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There has been a flurry of press releases as negotiations get underway towards developing a global market based mechanism (GMBM) for the aviation industry. And, boy, does the airline industry want us to know about it. The GMBM is rapidly turning into a PR exercise rather than a means of addressing the impact of aviation on the environment.
Having somehow slipped out from any obligations at the COP21 negotiations in Paris late last year, all eyes are now turned to ICAO and the GMBM. Getting a GMBM agreed at the ICAO Assembly this year will be essential if the aviation industry is to repair some of its tarnished reputation on environmental matters. In this respect the GMBM is invaluable. Media-savvy environmental groups can no longer complain that aviation is doing nothing to address climate change. Passengers will be able to fly without any guilt. And best of all, its effect on fares, and therefore airline profits, will be minimal.
We are being slightly facetious, of course. It’s about time the aviation industry took some economic responsibility for its pollution, and factored in some of the externalities it creates into its decision-making. However, at the same time, it’s worth pointing out that the voluntary pledges and the promise of a GMBM have helped the aviation industry largely avoid compulsory and externally imposed environmental targets.
While we have yet to see any estimates of the cost to airlines of offsetting their emissions under the GMBM, current evidence indicates it will be relatively small. The price of offsetting a tonne of CO2 emissions under the UN’s offsetting program, the Clean Development Mechanism (CDM), is currently less than €0.50 per tonne. Yes, that is right; half a Euro.
Based on this, a typical short-haul trip would generate only around €0.25 in additional costs. This is the exact amount Ryanair added to its ticket price in response to the introduction of the European Emissions Trading Scheme (ETS) in 2012. It is worth noting that in the same year Ryanair reported a 13% increase in profits.
Airlines will most likely be able to pass this cost onto passengers. The theory dictates that the more competitive the industry is, the more likely that industry-wide cost increases – such as those arising from a GMBM – would be passed on. Based on the airline industry’s assertion that it is extremely competitive, we would expect some, if not all, of the cost to the GMBM to be passed onto consumers through higher fares.
A 2008 study by IATA also suggests that passengers are, on average, not overly sensitive to industry-wide increases in fares. This further indicates that airlines would be able to pass on the cost of a GMBM, particularly if it is small. Again, look at the Ryanair example. Let’s not forget also that airlines are masters at revenue management, and in recovering their costs from different passenger groups in a way that has as small an effect on demand as possible.
In fact, the GMBM may also provide airlines with an opportunity to exploit to their advantage. Customers are less likely to complain about industry-wide fare increases if it’s for the good of the environment. If you’re faced with a GMBM cost of €0.25 per passenger, why not make the increase in ticket price to a round €0.50? Even on a low fare, an increase of that magnitude is unlikely to put off passengers but could make a significant difference to airline profits. Although, take heed of accusations made against Ryanair in 2013 that it was charging almost twice the actual cost of complying with the ETS and pocketing the €8m difference.
The biggest question mark airlines will be grappling with during the negotiations is the likely future cost of offsetting emissions. Unfortunately, there is no way of telling. However it’s worth highlighting that the GMBM is a voluntary mechanism and so will only succeed if it does not stand in the way of the growth of the airline industry.
At its peak in 2008, the cost for offsetting a tonne of CO2 emissions under the CDM hit €24. Should the GMBM produce a similar figure, this would increase the cost of offsetting the emissions produced by a passenger flying economy short-haul to €12 on a return trip. That’s equivalent to a couple of beers (or perhaps one at the airport). Would including this cost in the fare put off even the most price sensitive group of passengers? Prove it.
