| Nowadays, climate change has been regarded as one of the most severe challenges in the world. The EU has always been the leader of the actions combating climate change. It acts actively in promoting carbon reductions globally. To cap the fast growing CO2emissions of the international aviation sector, the EU published Directive2008/101/EC in2008, which included European airlines as well as airlines from third-countries into the European Union Emission Trading Scheme (EU ETS). According to this directive, aircraft operators will be obliged to surrender allowances for virtually all commercial flights landing at and departing from any airport in the28EU countries plus Iceland, Liechtenstein and Norway from2012onwards. The European commission released the latest list of operators on29January2013. According to this list, around5500aircraft operators from countries around the world were included in the EU ETS.35Chinese airlines were also listed in the document.The EU ETS works on the’ cap and trade’ principle. A cap is set on the overall volume of greenhouse gases that can be emitted each year by all the sectors covered by the system in Europe. Within this cap, companies receive or buy emission allowances which they can trade with one another if they wish. The cap is reduced over time so that total emissions fall. From2013onwards, the cap for aviation sector is set at95%of the historic aviation emissions which is calculated on the basis of the average total emissions reported between2004and2006.82%of the emission cap will be distributed for free. The allocation of the free allowances is based on the market share of each company in2010.Under the EU ETS, all flights in and out of the EU must carry emission allowances equivalent to their annual emissions. Airlines have to purchase some allowances in EU emission trading market, adding to their operating costs. Apart from the direct impact on the cost, profit and competition on aviation, this system also affects the related tour industry, international trade and the financing of aviation indirectly. Furthermore, low carbon transportation is the trend of world transport industry. The researches on the EU ETS and its impact on China’s aviation industry are significant for China to make a good preparation for the coming low-carbon age.EU’s integration of international aviation into the EU ETS attracted attention of scholars from home and abroad. A number of economic studies on these highly controversial issues have been conducted lately. However, little attention has been paid to the actual impact of the EU ETS on Chinese aviation. Chinese aviation has its own characteristics, such as its high growth rate, high profit margin and high degree of market concentration. It is not reasonable to apply the results of foreign studies to Chinese aviation. Therefore, this paper assessed the impact of the EU ETS on the basis of the characteristics of Chinese airlines. Since the impacts on passenger airlines are largely different from that on cargo airlines, this paper focuses on impacts on passenger airlines.This paper is divided into five chapters.The first chapter introduces the research background and makes an extensive literature review concerning the EU’s aviation carbon trading. Meanwhile, it defines the scope of the study and introduces the structure of the paper briefly. The scope of our study is the possible impacts of the EU ETS on Chinese network aircraft operators operating on China-Europe routes. For simplicity, this paper only consider passenger airlines.In the second chapter, the EU ETS and the corresponding documents which included aviation into the EU ETS are introduced and analyzed. Established in2005, the EU ETS is the world’s first and biggest carbon market which accounts for over three-quarters of the trading volume of the international carbon market. Based on emission trading theory, it is the most efficient market-based measure to reduce carbon emission. In2008, Directive2008/101/EC included aviation activities in the EU ETS. This legislation applies to EU and non-EU airlines alike. Emissions from flights to and from28EU countries, Iceland, Liechtenstein and Norway are all covered.The third chapter is the core of the paper. A detailed analysis of the economic impacts of the EU ETS on China’s aviation passenger transport was made in this chapter. At first, it gives an overview of China-Europe routes. Chinese airlines account for41%of the total traffic volume on our target routes. China’s biggest four operators (Air China, China Southern, China Eastern and Hainan Airlines) take the lead among Chinese airlines. Second, an extensive study of the economic impacts of the EU ETS on airline’s profitability is made from four aspects:increase of cost, cost pass-through behavior, price elasticity and windfall gains. This paper estimates the actual cost generated by the EU ETS for Chinese airlines in2013will range from€7.61million to€10.59million. This paper also concludes that a higher growth rate of business will lead to a higher cost on purchasing allowances. Facing the increase in cost, Chinese airlines will pass on the cost stemming from the ETS to customers through increasing air fares. Based on the competition of our target market and the congestion of airports, we could estimate that Chinese airlines could only pass on12%of the ETS cost to customers. The left88%of ETS cost that could not be passed on to customers will reduce their profit by€6.70-9.32million in2013. The12%of ETS cost that could be passed on to customers will also lead to profit loss as a result of the decrease of passenger transport demand which depends on price elasticity. According to IATA’s research, this paper estimate the price elasticity of demand for Chinese airlines on China-Europe routes is0.54. If the price increases by1%, the quantity demanded will decrease by0.54%. The demand on China-Europe routes is inelastic. The loss of profit caused by the decrease in demand is€0.0542-€0.0755million in2013. The total profit loss caused by both absorbing the cost and the decrease in demand will range from€6.75million to€9.39million in2013, which accounts for around4%of the gross profit of our target airlines operating on China-Europe routes. At the last of the third chapter, this paper have a discussion of the possibility of windfall gains for Chinese airlines. As Chinese airlines could be characterized as a highly regulated industry with a very low price elasticity of demand, it is possible for them to gain windfall profit.Based on the detailed analysis of chapter three, a simulation model is established in chapter four to forecast the potential impact of the EU ETS on Chinese airlines in phase three of the EU ETS (2013-2020). It presents the results from the following four aspects:cost increase, air transport price increase, profit loss and emission reductions. Because of the high growth rate of Chinese aviation, Chinese airlines will experience a higher cost increase relative to EU airlines. From2013to2020, the cost stemming from ETS is€202.99million. The passenger ticket price on China-Europe routes will grow by around4euros for every flight. Since customers are unlikely to be influenced by this tiny increase on price, the demand only will only drop by0.1%. Under the EU ETS, Chinese airlines will suffer a great profit loss of€180.08million from2013to2020. Comparing with profit under a’business as usual’(BAU) scenario, the total profit loss for Chinese airlines accounts for6.58%of the total BAU profit. The EU-ETS will have a small impact on aviation emissions because of the high marginal abatement cost of Chinese airlines. The emission reduction is0.016million ton over the whole period, accounting for0.05%of the total emission. To summarize, the traffic volume, profit and CO2emissions continue to increase over the time when aviation is included in the EU-ETS. CO2emission reduction could happen to Chinese airlines at the expense of the high profit loss. This paper should make good preparation to deal with this plausible policy. At last, this paper puts forward some suggestions for both Chinese government and Chinese airlines on the basis of our reality and the experience of other countries. Since the application of market based measures in global aviation is an irreversible trend, Chinese government should participate in the discussion of ICAO’s new solutions actively and try to establish our own emission trading system. For Chinese airlines, in the long run, they should build their emission trading departments which are responsible for calculating emissions, carrying out relevant researches and provide suggestions for the strategies of airlines. In addition, they should improve the environmental protection consciousness of customers.This paper presents several new ideas. First, it studies the cost pass-though behavior and price elasticity of demand in light of the characteristics of Chinese aviation. Second, the possibility of windfall gains for Chinese airlines is discussed on the basis of the current regulation system. Third, a simulation model is established in chapter four to evaluate the accumulative impact and a feedback mechanism is introduced into the model. There are also limitations in this paper. First, lacking of accurate statistical data of airlines operating on China-Europe routes, this paper adopted some of the data from the early studies of scholars, such as the passengers’ traffic volume on China-Europe routes, the price of CO2allowances. As a result, the authenticity and effectiveness of the data need to be verified. Second, since the implementation of the EU ETS on international airlines was temporarily suspended, there are many uncertainties in this research. |
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