Andreas Schröder
We examine a specific strategy of airlines aiming at minimsing their exposure to allowance auctions under the EU Emission Trading System (EU ETS). Airlines have interest in receiving allowances aplenty and free of charge. An attractive loophole is offered by a poor design element of the benchmark metric used for free allowance allocation by member states. For the entire trading period of eight years, an individual airline's allowance allocation depends on revenue-ton-kilometre (RTK) data of solely one single reporting year. Obviously, this creates massive incentives for airlines to abruptly boost RTK volumes in reporting years. How does this strategy pay off in detail? Should airlines fly with brickstones on board in reporting years? These questions are subject to investigation in this analysis. We find that taking on board one additional passenger or 100 kg cargo on a 1,000 km flight can possibly entail a marginal benefit of up to EUR 9,126 for Continental Airlines and EUR 8,562 for Lufthansa, contingent upon the airline's cost structure and the behaviour of competitors. For airlines with low EU market share, the incentive is slightly stronger than for large EU carriers. Results point to potential competition distortions. We give recommendations on how to modify the allocation mechanism.
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