Economic Analysis of Environmental Policies

1. Economic Analysis of Environmental Policies A Discussion of Past Practices & The Aviation Environmental Portfolio Management Tool Peter Hollingsworth Georgia Institute of Technology

2. This work was funded by the U.S. Federal Aviation Administration, Office of Environment and Energy, under FAA Contract No. DTFAWA-05-D-00012, Task Order 0002. The APMT effort is managed by Maryalice Locke. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the FAA, NASA or Transport Canada.

3. The Issue and Past Practice • Aviation’s benefits and environmental effects result from a complex system of interdependent technologies, operations, policies and market conditions • Past analyses • Generally focused on single metric • Noise • Air-quality • Climate • Generally focus on policy effectiveness or cost-effectiveness, e.g. $/dB or $/g-NOX • Actions in one domain may produce unintended negative consequences in another • Current tools and processes do not support recommended practices

4. Specific Examples of Existing Tools & Practices • Aviation Emission and Evaluation of Reduction Options Modeling System – AERO-MS • Stratus Consulting Spreadsheet Model – SCSM • ICAO Committee on Aviation Environmental Protection (CAEP/6) Analysis

5. Previous Tools • AERO-MS • Developed for NLR (Nationaal Lucht- en Ruimtevaartlaboratorium) • Used by CAEP and The Netherlands • Incorporates Analysis of • Aircraft Technology (limited) • Air transport demand and traffic • Operating costs • Direct (primary) economic impact • General economy for the Netherlands • Emissions Concentrations • Climate change • 1992 Base/Datum year • SCSM • Complemented AERO-MS for investigating CO2 reduction policies • Incorporated additional supply side responses, including global demand • No-longer in active use

6. The CAEP/6 Approach • Focused on increased NOX stringency • Basic assumptions included: • Two parties: manufacturer and operator • Cost are calculated where they occur, no translation into price of engine or fares • Non-recurring technology acquisition cost paid for by manufacturers • Recurring manufacturing, maintenance, operating costs paid for by operators • Technology accounted for using “Technology Levels”

7. Moving Toward Recommended Practice • Every aircraft model has a different combination of noise, emissions, fuel burn and performance • What is the right balance? Will tomorrow’s aircraft reflect this? • What are the most economically-efficient strategies for achieving capacity growth and addressing environmental goals? (e.g. US Next Generation Air Transportation System) • CAEP/6 NOx stringency • Greater leniency for CO to enable more aggressive NOx standard was briefly considered • What are the relative impacts of CO and NOx? • No PM certification standard • What is the health impact of PM vs. regulated emissions? • Climate vs. local air quality vs. noise • What are the relative impacts?

8. FAA Office of Aviation Environment and Energy Toolset • Future aviation growth will require new and innovative ways of tackling environmental issues • New, comprehensive suite of software tools • Allows for thorough assessment of the environmental effects of aviation • New capability to assess the interdependencies between aviation-related noise and emissions effects and associated environmental costs • Toolset includes: • Environmental Design Space (EDS) • Aircraft system-level trades, interdependencies, technology forecasting • Estimates performance, “cost”, emissions, noise for future aircraft designs • Aviation Environmental Design Tool (AEDT) • Uses fleet and schedule inputs (historical or future scenarios) • Estimates global emissions (SAGE), local emissions (EDMS), global noise (MAGENTA), and local noise (INM) • Aviation Environmental Portfolio Management Tool (APMT) • A modular suite of tools to better inform policy through rigorous environmental-economics analysis

9. APMT overview • Cost-effectiveness • $/kg NOx reduced • $/# people removed from 65dB DNL • $/kg PM reduced • $/kg CO2 reduced • Benefit-cost • Net change in societal welfare ($) • Distributional analyses • Who benefits, who pays • Consumers • Airports • Airlines • Manufacturers • People impacted by noise and pollution • Special groups • Geographical regions • Policy scenarios • Certification stringency • Market-based measures • Land-use controls • Sound insulation • Market scenarios • Demand • Fuel prices • Fleet • Environmental scenarios • CO2 growth • Technology and operational advances • CNS/ATM, NGATS • Long term technology forecasts APMT inputs outputs Global, Regional, Airport-local Slide courtesy of Ian Waitz/MIT

10. APMT architecture overview Policy, market and scenario inputs Economic model of primary markets (consumers, manufacturers, airlines, airports) Model of world-wide aircraft operations (AEDT = SAGE + INM + MAGENTA + EDMS) Monetized environmental impacts (Local air quality, noise, climate change) Direct, indirect and induced effects on broader economy Collected costs and benefits organized in balance sheets for different stakeholders Slide courtesy of Ian Waitz/MIT

11. APMT Component Description • Primary Market • Partial Equilibrium Block simulates economic flows in the aviation market (manufacturers, operators, consumers) given demand scenarios (e.g. FESG). Changes in prices lead to adjustments in supply and demand until equilibrium is reached within the aviation market • World-wide Operations Model • Fleet Operations Module converts PEB demand to select detailed aircraft types and flight schedules for input to AEDT • AEDT models aircraft fuel-burn, emissions, and noise • Impacts Monetization • Benefits Valuation Block converts AEDT emissions and noise outputs to monetized welfare impacts (climate, community noise, local air quality) • Scenario Inputs and Stakeholder Outputs • Interface, Analysis and Display Block provides inputs to all blocks/modules and collects and processes outputs to form summary measures for cost-effectiveness and benefit-cost analysis

12. Using APMT • Will provide a flexible framework for informing policy decisions • Can be used to estimate policy impacts under • different scenarios • different perspectives on how to “value” impacts • different assumptions • Cannot replace the human in the decision loop • Inputs, model design, baseline choice, scenario choices, assumptions, interpretation of output, must be done by experienced experts (not computers) • Will not predict the future (we know we can’t do that) It is for the policy-makers to decide how APMT will be used, what assumptions will be made, what scenarios will be tested

13. APMT Prototype • Objective: • Construct all of the functional modules of APMT • Limited capabilities compared to that planned for the final versions • Test the functionality of APMT for addressing various policy questions • Assess and propagate module and system level uncertainties • Guide the determination of high priority areas for future development and refinement • Identify resolution of guidance provided • Data flow is as critical/more critical then execution flow • Data driven process • Intermediate information is stored or accessible through central database • Need to be able to run modules independently from each other • APMT Prototype Work Plan and other reports are available at: http://web.mit.edu/aeroastro/www/partner/reports/index.html

14. APMT Prototype –Execution & Data Flow

15. Demonstrations & Assessment • Capability Demonstrations: • Baseline • With and without new aircraft technology shift • Reduced Thrust Take-Off • Operations, noise and emissions impacts • Fuel Price Change • With and without new aircraft technology shift • NOx Emissions Certification Stringency • With and without new aircraft technology shift • Noise Phase-Out • No new aircraft technology • Assessment • Module and system level sensitivity • Identification and propagation of uncertainty • Initial expert review of techniques and methods

16. Example Results–Reduced Thrust Demonstrator Intermediate Result: Noise Contours with and without reduced thrust Preliminary Results Reduced Thrust Baseline

17. Example Results–NPV Effect of Reduced Thrust NPV – Net Present Value Preliminary Results

18. Further Considerations • Depending on the questions being asked more detailed analysis may be required • Infrastructure changes • Costs • Timeframes • Non-equilibrium demand-supply interaction • Similar to what is included in USCAP aviation and security model • Incorporation of more detailed market dynamics • Emissions, noise, fleet and operations feedback • Statistics-based improvements to runtime efficiency that show fidelity-speed trades • Beyond usage of representative or average week or day

19. Parting Thoughts “The root of many problems lies not in the models themselves but in the way in which they are used. Too often we ask “What will happen?”, trapping us into the mug's game of prediction, when the real question should be: “Given that we cannot predict, what is our best move today?” This subtle shift in emphasis from forecasting to informing resolves many of the conundrums... Instead of determining the “best” model that solves optimal strategies we should instead seek the most “robust” model that achieves a given level of “goodness” across myriad models and uses assumptions consistent with known facts.” Steven Popper Senior economist, RAND Corporation, Santa Monica, California (In a letter to the Economist, July 2006)

20. BB&C Vital Link Policy Analysis Questions? The APMT Team

21. APMT Policy Scenarios demographic economic technical Measures & Strategies Impulse response functions for aviation climate impacts as ∆T Health and welfare impacts as f(∆T) associated with global emissions AEDT Demand and Supply Projection (DSP) CLIMATE EDS Cost to Fares Assumptions Meteorological and other environmental data Non-aviation emissions inventories and scenario AEDT Emissions & Noise from planes performing operations Incidence of various health Impacts associated with ground level emissions Concentration- response curves linking health & welfare endpoints to pollutants Simplified box model for local air quality chemistry Pollutant concentrations as functions of time and space near airports (exposure) New (EDS) Technology Fleet Development & Operations Future Air Transport Demand LOCAL AIR QUALITY Airline Operating Costs Population and demographic data Monetization and Economic values Database Air Transport Movements Incidence of impacts associated with ground level noise NOISE Coefficients from meta-analyses linking noise, annoyance and welfare impacts Partial Equilibrium Benefits Valuation General Economy (via simple multipliers) COLLECTED COSTS MONETIZED BENEFITS Cost-Effectiveness Analysis Benefit-Cost Analysis EDS AEDT Current Air Transport Databases Present Air Transport Demand Distributional Analysis (Balance Sheet) Current fleet, technology and flight operations APMT Analysis and Display Graphical User Interface and Output EXTERNAL DATA Flight Operations Module (FOM) Aircraft Price Model • New aircraft prices APMT Proposed Architecture