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

Abstract

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The impact of the EU-ETS on the aviation sector: Competitive effects of abatement efforts by airlines

“…In addition, national markets are usually controlled by a small group of firms (i.e. in Italy there are only seven active airline companies under the EU-ETS) and characterized by significant barriers to entry that discourage potential competitors from adopting entry strategies (Barbot et al, 2014). Thus, the aviation sector typically assumes an oligopolistic structure rather than a competitive one, and firms compete over the share of flights and of tonne-km flown during the year (Chin and Zhang, suggested by the economic literature from both a theoretical (Barbot et al, 2014;Basso, 2008;Chin and Zhang, 2013;Verhoef, 2010) and an empirical (Brander and Zhang, 1990;Oum et al, 1993) perspective.…”

“…For the purposes of this paper, additional simplifying assumptions concerning the demand and the cost functions are needed. As suggested by the literature (Barbot et al, 2014;Basso, 2008;Brander and Zhang, 1990;Chin and Zhang, 2013;Girardet and Spinler, 2013;Oum et al, 1993;Verhoef, 2010), it is assumed that the market is characterized by an inverse linear demand function:…”

“…The economic literature has thoroughly investigated the effects of the EU-ETS on economic performance and competitiveness, and innovation (see Ellerman et al (2015); Martin et al (2015)). Focusing on the aviation sector, some authors have found that the EU-ETS generates a reduction of profit margins (Malina et al, 2012;Girardet and Spinler, 2013), a loss of market shares, or a reduction of companies' growth rates (Faber and Brinke, 2011;Anger and Köhler, 2010), and a change in barriers to entry (Barbot et al, 2014). These effects may be even more important when airlines cannot off-set environmental costs by passing through additional costs onto air fares or by using profits gained on extra-European routes 2 .…”

“…To the best of our knowledge, the literature does not provide a generalization of the Cournot-Nash equilibrium to n firms to assess the actual and potential effects of the EU-ETS on airline market competition. Only recently, have some contributions started to investigate this approach (Barbot et al, 2014;Chin and Zhang, 2013). Barbot et al (2014) show that the ETS may affect potential competition since the share of capped allowances allocated initially for free may be used by incumbent air operators to deter entry into the market.…”

“…Only recently, have some contributions started to investigate this approach (Barbot et al, 2014;Chin and Zhang, 2013). Barbot et al (2014) show that the ETS may affect potential competition since the share of capped allowances allocated initially for free may be used by incumbent air operators to deter entry into the market. Chin and Zhang (2013) use a Cournot model to assess changes of output and efficiency level due to the different allowance allocation methods.…”