Question

The European Union imposed a tax on carbon emissions on all flights to and from Europe, regardless of nationality of the airlines. Read WSJ article Europe's Green Airline War (pdf).

•What is the effect of a carbon tax on the equilibrium number of flights? Would an equilibrium change be caused by a shift in demand?

•Would the imposed tax on carbon emission control the pollution generating source?

•Why would countries with airlines flying to and from Europe retaliate against the EU's imposition of a tax on carbon emissions?

Answer 1

Answer;

1.

The equilibrium number of flights will come down due to carbon taxes. It will happen because carbon tax will increase the overall price of the ticket and supply curve of flights will shift to the left. Thus, it will cause establishing a new equilibrium that will show the lesser number of flights at the given price level.The supply curve will change to the left. It will increase in the prices of flights. Thus, demand will come down and a new equilibrium will be established having higher prices and lower demand of flight.

Thus, the primary reason for the change is the shift in the supply curve of flights rather the demand. In this case, demand only comes down due to increase in prices of flights.

2.

It controls, but in a limited capacity as the number of flights will come down. But, the other sources who are producing carbon are not yet regulated by similar measures.

3.

It is the unilateral action taken by the EU without taking other party countries into confidence. Also, all the revenues collected through carbon tax by the EU are completely retained by them. Next, it negatively affects the world aviation industry as carbon tax collection wipes out the significant portion of the global aviation business. Further, affected countries are already taking initiatives to reduce carbon emission, but they have not charged such unilateral tax on any industry.

In the light of the above reasons, all countries can retaliate in a group or at the individual level so that the EU will rethink and roll back the carbon tax applied to airlines who are operating to and from the EU.