Journal of Energy Markets

The link between jet fuel prices, carbon credits and airline firm value

Finbarr Murphy, Na Li, Bernard Murphy and Mark Cummins


The European Commission expects aircraft operators flying into and out of Europe to enter the EU Emissions (cap and trade) Trading Scheme (EU ETS). There is a significant body of literature that examines the impact of jet fuel prices on airline firm value. Similarly, there is a growing body of literature that looks at the impact of the EU ETS scheme on energy-intensive companies, but this research relies on model projections. An empirical/econometric investigation using available historical data on airline stock prices is therefore timely. We use regression, cointegration and vector autoregression (VAR) analyses to examine the link between energy prices, exchange-traded EU allowance units of CO2 and airline firm value in recent years. We find that changes in carbon prices better explain airline firm value changes than oil price changes, with one exception. Combined, oil and carbon price changes explain as much as 22% of overall changes. With no evidence of cointegration between the variables, a VAR analysis found that airline stock price changes are affected by energy and carbon price changes, but that this impact is quickly dissipated. This analysis should be of particular interest to a range of personnel, including EU and national legislators and regulators, trading and risk management and the executives of airline companies.

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