Seminar – Carbon Pricing & Firm Profits: Theory & Estimates for US Airlines

Dr Robert Ritz, University of Cambridge

We present a new model to estimate the impacts of carbon pricing on firm-level profits, and use it to analyse future climate policy for the US airline industry. Our theoretical approach nests many familiar models of imperfect competition as special cases; it shows how the rate of carbon cost pass-through is a “sufficient statistic” for the profit impact of carbon pricing. Our pass-through estimates reveal substantial heterogeneity across airlines: at a $50/tCO2 tax, the large legacy carriers experience an average profit loss of six per cent of revenue – while low-cost Southwest Airlines’ profit rises by one per cent. We think of our approach as “quasi-structural”: it uses theory to identify the drivers of profit impacts and then completes their estimation using reduced-form econometrics.

Speaker bio

Dr Robert Ritz is Assistant Director of the Energy Policy Research Group (EPRG) at the University of Cambridge; a Senior Research Associate in Economics & Policy at the University of Cambridge Judge Business School, and a Fellow of Peterhouse, Cambridge.

Robert serves on the Academic Panel of the UK’s Competition & Markets Authority (CMA) and is a Principal at Vivid Economics, a London-based consultancy. Earlier in his career, he worked at the Oxford Institute for Energy Studies and McKinsey & Company; he has also been a visiting scholar at the Bank of England and MIT.

Robert’s research interests span industrial organisation, energy economics (oil & gas, electricity & carbon markets) and climate policy. His current projects are on market-based environmental policy, the economics of cost pass-through, and the design of high-renewables electricity markets.

He holds a DPhil in Economics from Nuffield College, University of Oxford, an MA in Financial Economics from the University of St Andrews, and attended the University of Pennsylvania and its Wharton School as a visiting McNeil Scholar.