This is all pretty back-of-the-envelope, with a lot of uncertainties to be sure. Offset costs in particular may vary substantially from this baseline, from below $1 per tonne of CO2 for UN Certified Emission Reduction (CER) credits to a higher price for offsets with high environmental integrity. Nonetheless, we estimate that ICAO’s offsetting system may cost airlines about $23 billion US from 2021 to 2035, or equivalent to 3% of annual global revenue and two-thirds more than IATA’s net profit in 2014, a good year. This is not chump change.

But how does that compare to the climate damages of international aviation? Those equal an estimated $700 billion US over the same period of time, or thirty times the offsetting costs. Thus, the ICAO agreement would entail the aviation industry paying about 3 cents on the dollar of its climate damages from 2021 to 2035 (graphic).

How you interpret these figures depends on your perspective. If you’re an airline executive, you’re likely swallowing hard about the thought of parting with 20 months of profit over those 15 years but convincing yourself that this is the cost of running a carbon intensive business in a climate constrained world. If you are a well-behaved environmental economist, you’re likely to see this as a case study in the value of letting environmental markets find least cost solutions. If, like me, you are a bit of a skeptic, you might start to worry about what that 97% discount actually means for the planet.

The silver lining in all this is that ICAO’s resolution will likely include a review clause where the offsetting requirements can be strengthened over time starting in 2022 to align the system better with the UNFCCC climate goals established in Paris last year. Here’s hoping that this clause gets a good workout.