Emission Pricing and Capital Replacement : Evidence from Aircraft Fleet Renewal

This paper empirically studies how emission pricing affects capital replacement and adoption of embodied environmental technology. A pricing policy encourages firms to accelerate retirement of old capital assets and replace them with newer more efficient assets, but this may crowd out replacements outside the policy. Using asset-level data from the airline industry, I show that the inclusion of intra-European aviation in the European Union Emissions Trading Scheme decreased the retirement age of ‘regulated’ short-haul aircraft by 2.8 years (14 percent), while the retirement age of ‘unregulated’ long-haul aircraft increased by 2 years (11 percent). Accounting for the higher emissions of long-haul operations, the net environmental benefit of induced fleet renewal is virtually zero and may even be negative. This demonstrates that regulators must consider the impacts beyond regulated capital when environmental policies are incomplete