The Route Specific Cost Impact of the European Union Fit-For-55-Measures and their Effect on Air Travel Demand

Abstract

The European Union’s „Fit for 55” package aims at reducing CO2-emissions by 55% until 2030 compared to the baseline emissions from 1990. This reduction is sought by a bundle of measures, out of which several affect commercial aviation. This includes a tightening of the EU Emission Trading System (EU ETS), a mandatory blending quota for sustainable aviation fuels (SAF) on European airports, and a minimum taxation on energy (Energy Taxation Directive, ETD). In this study, we consider the impact of these measures in two ways. First, we provide an in-depth analysis of the price increase which is to be expected in the coming decades. We compare price increases for different geographic domains and, for long distance travel, for transfer at hubs inside and outside Europe. Second, we derive demand elasticities on route level from a discrete choice model. Given these elasticities, we analyse the impact of the measures on passenger demand. This impact is two-fold: On the one hand, the overall number of passengers will grow slower than it would have if no price increases occurred. From an environmental perspective, this is – besides incentivising airlines to reduce fuel consumption – a desired impact of the measures. On the other hand, asymmetric price increases may occur in cases in which different travel routes are asymmetrically impacted by the ’Fit for 55’ measure. In this case, passengers may prefer a route which avoids European airports, leading to so-called Carbon Leakage. Using cross-price elasticities, we analyse the extent to which this will be the case.