The introduction of an emission trading system within the European Union from 2012 on represents a major financial barrier for all airlines, especially those operating their hubs inside the EU. While the plan is to request all airlines flying in the EU to buy emission certificates, most non-European carriers could still benefit from the international disputes going on at the moment. European-based airlines in turn fear a disadvantage against their non-european competitors, as the need for emission certificates will burden their already high cost structures even further.
The paper should first explain the concept of emission trading schemes as well as the current plan of introducing emission trading in the European Union. The second part will then elaborate on the airline’s perspective on emission trading and the included risks/ disadvantages originating from an introduction of such a system. A third part will then analyze the correlation between announcements concerning the emission trading system and the performance of airline stock prices. The analysis shall be based on the stock performance of major European airlines, as they will be the ones facing major discrimination if the system gets introduced. Finally, the usefulness of an emission trading system is going to be discussed and alternatives to solve the climate change issue will be presented.
Table of Contents
1 Introduction
1.1 Background
1.2 Problem Definition and Objective
1.3 Course of Investigation
2 Aviation and Climate Change
2.1 The Environmental Impact of Aviation Emissions
2.2 Potential Climate Change Mitigation Measures
2.2.1 Technological Innovation
2.2.2 Operational Efficiency
2.2.3 Infrastructure Improvements
2.2.4 Economic Measures
3 Emission Trading Regulation in Aviation
3.1 The Inclusion of Aviation in the EU ETS
3.1.1 Underlying Policy Objectives
3.1.2 Design of the EU ETS
3.1.3 Influence on Airline Performance and Competition
3.2 The EU ETS in the International Context
3.2.1 Legal Framework
3.2.2 The International Communities’ Perspective on the EU ETS
3.2.3 Current Developments in Global Emission Trading Regulation
4 The Influence of Emission Trading Regulation on Airline Stock Prices – an Event Study
4.1 The General Logic of Event Studies
4.2 Application of Event Studies to Regulatory Changes – Special Challenges
4.3 Methodology of the Event Study on Aviation in the EU ETS
4.4 Result Presentation
4.5 Result Interpretation and Discussion
5 Conclusion
5.1 Limitations of the Work
5.2 Outlook and Future Research Suggestions
5.3 Conclusion
Objectives and Research Scope
This thesis examines the financial impact of the European Union's inclusion of the aviation industry in its Emission Trading System (EU ETS) on airline stock performance. The primary research objective is to determine whether the regulatory requirement, which imposes additional financial burdens on airlines already suffering from low margins and high volatility, significantly influences investor perception and company valuation.
- Analysis of the environmental externalities associated with global aviation and climate change.
- Evaluation of existing climate change mitigation measures and the specific role of the EU ETS.
- Quantitative assessment of the regulatory impact via an event study methodology on selected European airline stocks.
- Investigation of the international political conflict and competitive distortions triggered by the EU's unilateral regulatory approach.
Excerpt from the Book
3.1.3 Influence on Airline Performance and Competition
In general, an airline’s financial performance might be impacted by the inclusion of aviation in the EU ETS in two different ways: an increase in operating costs since CO2 emissions become a direct production factor, as well as a potential decrease in revenue due to a decline in demand resulting from increased air fares (Bushnell, Mansur, & Chong, 2011, p. 3). The degree to which both, changes in costs and revenue, occur, depends on the airline’s ability to pass on the costs of CO2 emissions to the consumer. A high level of costs pass-through results in low cost increases, but a higher loss in revenue, and vice versa. The total costs arising from the inclusion of aviation in the EU ETS include costs for auctioned allowances, costs for purchasing allowances on the EU ETS market, abatement costs to prevent the need for additional allowances, as well as administration and transaction costs. Moreover, opportunity costs for freely allocated allowances could be taken into account as imputed costs (Wit et al., 2005, p. 130).
Within the literature concerning the inclusion of aviation in the EU ETS, a multitude of studies attempting to assess the financial impact of the regulation can be found, either written preceding or following the proposal of the European Commission. As numerous as the amount of studies, however, are the results obtained when reviewing these studies. Overall, two opinions are prevalent: The equal impact thesis assumes airlines to be able to fully pass on additional costs arising from the EU ETS to passengers, thereby imposing no severe financial burden on the industry. Moreover, a rather price-inelastic demand is assumed and competitive distortions are negated (Albers, Bühne, & Peters, 2009, p. 1). Examples for studies arguing in favor of the equal impact thesis are the impact assessment of the European Commission itself (2006), the final report of the Omega study by Anger et al. (2008) as well as the consecutive article Including aviation in the European emissions trading scheme: Impacts on the industry, CO2 emissions and macroeconomic activity in the EU by Anger (2010).
Summary of Chapters
1 Introduction: Provides the background of aviation's role in the global economy, defines the research problem regarding climate change impact, and outlines the structure of the thesis.
2 Aviation and Climate Change: Details the environmental impact of aviation emissions and explores various technological, operational, and economic mitigation measures.
3 Emission Trading Regulation in Aviation: Examines the specific design of the EU ETS, its policy objectives, and the intense international political debate sparked by its unilateral implementation.
4 The Influence of Emission Trading Regulation on Airline Stock Prices – an Event Study: Describes the methodology for applying statistical event studies to regulatory changes and presents the findings regarding investor reactions and stock price behavior.
5 Conclusion: Summarizes the thesis, acknowledges limitations of the work, and offers an outlook on future research regarding aviation sustainability and regulatory climate policies.
Keywords
Aviation Industry, Climate Change, Emission Trading System, EU ETS, Airline Stock Prices, Event Study, Market Efficiency, Environmental Regulation, Carbon Allowances, Financial Performance, Competitive Distortion, Sustainability, Corporate Strategy, ICAO, Global Warming.
Frequently Asked Questions
What is the core focus of this research?
This work evaluates the financial implications of including the aviation sector in the EU Emission Trading System, specifically analyzing impacts on airline profitability and stock market valuation.
Which thematic areas are central to this work?
The central themes include aviation’s contribution to climate change, the legislative design of the EU ETS, the economic burden on carriers, and the international political resistance against the EU’s approach.
What is the primary research objective?
The main goal is to assess whether the added financial burden of the EU ETS influences airline stock prices and, by proxy, investor perception of the industry’s future financial health.
Which scientific methods were applied?
The study utilizes a quantitative event study framework typically used in empirical finance to measure abnormal returns in response to specific regulatory announcements.
What does the main body cover?
The main body investigates the technical aspects of aviation emissions, the specific mechanics of the EU ETS, and the legal conflicts arising from the EU's unilateral regulation in an international context.
Which keywords characterize the work?
Key terms include EU ETS, aviation emissions, event study, stock market efficiency, climate policy, and competitive distortion.
Why did the author specifically analyze European carriers?
European carriers are studied exclusively because they are directly subject to the EU ETS, allowing for a clearer observation of how this specific regulatory change impacts their market performance.
What conclusion did the author reach regarding stock market impact?
The analysis concludes that investors place relatively low significance on the regulatory change, indicating no major negative impact on firm value, which supports the 'equal impact thesis'.
How does the author interpret the international resistance?
The author identifies the international conflict not merely as a reaction to financial costs, but as a tactical political calculus regarding the future landscape of carbon markets.
- Citar trabajo
- Lisa Jung (Autor), 2012, The Influence of Emission Trading Regulation on Airline Stock Prices, Múnich, GRIN Verlag, https://www.grin.com/document/1401382
