Doing Nothing? Carbon Abatement Decisions of Pure Monopoly Airlines under a Dynamic Aviation Carbon Tax

The aviation carbon tax is a critical policy instrument for emission reductions, yet its impact on airline operations remains under explored. This study investigates the optimal capacity and abatement investment decisions of a monopolistic airline under a dynamic aviation carbon tax. By constructing and solving three models—no tax, tax without abatement, and tax with abatement—we derive equilibrium solutions revealing key insights. When initial carbon allowances are sufficient, the tax policy becomes ineffective. When allowances are scarce, the airline’s abatement level and cost become critical determinants of its optimal strategy. Interestingly, a larger market size or lower abatement cost may paradoxically reduce the airline’s tolerance for the carbon tax. Moreover, under sufficiently high tax rates, even environmentally conscious green airlines may find it optimal to abandon abatement investments altogether. This research provides theoretical contributions and practical insights for airlines in countries with low carbon regulations as they navigate increasingly stringent aviation carbon tax policies.