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The Impact of Climate Change Policy on Competition in the Air Transport Industry

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  • Peter Forsyth

    (Monash University)

Abstract

This paper examines how climate change policy can impact on competition, prices and profitability in the air transport industry. It begins with an outline of the climate change policies that have been suggested, and it gives particular attention to the inclusion of air transport in an emissions trading scheme (ETS).This is likely to prove an important policy direction, with the EU, Australia and New Zealand all planning to include air transport in their ETSs. The scope for airlines to reduce their emissions intensity in the short run and long run is examined- it is concluded that the scope in the short run is quite limited. After this, the application of the emissions trading schemes of the EU, Australia and New Zealand to air transport is discussed, and the possible impacts on air fares are assessed. Allowance is made for the cost of permits for both direct and indirect emissions. The impacts of climate change policies, such as carbon taxes or requirements to purchase emissions permits, on airline competition, prices and profitability are analysed next. Impacts differ according to market structure- whether airline city pair markets are competitive, monopolistic or oligopolistic. They also depend on the time scale- airlines are unlikely to be able to pass on the full cost of their permits to their passengers in the short run, though in the long run, it is likely that airlines will exit from some city pairs, and this will enable to remaining airlines to raise their fares and restore their profitability. This may not occur in markets constrained by airport slots or capacity limits imposed in air services agreements on international routes, though the airlines’ problems are not likely to be as severe as has been suggested.

Suggested Citation

  • 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.
  • Handle: RePEc:oec:itfaaa:2008/18-en
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    File URL: http://dx.doi.org/10.1787/235104027370
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    Cited by:

    1. Brueckner, Jan K. & Zhang, Anming, 2010. "Airline emission charges: Effects on airfares, service quality, and aircraft design," Transportation Research Part B: Methodological, Elsevier, vol. 44(8-9), pages 960-971, September.
    2. Malina, Robert & McConnachie, Dominic & Winchester, Niven & Wollersheim, Christoph & Paltsev, Sergey & Waitz, Ian A., 2012. "The impact of the European Union Emissions Trading Scheme on US aviation," Journal of Air Transport Management, Elsevier, vol. 19(C), pages 36-41.
    3. Barbot, Cristina & Betancor, Ofelia & Socorro, M. Pilar & Viecens, M. Fernanda, 2014. "Trade-offs between environmental regulation and market competition: Airlines, emission trading systems and entry deterrence," Transport Policy, Elsevier, vol. 33(C), pages 65-72.
    4. Adler, Nicole & Gellman, Aaron, 2012. "Strategies for managing risk in a changing aviation environment," Journal of Air Transport Management, Elsevier, vol. 21(C), pages 24-35.
    5. Koopmans, Carl & Lieshout, Rogier, 2016. "Airline cost changes: To what extent are they passed through to the passenger?," Journal of Air Transport Management, Elsevier, vol. 53(C), pages 1-11.
    6. Forsyth, Peter, 2011. "Environmental and financial sustainability of air transport: Are they incompatible?," Journal of Air Transport Management, Elsevier, vol. 17(1), pages 27-32.
    7. Martin Schaefer & Janina Scheelhaase & Wolfgang Grimme & Sven Maertens, 2010. "Ökonomische Effekte des EU-Emissionshandelssystems auf Fluggesellschaften und EU-Mitgliedstaaten: ein innovativer Modellierungsansatz," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 79(2), pages 194-210.

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