Working Paper

Economic incentives for fuel efficiency under a U.S. aircraft CO2 standard

To address the danger that greenhouse gas (GHG) emissions from aircraft pose to public health and welfare, the U.S. Environmental Protection Agency (EPA) is set to propose an aircraft CO2 emissions standard. The EPA may adopt the standard recommended in 2016 by the United Nations International Civil Aviation Organization (ICAO), or it could set domestic regulations that are more stringent.

This paper surveys current economic incentives applied to the aviation sector and then explores additional ways to leverage the fuel-efficiency benchmark provided by the ICAO CO2 standard to promote more fuel-efficient aircraft. Adoption and implementation of these incentives could help the United States reach its goal of carbon-neutral growth for its airlines from 2020. Revenue-neutral or revenue-positive incentives are most likely to avoid socially regressive incentives for additional flying.

As one example, the figure below shows the impacts of a feebate system—i.e., a fee and rebate system—applied to older, less efficient and newer, more efficient aircraft in the same family. Data for older aircraft models are shown in the left bar of each pair, and the successor models are shown on the right bar. While the successor aircraft always costs more than its predecessor at the time of purchase, the gap in total cost of ownership narrows significantly when fuel savings over seven years of operation are considered. Additionally, when the fee and rebate are applied to the aircraft based on their performance against the ICAO CO2 standard, it tips the balance so that the successor is cheaper over a seven-year payback period.

total cost of aircraft operation with feebate per model