Carbon Emission Trading Scheme and the Aviation Sector: An experimental analysis on allocation of allowances

Abstract

The European Union has proposed a Directive to include aviation activities in the Emission Trading Scheme (ETS) in 2012. The allowance allocation method which will be put in place is relatively easy to implement with low administration cost. However, careful scrutiny suggests that the allocation method does not favor airlines with high energy efficiency. This study proposes an alternative allowance allocation method which is fairer in that it rewards energy efficient airlines. Further, the new method is easy to implement with low administrative cost. The Cournot model serves as the theoretical foundation upon which the experiments are designed to simulate the aviation industry under the ETS. The equilibrium is calculated for each allowance allocation method. Results from experiments suggest consistency with theoretical outcomes.