Unilateral emission trading and competition between US and EU carriers

From 2011 onwards, the European aviation sector is scheduled to join the Greenhouse Gas Emission Allowances Trading System (EU ETS). European policy makers and airlines alike have now raised concerns that this will lead to a competitive disadvantage for EU carriers relative to those from the USA in the market for transatlantic flights. We use a Cournot model with economies of density on long haul flights to analyse the effects of emission trading. We find that the EU airlines’ competitive position is affected, but not hurt as severely as feared. Rather than trying to fight European carriers, US carriers escape fiercer competition due to emission trading costs and revert to other markets in which they have a competitive advantage.