The effect of the European Emissions Trading System (EU ETS) on aviation demand: An empirical comparison with the impact of ticket taxes

Abstract

To regulate the rising environmental impact of flying, the EU integrated aviation into the European Emissions Trading System (EU ETS) in 2012. This study gives an empirical ex-post evaluation on the effect of the EU ETS on aviation demand using a gravity model approach. The results of the Poisson pseudo-maximum likelihood (PPML) estimates suggest that the EU ETS has so far had no statistically significant effects on intra-EEA (European Economic Area) air passenger flows. This study additionally controls for the impact of the Austrian and German air transportation tax on aviation demand. The ticket tax brings about statistically significant and robust demand reductions on the affected country-pairs. But although the tax reduces demand, this policy may still not be the adequate measure as the aviation taxes that are in place do not relate to the amount of CO2 emitted by air travel. Generally, policy instruments are preferred that incentivize emission reductions, as is the case with kerosene taxes or emissions trading systems (ETS).