The EU emissions trading system and airline low-carbon transition: A game-theoretic approach

Abstract

Aviation is among one of the fastest-growing sources of greenhouse gas emissions (GHG). Thus, transitioning into a more low-carbon approach for future sustainable growth in the airline industry is necessary. Inspired by European Union's GHG emissions trading system that allows automobile makers to “pool” their carbon emissions, we study three emission pooling scenarios for the airline industry. Under the EU emissions trading system (EU ETS), passenger and cargo airlines such as Lufthansa and FedEx can either (1) pay a premium for each ton of carbon dioxide equivalent (CO2eq) they fall short of free allowances (Pay Premium Strategy) or (2) buy allowances from other industries in the EU ETS market (Market-Based Strategy) (3) partnership with other airlines to “pool” their carbon emissions (Cooperative Strategy). These three approaches correspond to different market structures. The latest strategy has a co-opetition relationship between airlines: traditional airlines operating older aircraft purchase emission allowances from airlines operating newer aircraft. The purpose of this paper is to examine the conditions for airlines' paying penalties, purchasing allowances from the ETS market, or cooperation. We demonstrate that the EU ETS will always be detrimental to airlines using older aircraft. A hefty premium may effectively induce airlines to pursue a low-carbon transition plan. Our study shows that the ETS is not a silver bullet; it only works when the premium mechanism is designed properly and a fair market for emission allowances is available.