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TERI SAS launches M.Sc. (Energy Studies & Management)
An analysis of inclusion of aviation sector in the EU ETS: estimating the additional cost for the airlines

Student name: Ms Prerna Prabhakar
Guide: Dr Subir Sen
Year of completion: 2011
Host Organisation: Climate Connect Limited and TERI University
Supervisor (Host Organisation): Mr Shashank Mehta
Abstract: The aviation sector is an important component in the nation’s economy. In the European Union, the aviation is growing at a faster pace with rising emission levels associated with the growth. The European Union Emissions Trading Scheme that started in 2005 is a market based approach to deal with the problem of climate change. The EU ETS does not cover the aviation sector. Therefore, to check the rising emission levels of the aviation sector, it will be included in the EU ETS from 2012. The scheme is expected to impose additional cost on the airlines. In this study, we analyze the scheme and its development. We formulate a function representing the additional cost to the airlines with the EU ETS. The factors affecting the EU ETS cost includes the cost of buying extra allowances, the cost of using Kyoto instruments quota, the administrative cost and the airlines’ initiative in the environmental efficiency. For setting up of this function, we take a sample of 32 Asian airlines going to the EU member states and vice versa. On the basis of our analysis, we find that all the four factors discussed above are significant in explaining the cost imposed by the scheme on the airlines. Based on the sample of 32 Asian airlines, we can draw an inference for all the airlines included in the EU ETS.

This additional cost would hamper the growth of the aviation sector. It would lead to a distortion of competition between the airlines. This is because the EU carriers would be at a disadvantage as compared to the non EU carriers and this would lead to shifting of the airports hubs to non EU regions. The additional cost of the scheme also affects the competitiveness of the EU as a business location, leads to job losses and also affects the tourism sector which is an important contributor to the EU’s economy.