Technology Diffusion in Carbon Markets: Evidence from Aviation

Abstract

Carbon pricing has been found mainly to foster low-carbon innovation but not low-carbon technology adoption. Focusing on the aviation sector, a hard-to-abate industry, we provide novel evidence that the EU’s Emission Trading System (EU ETS) is responsible for a greater diffusion of available low-carbon technologies. By exploiting a policy change in the carbon market scope, we find a more intensive use of efficient aircraft and a sizeable effect of aircraft retrofitting – use of winglets – compared to the counterfactual, driving improvements in emission intensity. These effects, however, are not uniform: aircraft choice and retrofitting decisions differ between Eastern and Western routes. Examining the mechanisms behind our findings, we show that the more intensive use of efficient aircraft—either through fleet replacement or differential use—is the main factor driving the ETS’s effect on emission intensity. Our study highlights the importance of carbon pricing to accelerate the adoption rates of low carbon technologies, even in hard-to-abate sectors.