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

Posted by D. Daniel Sokol

Cristina Barbot (CEFUP, Faculty of Economics of Porto), Ofelia Betancor (Universidad de Las Palmas), M. Pilar Socorro (Universidad de Las Palmas) and M. Fernanda Viecens (Universidad de San Andres) discuss Trade-offs between environmental regulation and market competition: airlines, emission trading systems and entry deterrence

ABSTRACT: Emission trading systems (ETS) are being applied worldwide and in different economic sectors as an environmental regulatory tool that induces reductions of CO2 emissions. In Europe such a system is in place since 2005 for energy intensive installations and, since 1st January 2012, for airlines with flights arriving and departing from Community airports. The efficiency of the system should consider not only how it allows reaching an environmental goal, but also it should take into account its implications for market competition. In this work we develop a theoretical model that analyses the European ETS’s main features as devised for airlines, focusing on its effects on potential competition and entry deterrence. Contrary to other economic activities under ETS, potential competition is usual in most airline markets. Our results indicate that the share of capped allowances allocated initially for free to air operators may! be a key element in deterring or allowing entry into the market. This result may be in collision with the general European principle of promoting competition and may represent a step backwards in the construction of a single European air transport market.