Understanding the Relationship Between Aviation Economics and the Broader Economy

Project Category: 
Interdependencies and policy assessment
Project Number: 

There are several administrative approaches to reduce aviation's impacts on climate change. One market-based measure of particular interest to governments worldwide is cap-and-trade, which is also referred to as "emission trading." Beginning in 2012, the European Union included aviation in its emissions trading scheme. In the US Congress, various climate bills were under consideration, such as the American Clean Energy and Security Act ("Waxman-Markey Bill"), which is a variant of a cap-and-trade plan and required a 17 percent emissions reduction from 2005 levels by 2020.

Emission trading is based on a cap on the amount of an emitted pollutant and the allocation of allowances, which represent the right to pollute. The number of allowances is reduced over time, according to the initially defined reduction objectives. Companies that emit fewer pollutants than they are allocated can sell the excess to other companies that need more. The trade of allowances thus leads to a reduction of the pollutant by those companies and industries, where the abatement costs are lowest. This approach is therefore more efficient compared to a uniform reduction of emissions across all industries.

Project 31 analyzed the effects of a potential introduction of a cap-and-trade policy in the aviation industry. Analyses were conducted through the joint application of the Aviation Environmental Portfolio Management Tool, in particular the APMT Economics module, and a global model of economic growth and greenhouse gas emissions, the MIT Emissions Prediction and Policy Analysis (EPPA) model. Where the EPPA model's outputs provide information on the world economy, changes of greenhouse gas emissions and the expected cost of carbon, APMT Economics focused on the airline industry, and provided outputs such as operating costs of airlines, demand, or airline fleets.

While the project focused initially on the implications of a cap-and-trade policy, the tools enabled the study of a variety of other mitigation options — for example, the extent to which mandates for renewable fuels in one sector can influence price and availability in other sectors, or the relative economic efficiency of sector-based regulations and standards versus broader economy-wide measures.


The latest and final projet outcome was an analysis of the Market Cost of Renewable Jet Fuel Adoption in the United States. The US Federal Aviation Administration (FAA) has a goal that one billion gallons of renewable jet fuel is consumed by the US aviation industry each year from 2018. We examined the cost to US airlines of meeting this goal using renewable fuel produced from a Hydroprocessed Esters and Fatty Acids (HEFA) process. Our approach employed an economy-wide model of economic activity and energy systems and a detailed partial equilibrium model of the aviation industry. If soybean oil is used as a feedstock, we found that meeting the aviation biofuel goal in 2020 will require an implicit subsidy to biofuel producers of $2.69 per gallon of renewable jet fuel. If the aviation goal can be met by fuel from oilseed rotation crops grown on otherwise fallow land, the implicit subsidy is $0.35 per gallon of renewable jet fuel. As commercial aviation biofuel consumption represents less than two per cent of total fuel used by this industry, the goal has a small impact on the average price of jet fuel and carbon dioxide emissions. We also found that, as the product slate for HEFA processes includes diesel and jet fuel, there are important interactions between the goal for renewable jet fuel and mandates for ground transportation fu

Participating university

Massachusetts Institute of Technology

Lead investigators

Ian Waitz, Professor, Aeronautics and Astronautics, Massachusetts Institute of Technology, iaw@mit.edu
John Reilly, Senior Lecturer, Sloan School of Management, Massachusetts Institute of Technology, jreilly@mit.edu

Project manager

Thomas Cuddy, Environmental Policy and Operations (AEE-400), Federal
Aviation Administration, thomas.cuddy@faa.gov

Downloads and links

Economic and emissions impacts of renewable fuel goals for aviation in the US. Winchester, N., D. McConnachie, C. Wollersheim, I.A. Waitz (2013). Transportation Research Part A: Policy and Practice, 58, 116-128.

• Market Cost of Renewable Jet Fuel Adoption in the United States, Winchester,Dominic McConnachie, Wollersheim, Waitz. A PARTNER Project 31 report. March 2013. Report No. PARTNER-COE-2013-001. Download (pdf 1.5M)

• The Impact of Climate Policy on US Aviation. Niven Winchester, Christoph Wollersheim, Regina Clewlow, Nicolas C. Jost, Sergey Paltsev, John M. Reilly, Ian A. Waitz. A PARTNER Project 31 report. May 2011. Report No. PARTNER-COE-2011-001. Download (pdf 656K)


Description of the MIT Emissions Prediction and Policy Analysis Model