Problem
Research questions and friction points this paper is trying to address.
carbon regulation
airline competition
consumer surplus
emissions trading
market asymmetry
Carbon Regulation and Competition in the European Airline Industry
🤖 AI Summary
This study quantifies the impact of the European Union Emissions Trading System (EU ETS) on competition, consumer welfare, and airline profits in the European aviation sector. Employing a two-stage structural model that endogenizes route entry, flight frequency, and pricing—calibrated using market share and fare data—the paper conducts counterfactual simulations of rising carbon prices. It is the first to jointly incorporate carbon tax revenues and the social value of emissions reductions to assess net welfare effects, revealing pronounced asymmetries across airline types and route lengths: consumer surplus declines by up to 90% on medium-haul routes, while short-haul markets experience net welfare gains; airline profits fall by 8–45%; and annual carbon tax revenues range from $0.9 to $3.1 billion, accompanied by $0.5–$1.4 billion in social benefits from emission reductions.
📝 Abstract
The European Union Emissions Trading System is set to substantially increase the effective carbon price faced by airlines. To quantify the impact of this carbon regulation on the European airline industry, we estimate a two-stage model of airline competition with endogenous route entry, flight frequencies, and pricing using European data on market shares and prices. Counterfactual simulations reveal that the impacts of carbon pricing are highly asymmetric across carrier types and market segments. Consumer surplus declines by up to 25% overall, with medium-haul markets bearing the brunt at up to 90%, while short-haul markets experience positive net welfare gains (including carbon revenue and the social value of avoided emissions) as airlines reallocate capacity toward shorter routes. We find that airline profits decline by 8-45% across scenarios, while carbon tax revenue of $0.9-3.1 billion and a social value of avoided CO2 emissions of $0.5-1.4 billion partially offset the welfare losses. We also show that a hypothetical Wizz Air-Ryanair merger primarily benefits firm profits through network expansion synergies.
Innovation
Methods, ideas, or system contributions that make the work stand out.
two-stage competition model
endogenous route entry
carbon pricing
counterfactual simulation
asymmetric welfare impact
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