Participation in the EU carbon trading scheme is argued to be an effective policy for reducing carbon emissions from European airlines. The scheme puts a price on carbon and incentivizes airlines to lower emissions and invest in new technologies. However, the low price of carbon permits makes the scheme ineffective. Additionally, the costs imposed on airlines could harm an important industry. Alternative policies like carbon taxation or tougher regulations may be more effective in the long run, especially with a global coordinated approach.

1. A2 Micro
Carbon Trading and
Business Economics
Tutor2u, Summer 2013

2. Evaluate the argument that participation in the EU carbon
trading scheme is likely to be most effective policy for reducing
carbon emissions from the European airline industry
The EU brought in the Emissions Trading
Scheme for airlines on 1 January. This
applies to internal flights, that begin and
end within the 27-country single market
Aircraft using airports within the EU must
pay a tax on each tonne of CO2 emitted.
The airlines have said that this will cost
them £14.0bn over eight years

3. Evaluation in a Paragraph
Evaluation should be
backed up with evidence
and/or knowledge to gain
full credit

4. Carbon Trading and Carbon Taxation - Business Impact
Recession
causes price of
permits to
collapse
Carbon price
recovers – but
high enough to
make a
difference?
2012 – price stuck
below Euro 10 per
tonne – excess
supply of carbon
permits

5. Price of
carbon
permit
Quantity of permits
(1 permit = 1 tonne
CO2)
Carbon Trading and Carbon Taxation - Business Impact
Carbon Trading Market
Supply of
Permits
Euro 20
Q1
Demand for
Permits

6. Price of
carbon
permit
Quantity of permits
(1 permit = 1 tonne
CO2)
Carbon Trading and Carbon Taxation - Business Impact
Carbon Trading Market
Supply of
Permits
Euro 20
Q1
Demand for
Permits
D2
Euro 30

7. Price of
carbon
permit
Quantity of permits
(1 permit = 1 tonne
CO2)
Carbon Trading and Carbon Taxation - Business Impact
Carbon Trading Market
Supply of
Permits
Euro 20
Q1
Demand for
Permits
D2
Euro 30
Q2
S2
Euro 35

8. Carbon Trading and Carbon Taxation - Business Impact
Cost, Price The Effect of a Carbon Tax on Producers
Output (Q)
MC
MR
AR
AC

9. Carbon Trading and Carbon Taxation - Business Impact
Cost, Price The Effect of a Carbon Tax on Producers
Output (Q)
MC
MR
AR
AC
AC2
MC2

10. Carbon Trading and Carbon Taxation - Business Impact
Cost, Price The Effect of a Carbon Tax on Producers
Output (Q)
MC
MR
AR
AC
AC2
MC2
Q1Q2
P1
P2

11. Costs, Benef
its
Output (Q)
Volume of flights
Externalities in the Airline Industry
By 2020, global international aviation
CO2 emissions are projected to be
around 70% higher than in 2005
even if fuel efficiency improves by
2% per year.
Direct emissions from aviation
account for about 3% of the EU’s
total greenhouse emissions.
Including aviation in the EU
emissions trading scheme is forecast
to save around 176 million tonnes of
CO2 emissions over the period up to
2015.
MPC
MPB

12. Costs, Benef
its
Output (Q)
Volume of flights
Externalities in the Airline Industry
MPC
MPB
MSC
Qp
Using an appropriate diagram
explain how the EU airline industry
leads to a divergence between
private and social costs and benefits
Externalities are third party
effects arising from production
and consumption of goods and
services for which no appropriate
compensation is paid

13. Costs, Benef
its
Output (Q)
Volume of flights
Externalities in the Airline Industry
MPC
MPB
MSC
External Cost
Qp
Using an appropriate diagram
explain how the EU airline industry
leads to a divergence between
private and social costs and benefits
Externalities are third party
effects arising from production
and consumption of goods and
services for which no appropriate
compensation is paid

14. Costs, Benef
its
Output (Q)
Volume of flights
Externalities in the Airline Industry
MPC
MPB
MSC
External Cost
QpQs
Social
Optimum
Output
Free market equilibrium (at Qp) is
different from the social optimum
(we are not showing possible
positive externalities from
consumption here)
Market failure when the market price
fails to take into account the external
costs

15. Evaluate the argument that participation in the EU carbon trading scheme is
likely to be most effective policy for reducing carbon emissions from the
European airline industry
Explain &
Analyse
Carbon
Trading
Conditions
for carbon
trading to be
effective
Critical
evaluation –
problems
with trading
Viable
alternatives
– more
effective?
Knowledge
Analysis
Analysis
Evaluation
Evaluation

16. Evaluate the argument that participation in the EU carbon trading scheme is
likely to be most effective policy for reducing carbon emissions from the
European airline industry
Trading puts a price on carbon
Incentivises airlines to reduce their emissions
Stimulates investment in new aircraft
A boost to innovation / dynamic efficiency
Revenues can be ring-fenced for green projects
Arguments
for a carbon
trading
scheme

17. Evaluate the argument that participation in the EU carbon trading scheme is
likely to be most effective policy for reducing carbon emissions from the
European airline industry
Collapse of EU carbon price makes it ineffective
Imposes extra costs on EU airlines – already struggling
Government failure – e.g. fraud from allocating permits
Might cost jobs in an important industry for the EU
Variable / uncertain price of carbon limits incentive to invest
Criticisms of
carbon
trading

18. “In the long run…..”
Strong evaluation might
compare short run v long
run effects from a policy
intervention

19. Evaluate the argument that participation in the EU carbon trading scheme is
likely to be most effective policy for reducing carbon emissions from the
European airline industry
Carbon or fuel taxation gives more certainty
Tougher industry regulations
Tax incentives for innovation
Market forces work in long run
Global approach needed to cut emissions
Alternatives
and a Long
Run
Perspective

20. The Knowledge
Students with current
knowledge invariably
outscore those who don’t –
true for micro and macro!

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