Econometric supply-and-demand models to analyze carbon pricing policies

Abstract

In this paper, the introduction of a carbon pricing policy in air transport industry is investigated. The impact on ticket prices, airlines’ market shares and resulting network-wide carbon emissions is studied via a methodology which includes a supply and demand model and a method for estimating carbon emissions costs by airline and itinerary. The application of the carbon pricing policy at the U.S. domestic aviation network revealed that the policy could have some significant effects on ticket prices, air travel demand and resulting CO2 emissions for high carbon price. But, to achieve the aviation industry ambitious goal to reduce net aviation CO2 emissions by 50% until 2050, this paper suggests that airlines and policy makers need to adopt a multi-faceted approach with carbon pricing policies, technological, operational and infrastructure improvements to ensure economic and environmental sustainability. Keywords: Carbon pricing policy, Demand and supply model, Discrete choice model, Airline emissions cost, Game theory