Synthetic control methods for policy analysis: Evaluating the effect of the European Emission Trading System on aviation supply

In this paper, we provide a novel application of synthetic control methods by offering two major modifications to the existing methodological framework. We provide the first complete ex-post evaluation of the causal impact of carbon pricing on aviation supply, expressed in terms of airline output (i.e., number of seats supplied at the airline-route level). We investigated the policy change in the European Union Emission Trading System (EU ETS), the first large greenhouse gas emissions trading scheme in the world. We distinguish between low-cost, regional and full service airlines, short and medium/long-haul routes, routes towards (or from) hub airports versus non-hub airports, monopolistic versus non-monopolistic routes. The analysis shows that the EU ETS does not have a substantial impact on the average aircraft size, while it has caused a reduction of total airline seat capacity and flight frequency, with the percentage of airline seat capacity reduction reaching above 20% at its peak. The overall effect of the policy has a remarkable impact on low-cost and regional airlines, short-haul routes, spoke–spoke markets and monopolistic routes. Our results are the first empirical confirmation to the theoretical prediction in the aviation literature that emission charges will reduce flight frequency and increase load factors while having no effect on aircraft size.