On-exchange and over-the-counter trading? Carbon abatement and capacity decisions in competing air-transport supply chains

The carbon emission of air-transport industry becomes a global concern, urging the airlines to promote solutions through carbon trading mechanism and sustainable aviation fuel (SAF). This paper studies the impact of cap-and-trade system with two different modes on carbon abatement and capacity input in competing air-transport supply chains. We model carbon trading mechanisms of On-exchange trading (OET) and Over-the-counter trading (OCT) in a duopolistic setting, and establish the equilibrium outcomes. It is found carbon abatement rate increases in trading price under OET, but decreases under OCT. The total capacity input may increase in carbon abatement cost, depending on the relationship between the ratio of unit carbon emissions and the ratio of the trading prices under two modes. The relationship between capacity input and unit carbon emission is moderated by abatement cost and the allowance of the airline in need under OCT. Counterintuitively, capacity input increases in unit carbon emission in some cases.