A general equilibrium analysis of climate policy for aviation

Abstract

Regulation of aviation's contribution to the global problem of climate change is increasingly likely in the near term, but the method agreed upon by most economists-a multi-sectoral market-based approach such as a cap and trade system-is opposed by industry stakeholders. An efficient economy-wide policy would determine the optimal level of sectoral emissions reductions, but industry groups have instead proposed independent aviation-sector goals for carbon mitigation and technology adoption. This thesis asks the question: how much should airlines reduce their emissions, and which technologies will be necessary to achieve those reductions. In order to comprehend the problem of mitigation costs and outcomes within the context of the global economy, I introduce an aviation-resolved version of the MIT Emissions Prediction and Policy Analysis model; a computable general equilibrium model of the global economy. In EPPA-A, the social accounting matrix is re-balanced to include aviation, a non-unity income elasticity of demand is introduced, and substitution elasticity parameters are estimated. Additionally, I include an additional module to analyze the potential non-market impacts of government infrastructure on aviation emissions by explicitly modeling an advanced Air Traffic Control sector. Several policy scenarios are applied to the model including: an idealized economywide cap and trade system in each developed nation or region, and an aviation-sectoronly cap within an economy-wide cap, both with and without trading enabled between the aviation cap and the economy-wide cap. Each policy scenario is compared to a business-as-usual case, and relative welfare loss under each policy is calculated. The business-as-usual and economy-wide cap policies are also run with the advanced Air Traffic Control module enabled, and the efficacy is determined. I find that in the context of total economic welfare, the method of aviation regulation is of little significance; the differences in results among the different policy scenarios are very small (on the order of 0.002% in the U.S.). However, the price of aviation and sector output are more responsive. When trading between an aviationsector- only cap and the economy-wide cap is enabled, outcomes are practically identical. When trading is not allowed, the price of aviation increases 21.8%, and output falls 32.8% compared to the economy-wide policy-only case. I find that national welfare outcomes are sensitive to international trade, and border adjustments for aviation emissions are important. Finally, the efficacy of advanced Air Traffic Control infrastructure, and the economic welfare gained or lost, is sensitive to the parameter estimates which exhibit high uncertainty. I find that the low-efficacy parameters result in slightly lower fuel intensity, but are also net-welfare decreasing, while the high parameter estimates increase welfare, but result in an infeasible reduction in sectoral energy intensity.