Abstract:

Commercial aviation contributes 2.4% of global CO2 emissions, with projected growth in air traffic indicating a rapid increase in this percentage in the coming decades. Different countries use different regulatory methods to regulate aviation emissions, targeting specific flights or all flights departing from their country. This paper examines the market effects of these methods by modeling regional carbon taxes on airfares using two approaches. The analysis of the study focuses on the 30 international routes with the most kilometers traveled by revenue-paying passengers (known as revenue passenger kilometers, or RPKs) in three regions: China, Europe, and the United States. The authors applied regional carbon tax estimates to the average ticket prices of these routes and compared the resulting fare increases among different carriers based on the regulatory approach. The results demonstrate that when an operator's country of registration regulates emissions, competition between carriers may become distorted. Distortion would occur if carriers were charged different carbon prices based on their country of registration despite operating the same routes and with similar carbon intensities. This effect could be amplified for flights between China and Europe because of the greater difference in assumed carbon prices between these regions. On average, the variance in fare increases for European carriers relative to Chinese carriers is 3.5 times greater when regulating emissions by the country of registration compared to the country of departure. This outcome highlights the shortcomings of implementing emissions mitigation measures by country of registration; it provides a market advantage to operators registered in countries with fewer regulations in place, potentially deterring countries from taking swift action to decarbonize.