Pricing carbon in the aviation sector: Evidence from the European emissions trading system

Abstract

A policy change in the European Union's Emissions Trading Scheme (EU ETS) provides us with a unique opportunity to measure the impact of carbon pricing on aviation, the most climate-intensive mode of transport. We implement a difference-in-differences strategy on a sample based on all flights within Europe from 2010 to 2016 to examine the causal impact of the EU ETS on emissions and supply. We find that the EU ETS reduced emissions by 4.7% in the regulated routes relative to the counterfactual. When we restrict the sample to short-haul flights, routes on which competition from other means of transport may exist (less than 1,000 km), the reduction in emissions is 10.7%. Finally, the reduction in emissions is also high for low-cost airlines (−11%) but it is not statistically significant for network airlines. In sum, the EU ETS has helped to mitigate emission growth by 3 Mt CO2 per year during the period analyzed, but not to reduce absolute emissions in the sector, as needed.