By Adair Turner
Catastrophic floods in Germany and China have once again made clear the terrible global threat posed by climate change. In response, the world must invest in strengthening its resilience to extreme weather events and accelerate reductions in carbon dioxide emissions to limit how much worse that threat is to become.
A day before the floods hit Germany last month, the EU outlined policies to cut emissions by 55 percent from 1990 levels by 2030. Those measures include a significant role for carbon pricing, with a tighter cap on emissions within the EU’s trading scheme, as well as the elimination of free emissions allowances for heavy industry and a tax on conventional aviation jet fuel for intra-European flights.
The latter proposal has provoked industry opposition, with the International Air Transport Association (IATA) arguing that “tax is not the answer to aviation sustainability.” In fact, the aviation industry, alongside other sectors, should embrace carbon pricing as a powerful tool to achieve emissions reductions at least cost.
In some sectors, decarbonization would make consumers better off. Within 10 years, for example, European drivers would spend significantly less to own and run their automobiles, because electric vehicles are much more efficient than those powered by gasoline or diesel.
However, in some “harder-to-abate” industries, decarbonization will carry a cost.
Maritime freight rates could increase 50 percent or more when container ships burn ammonia or methanol rather than heavy fuel oil. Likewise, wholesale steel prices could rise by about 30 percent if producers use hydrogen as the reduction agent rather than coking coal, or add carbon capture and storage to existing processes.
Carbon pricing is therefore needed to allow zero-carbon producers to compete effectively against the old high-emissions technology, but the effect on end consumers would be very small. If a tonne of steel costs 30 percent more, the price of an automobile will rise less than 1 percent, and even a 100 percent increase in maritime freight rates would have an impact of less than 1 percent on the price of a pair of jeans made in Bangladesh and bought in Berlin or New York.
As for aviation, another harder-to-abate sector, electric engines might enable shorter flights that are carbon-free, guilt-free and cheaper than today, but because batteries are far too heavy to power long-distance electric flight, decarbonization would require sustainable aviation fuels (SAFs) to replace today’s conventional jet fuel. Whether those SAFs are biofuels or synthetic fuels (made by using electricity to combine hydrogen and carbon dioxide), they will almost certainly carry a cost premium, which innovation and scale can reduce over time, but never eliminate.
Free markets, voluntary action and innovation would therefore not be sufficient to decarbonize aviation; public policy is also needed. One option is to make biofuels or synthetic fuels less expensive, and there is a strong case for public financial support for technology development, but a permanent subsidy that allows the aviation industry to avoid the costs of its carbon pollution would be unacceptable. Closing the cost gap would therefore require either a carbon tax on conventional jet fuel, or fuel-use mandates requiring airlines to use a steadily rising percentage of SAFs.
The IATA argues that any such taxes would “siphon money from the industry that could support emissions-reducing investments in fleet renewal and clean technologies,” but this reflects the common fallacy that taxes which increase business costs reduce corporate profits.
If the tax on conventional jet fuel is introduced gradually, as the EU proposes, the cost increase would be passed through to customers in the form of higher ticket prices. Businesses’ fears that higher carbon costs mean lower profits are as deluded as green lobby groups’ dreams that they can “make business pay.”
For aviation, the consumer cost effect of a carbon tax would be non-trivial. Steel, cement and shipping costs account for very small proportions of the price of consumer products, but fuel constitutes about 20 percent of total aviation prices. So, if its cost rises by 50 percent, ticket prices could increase by about 10 percent.
If that is the cost of decarbonizing aviation, we must tell consumers openly while placing higher prices in context. More expensive tickets would not significantly reduce consumer living standards, because air travel accounts for only about 3 percent of total consumer expenditure in the UK. Meanwhile, many people would gain more from cheaper road transport than they lose from more expensive aviation. Nor would increased flying costs have a regressive distributive effect.
In one other key sector — residential heating — higher carbon costs do fall disproportionately on lower-income households, whose outlays can reach about 10 percent of disposable income. So any carbon taxes should be balanced by significant financial support for the most affected. In contrast, aviation spending as a portion of total expenditure falls as incomes decline. Richer consumers would therefore pay the lion’s share of the higher cost.
At the same time, in aviation (and elsewhere) carbon prices would provide strong incentives for cost reduction. Higher prices for conventional jet fuel, if signaled well in advance, and especially if combined with fuel-use mandates, would create solid business cases for the productions of biofuel or synthetic fuel, spurring innovation and enabling the industry to achieve scale economies and reduce costs. Expectations of higher future fuel costs would also encourage improved engine and aircraft design. This could eventually boost fuel efficiency by 30 to 40 percent, significantly reducing the long-term impact of higher fuel costs on ticket prices.
Some green advocacy groups hope to cut aviation emissions by restricting air travel. The airline industry rightly argues that low-carbon flights are feasible. To make that a reality as soon as possible, the sector should welcome carbon pricing and argue for its application not just in Europe, but around the world.
Adair Turner, chair of the international think tank Energy Transitions Commission, was chair of the British Financial Services Authority from 2008 to 2012.
Copyright: Project Syndicate
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