CO2 emissions and airfare in the U.S. domestic air travel market: cost pass-through vs. environmental awareness

We develop an analytical model analyzing the competition between a high CO2 emission flight and a low CO2 emission flight. The results show that the high operating cost associated with a high CO2 emission flight will be passed through to passengers in higher airfare. However, the demand shift among environmentally conscious passengers favoring a low CO2 emission flight would yield price premium for a green flight, while penalizing a non-green flight. The net airfare effect is uncertain a priori, depending on the environment-induced demand shift relative to the cost difference between a high and low CO2 emission flight. Using data in the U.S. domestic air travel market, we conduct an empirical analysis to test this proposition. First, we calculate the CO2 emissions per passenger at the flight level, and compare our calculated CO2 emissions with those as displayed on Google Flights search. The results show that Google Flights method underestimates CO2 emissions as compared to our calculation by 12 % for economy class, and by 11 % for first class. Nevertheless, the two sets of CO2 emissions are highly correlated at 0.92. Furthermore, our empirical findings show a positive relationship between airfare and CO2 emissions, suggesting a higher cost is associated with operating less fuel-efficient aircraft, and such a cost pass-through effect on airfare dominates the demand shift related to environmental concern. We also find a direct, positive effect of CO2 on market share, and such an effect is much smaller than the effect on airfare. These results imply the benefit for an airline of operating a greener flight is mainly from cost saving on the supply side, rather than price premium and market share increase related to eco-conscious travelers on the demand side.