A Strategy for Accelerated Decarbonization and Fuel Security in the Air-Transport Industry via Mandated Investment in Sustainable Aviation Fuel

13 Pages Posted: 24 Oct 2019 Last revised: 30 Mar 2020

Date Written: February 7, 2020

Abstract

A carbon price applied to aviation fuel at current EU ETS trading prices would raise air ticket prices, e.g. for a New York to London flight, by a paltry $10. Such a meager price incentive would not induce emission reductions in aviation consistent with climate stabilization objectives. However, if the carbon price were applied to global airline fuel consumption it would generate an annual revenue stream of over $23 billion, sufficient to fund a technology and commercial development program for sustainable aviation fuel (SAF) on the scale of the Manhattan Project. Carbon fee-financed subsidies would accelerate the industry transition to sustainable and secure fuel supplies by immediately overcoming the price barrier to SAF commercialization. This use of carbon fee revenue contravenes conventional economic climate policy, which favors diversion of industry resources away from reducing its own emissions via carbon offsets and trading. But the diversion only postpones the inevitable future cost of tackling the more difficult challenges. The long-term cost effectiveness of early-stage technology development and commercialization, e.g. for SAF, is not recognized by myopic trading markets and may not be predictable, but what is certain is that the IPCC’s CO2 emission reduction targets (net-zero global emissions by mid-century) will require full decarbonization of aviation and other fuel-reliant industries. The most expedient route to decarbonization of aviation on the scale and in the timeframe required for climate stabilization is through investment in sustainable fuels.

Key policy insights:
- Regulatory policies and combinations of policies with narrowly focused objectives and scope can, in the long term, be more practical and cost-effective than economy-wide regulatory regimes for bringing down carbon emissions.
- Sectoral carbon taxes, or equivalent fuel-consumption fees, could very effectively reduce carbon emissions within the regulated sector if the tax revenue is used for that purpose.
- The Refunded Emission Payment (REP) system pioneered by Sweden in the 1990’s would, with some practical adaptations, be especially well suited to the aviation industry for greenhouse gas reduction.
- Net revenue transfers in an REP-type system can be structured as mandatory equity investments, which could return long-term decarbonization dividends to regulated entities.

Keywords: Climate policy, Sustainable aviation fuels, Carbon tax, Refunded emission payments, Subsidies, Sustainable investment

JEL Classification: H23, O31, Q58, R48

Suggested Citation

Johnson, Kenneth C., A Strategy for Accelerated Decarbonization and Fuel Security in the Air-Transport Industry via Mandated Investment in Sustainable Aviation Fuel (February 7, 2020). Available at SSRN: https://ssrn.com/abstract=3470249 or http://dx.doi.org/10.2139/ssrn.3470249

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