Strategic Reactions of Airlines to the European Trading Scheme

Abstract : The air transport sector entered the European Trading Scheme in 2012 (for the intra-European flights). The regulation of CO2 emissions is costly for airlines and modifies the organization of their market. Our paper proposes an economic analysis in which the regulation but also CO2 emissions of airlines are modelled. We show that, in a perfect competition setting, the difference between passengers carried without regulation and when the regulation is put in place, is negative for the best-performing planes. However, for the less efficient aircraft, the implementation of the regulation entails a reduction of airlines activity, and therefore a low level of carbon emissions.