Abstract
The United States Environmental Protection Agency (EPA) in June 2015, took a step toward regulating carbon emissions from airlines, following an assessment that airlines contribute to climate change. On July 25, 2016, the final endangerment finding (Note 1) under section 231(a) (2) (A) of the Clean Air Act for aviation emissions was issued by the EPA. The European Union had issued a similar finding previously and had proposed implementing an emission trading scheme in which the airlines would be required to participate in a cap and trade scheme for emissions from jet fuel. Traditional jet fuel is derived from petroleum, whose price is volatile and depends on geopolitical stability. Fuel burn is a significant cost for airlines and affects their profitability and value. Fuel burn is also a significant source of greenhouse gas emissions. An investigation of alternatives to jet fuel and switching from conventional jet fuel based on varying emission profiles, production costs and varying carbon prices is therefore timely. We use a simple decision support system to examine the link between the life-cycle greenhouse gas emissions of a range of fuels, economic costs of production and varying carbon prices. This analysis should be of interest to regulators, traders, risk managers and executives in the airline industry as well as practitioners of sustainability management.
Highlights
Petroleum products have always been the airlines’ fuel of choice because they offer optimal characteristics in terms of energy content, performance, availability, ease of handling, and price
It seems clear that there is a place for sustainable alternatives to traditional jet fuel in aviation
While traditional jet fuel is the preferred fuel of choice when oil prices are low, the situation changes when greenhouse gas (GHG) prices hit $70/ton
Summary
Petroleum products have always been the airlines’ fuel of choice because they offer optimal characteristics in terms of energy content, performance, availability, ease of handling, and price. Plunging crude oil prices, which dropped from more than $100 per barrel in June 2014 to around $50 per barrel in April 2017, together with accelerating economic growth, sparked increased profits for all US airlines, and drove rosy forecasts for carriers’ stocks. US carriers had a more than a three-fold increase in profits from a year earlier and collective global net profits of $33 billion in 2015, up from $16.4 billion in 2014 (International Air Transportation Association [IATA] Press Release No 58, December 2015). According to the International Air Transport Association (IATA), this increase reflected the net impact of several global factors including improving economic prospects, record load factors, lower oil prices and the major appreciation of the US dollar.
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