Strategic reaction of airlines to the ETS

International audienceThe air transport sector is about to enter the European Trading Scheme progressively in 2011. The regulation of the CO2 emissions means for airlines more costs and a modification of the organization of their market. Our paper proposes a precise model of nonetheless the regulation but also of airlines CO2 emissions. Our conclusions are twofold. Firstly, although profits are negatively impacted by the introduction of the ETS, a monopoly airline carries more passengers at a lower price. Two opposite effects are at play: the marginal cost increases as polluting becomes costly, which results in an increase of the price. However, there is a second effect that makes the price decreasing: the way the free allowances are given creates a bias towards more activity. We show that more activity is reached at the equilibrium. De facto, more CO2 is emitted. Nevertheless, we show as well that it is profitable for the airline to buy a new aircraft because the marginal cost decreased. Again more activity is reached at equilibrium but at the cost of less CO2 emissions