Carbon Regulation and Competition in European Aviation

The EU Emissions Trading System will substantially increase the effective carbon price faced by airlines. This study constructs a two-stage aviation competition model with endogenous product entry, direct flight frequency, and pricing. Estimates show that overall consumer surplus declines by up to 34%, with long- and medium-haul markets declining by up to 95%, while short-haul markets experience welfare gains due to capacity reallocation. Airline profits decline by 1%-42%. Carbon tax revenues of $1.9-$2.9 billion and the social value of avoided emissions of $2.7-$4.0 billion can offset the private surplus losses.