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Trade-offs between environmental regulation and market competition: airlines, emission trading systems and entry deterrence

  • Cristina Barbot
  • Ofelia Betancor
  • M. Pilar Socorro
  • M. Fernanda Viecens

Emission trading systems (ETS) are being applied worldwide and in different economic sectors as an environmental regulatory tool that induces reductions of CO2 emissions. In Europe such a system is in place since 2005 for energy intensive installations and, since 1st January 2012, for airlines with flights arriving and departing from Community airports. The efficiency of the system should consider not only how it allows reaching an environmental goal, but also it should take into account its implications for market competition. In this work we develop a theoretical model that analyses the European ETS’s main features as devised for airlines, focusing on its effects on potential competition and entry deterrence. Contrary to other economic activities under ETS, potential competition is usual in most airline markets. Our results indicate that the share of capped allowances allocated initially for free to air operators may be a key element in deterring or allowing entry into the market. This result may be in collision with the general European principle of promoting competition and may represent a step backwards in the construction of a single European air transport market.

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Paper provided by FEDEA in its series Working Papers with number 2012-05.

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Date of creation: Sep 2012
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Handle: RePEc:fda:fdaddt:2012-05
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  1. Lambert Schoonbeek & Frans Vries, 2009. "Environmental taxes and industry monopolization," Journal of Regulatory Economics, Springer, vol. 36(1), pages 94-106, August.
  2. Edward Caltrhop & Stef Proost, 2002. "Environmental Pricing in Transport," Energy, Transport and Environment Working Papers Series ete0208, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
  3. Scheelhaase, Janina D., 2010. "Local emission charges – A new economic instrument at German airports," Journal of Air Transport Management, Elsevier, vol. 16(2), pages 94-99.
  4. Carlos Chavez & John K. Stranlund, 2000. "Enforcing Transferable Permit Systems in the Presence of Market Power," Working Papers 04-2000, Departamento de Economía, Universidad de Concepción.
  5. Niels Nannerup, 1998. "Strategic Environmental Policy Under Incomplete Information," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 11(1), pages 61-78, January.
  6. Hoel, Michael & Karp, Larry, 2000. "Taxes and Quotas for a Stock Pollutant with Multiplicative Uncertainty," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9v86p5s7, Department of Agricultural & Resource Economics, UC Berkeley.
  7. Anthony Heyes, 2009. "Is environmental regulation bad for competition? A survey," Journal of Regulatory Economics, Springer, vol. 36(1), pages 1-28, August.
  8. Peter Forsyth, 2008. "The Impact of Climate Change Policy on Competition in the Air Transport Industry," OECD/ITF Joint Transport Research Centre Discussion Papers 2008/18, OECD Publishing.
  9. Anger, Annela, 2010. "Including aviation in the European emissions trading scheme: Impacts on the industry, CO2 emissions and macroeconomic activity in the EU," Journal of Air Transport Management, Elsevier, vol. 16(2), pages 100-105.
  10. Yates, Andrew J. & Cronshaw, Mark B., 2001. "Pollution Permit Markets with Intertemporal Trading and Asymmetric Information," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 104-118, July.
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