Voluntary carbon offset and airline alliance

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.