Voluntary carbon offset and airline alliance. (May 2019)

• Record Type: Journal Article
• Authors: Zheng, Shiyuan; Ge, Ying-En; Fu, Xiaowen; Jiang, Changmin
• Is Part Of: Transportation research. Volume 123(2019)
• Page Start: 110
• Page End: 126
• Publication Date: 2019-05
• Subjects: Voluntary carbon offset -- CORSIA -- Airline alliance -- Bargaining; Transportation -- Research -- Periodicals; Transportation -- Mathematical models -- Periodicals
• DOI: 10.1016/j.trb.2019.03.015
• Languages: English
• ISSNs: 0191-2615

Abstract

Highlights: This study develops a theoretical model to investigate airlines' incentives to collude on offset purchases and the potential mechanisms and corresponding market/welfare implications of such collusions. The model compares two types of voluntary carbon offset schemes, namely a Chicago Climate Exchange (CCX)-style market and an over-the-counter (OTC) market. The results suggest that airlines do not have incentive to cooperate in offset purchases in CCX market but might be willing to willing to form alliances in OTC market. The model also analyzes the profit and social welfare implications of an internal bargaining mechanism for alliances without output coordination. Abstract: This study develops a theoretical model to analyze the effects of two types of voluntary carbon offset schemes, particularly airlines' incentives to collude on offset purchases as well as the potential mechanisms and corresponding market/welfare implications of such alliance. The modeling results suggest that in a Chicago Climate Exchange (CCX)-style market, airlines do not have the incentive to cooperate in offset purchases. However, in an over-the-counter (OTC) market, airlines are willing to form alliance provided that the alliance's bargaining power is sufficiently stronger than the airlines' independent bargaining power. With coordinated output decision, the alliance increases social welfare when the marginal environmental cost of aviation is high. If the alliance partners do not coordinate their output decision, we show that an internal bargaining mechanism within the alliance can reduce the offset price and increase the alliance's profit compared with the case of output-coordinated alliance. Without such internal mechanism, the alliances' total profits and the social welfare may decrease. In addition, we extend our models to consider the alliance synergy effect in reducing the alliance members' marginal operating costs.