The Impact of the EU-ETS on the Aviation Sector: Competitive Effects of Abatement Efforts by Airlines

In the next few years, it is estimated that the aviation sector will account for more than 15% of total GHG emissions against the current 5%. In order to curb emissions and, considering the rapid growth of this industry Directive 101/2008/EC has included the aviation sector in the European Union Emission Trading Scheme (EU-ETS), thus generating additional costs for airlines. The paper develops an original model to analyse the impact of EU-ETS on the aviation sector. This study expands previous researches by explicitly considering abatement efforts in the airline cost function, by highlighting interdependence effects using strategies to reduce emissions, firm actions in the secondary market, free allowances, and fines. Several policy implications, which are particularly useful in an operational perspective, can be derived to support policy-making decisions through a better understanding of the overall EU-ETS effects. The pattern of results suggests the presence of a trade-off in determining profits between the efficiency cost of individual airlines and the share of allowances distributed free of charge. From a regulatory industrial perspective, the higher the latter, the lower the incentives for airlines to reduce GHG emissions. Moreover, the higher is the number of airlines competing on the same air route, the lower is the increase of profits under a Cournot oligopoly, and/or a market collusion structure. Still pending is the final effect of different strategies adopted by airlines in the allowance market.