Evolution of the emergency freight transport in Europe: What are the effects on cargo demand after implementing a fuel tax on air cargo?

Strategies to reduce undesirable effects of aviation on the environment are extensively discussed by governments. This research determines if taxation could be used as an instrument for CO2 reduction policies by studying the effect of implementing fuel taxes on domestic air cargo in Germany. This research is a case study of the express critical service provider Time:Matters GmbH, owned by Lufthansa Cargo. The effects of implementing a fuel tax on air cargo will be studied by the price elasticity of demand. Furthermore, the cross-price elasticity between air and rail cargo demand will indicate whether a fuel tax on air cargo will result in a modal shift to rail transport, the more environmental-friendly mode of transport. The elasticities of demand are estimated by a two- and three-least squares model. This research shows that the price elasticity of air cargo demand ranges from -0.052 to -0.177 on specific, domestic routes in Germany and is thus price inelastic. These results indicate that aviation fuel tax could have a positive environmental impact by reducing CO2 emissions, however, due to the price inelasticity the scope and size of the impact is very limited. The price elasticity of rail cargo demand ranges from -0.171 to 0.062. Furthermore, a negative cross-price elasticity, ranging from -2.693 to -0.791, suggests that air and rail transport are complementary services according to this research. Both air and rail cargo demand of Time:Matters GmbH will decrease as a result of the fuel tax on air cargo. Additionally, this research concludes that the rail cargo demand is more sensitive to the level of taxation than the air cargo demand.