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Carbon Budgeting for Business Travel

A carbon budget is similar to a financial budget. It acts as an additional constraint on demand for business travel by rationing the amount of carbon (aka CO2) that travelers can use up. 

The carbon budgeting problems are how much carbon should be made available, in what time period, and to which travelers. Then there is the monitoring of actual vs. budget variances, and the need to present this information concisely when a traveler is debating whether to take a trip or not. Traditional carbon budgets are not easy to administer.

The "invisible" carbon budget approach solves all these problems.

Bright green crops fill the foreground underneath a blue sky with puffy white clouds. the slide title says  "Reducing Business Travel's CO2 with the Invisible Carbon Budget"

The Invisible Carbon Budget

This PDF explains how the invisible carbon budget works.  Note that implementing this method requires a feature not yet available in any corporate travel booking tool. Fear not, as there is at least one corporate travel booking tool provider that has this feature on its roadmap.  Others will surely follow.

An Excel page configured to let the user enter variables and then see the results.

A Carbon Budget Scenario Model

This Excel file lets you see how different goals affect a travel program's key metrics including total carbon emissions, total spend, average ticket price, and average CO2 per trip.

It also has tabs that allow you to test tClara's rebuttal to the "Cabin Class Fallacy", as explained in the next section.

The Cabin Class Fallacy

Unfortunately, most travelers and travel managers still believe the best way to reduce their total airline-related emissions is to travel in economy class. They believe this because an economy seat is allocated about one-third the amount of CO2 compared to a lie-flat business-class seat, everything else being equal. The carbon-budget-conscious traveler is expected to choose the ticket option that has the least CO2.

This quest for the lowest-emission ticket solves the wrong problem and can result in higher, not lower total emissions.  The right problem is how to reduce a company's total airline-related emissions.  That's very different from minimizing each traveler's CO2 per flight. Reducing a company's total emissions requires a look at the bigger picture. The "invisible" carbon budget approach makes easy work of this.

Why The Cabin Class Fallacy is Wrong

The short answer is that weight and price matter a lot. These two essential factors are ignored by the overly-simplistic metric of "CO2 kg per Passenger."

This Excel file shows why physics (the weight factor) and economics (the price factor) both prove that economy seats are worse for the climate than business class seats - depending on their prices.

The key economic insight is that the price of the business-class seat must be considered.  If it costs more than three to four times the economy seat, it will use up the travel budget faster than three economy tickets would, resulting in less overall emissions from the travel budget.

On the physics front, it takes less fuel to fly one passenger with luggage in business class than it does to fly three economy class passengers and their luggage.  Less fuel means less CO2...simple as that. Read more about this provocative assertion here.

A Simple Example

Assume a company has $12,000 to spend on air travel, and it can buy 12 economy tickets at $1,000 each, or buy three business-class tickets at $4,000 each. Let's say the economy seats each have 1,000 kg of CO2, and the business-class seats each have 3,000 kg of CO2. 

It's better for the climate if the $12,000 budget is used on the three business class seats, as they will produce 25% fewer emissions than if the company flew 12 people in economy class. 9,000 kg vs. 12,000 kg - it's not even close....when the business-class ticket's price is at least four times the economy ticket.

But if the business-class ticket's price changes to $2,000 each, then flying in economy is better for this budget. In this example, the budget could now be spent on six business-class tickets, which would emit 18,000 kg CO2, or 50% more than the "all in economy" budget generates.

It's the carbon intensity, not the cabin, that matters to the climate. The lower the intensity, the better.

The Carbon Intensity Metric

The carbon intensity metric is the best way to gauge a travel budget's impact on the climate.

Simply divide the total CO2 kg associated with the ticket by the ticket's price, and keep track of this data.

 

Using the simple example above with business-class tickets at $4,000 the all-economy class budget results in a carbon intensity ratio of 1.00 kg of CO2 for every ticket dollar, while the all-business class budget results in a ratio of 0.75 (3,000 kg / $4,000.)  If these business-class tickets cost $2,000 each, then their carbon intensity metric is 1.50 (3,000 kg / $2,000.) 

If reducing travel-related emissions is important then companies should encourage travelers to book tickets with low carbon intensities. Yes, this means tickets will be more expensive, everything else being equal, as cheap fares in economy class do not do well on this metric.

The carbon intensity metric is a well-known metric used by procurement teams and ESG data providers, such as the S&P Global ESG Scorecard.  The metric serves as an easy way to normalize a supplier's carbon footprint.  This makes it easy to aggregate and compare across a wide variety of spend categories, including airlines, hotels, and rental cars. See this Fortune article for more information on carbon intensity metrics.

Companies and airlines should all want to drive their carbon intensity down. The ideal situation would be purchasing airline tickets that have no CO2 associated with them, so 0.00 CO2 kg per $.  Conversely, the higher this metric's value, the dirtier, carbon-wise, the spend on airline tickets.
 

It's worth noting that the US airline industry's average carbon intensity in 2021 was 1.13 kg CO2 per ticket dollar, as calculated by FlightBI here. The low-cost carriers (Spirit, Allegiant, and Frontier) had the highest (worst) values, at or above 1.29 kg per $.  That's because they sell cheap tickets on crowded planes.

A Word on Benchmarking

Travel managers, procurement teams, and ESG analysts will want to benchmark their own travel programs, as well as the airlines they deal with. From a climate perspective, the carbon intensity metric is a far better indicator than other metrics such as CO2 kg per revenue passenger kilometer, or CO2 kg per passenger. This table shows how differently the US airlines rank on these metrics.

tClara expects that several travel management companies (TMCs) will soon offer their clients benchmarks using the carbon intensity metric. Meanwhile, companies that know their CO2 emissions can easily benchmark their carbon intensity metrics with each other.

What's Wrong with Carbon Taxes?

Adding a carbon tax to the cost of a flight should reduce demand for travel.  But is the tax high enough to make travelers or their managers think twice about the merits of taking the trip?  For example, adding $50 to a $500 ticket's price probably won't make or break the decision about taking the trip.

The key to predicting the effectiveness of a carbon tax is ensuring that the travel budgets are closely monitored and not increased due to the tax.  For example, if a 10% carbon tax is added to the cost of every flight and the travel budgets are not changed, then the tax should reduce travel emissions by ~10%, all else being equal.

There will be questions about who sets the tax amount and where that money goes. Perhaps most importantly, the carbon tax does nothing to improve the quality of the trip or otherwise help the traveler achieve the trip's business goals.

 

If the goal is to significantly reduce emissions by making travel more expensive, the carbon tax must be set at a high level, e.g., 20% of the ticket price, or at least $300 per ton of CO2, or $200 per trip, whichever is greater.

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