Pricing Carbon in the Aviation Sector : Supply Effects of the European Emissions Trading System

We examine the causal impact of carbon pricing on aviation supply exploiting a policy change in the European Emissions Trading system (EU ETS). Our econometric approach is based on a matched differences-in-differences strategy. We find that low-cost airlines end up supplying 7% fewer seats than the counterfactual. When we restrict the estimation to routes on which intermodal competition may exist, the reduction in seats is 23% greater than the counterfactual and the change is persistent in time. Finally, network airlines are found to increase the average size of their aircrafts as a result of the EU ETS