This paper tries to analyse different aspects of the inclusion of the aviation sector in EUETS from a detailed survey of the existing literature. It finds that among other issues like permit allocation methods, the ongoing literature mainly focuses on the different impacts on airline companies’ cost as well as on passengers’ demand. These factors lead to a distortion of the current competition, between intra European Union (EU) airlines as well as between EU and other non EU airlines. Among the intra EU airlines the impact of the increase in the cost is expected to be different for different types of airlines, which can even change the existing market structure of the aviation system. Impact on international competition and the reconfiguration of the current route network can cause a carbon leakage. Carbon leakage can happen in two cases - CO2 emissions increase outside the EU offsetting the emissions reduction within EU, or even worse, if the non-EU airlines decide to fly longer distances (outside EU airspace) to save the permit cost, global emissions will increase. However, some economists claim that a reconfiguration of the current route network is least probable to occur, because the increase in cost due to this policy will be insignificant. This paper calls for future theoretical work analysing the movement of cost and passengers’ demand both in short and the long run and equilibrium conditions for a route network reconfiguration; and empirical work with more authentic data to study these effects.

Susmita Mitra

Published in Berlin Working Papers on Money, Finance, Trade and Development, February 2012