Market-Based Instruments for International Aviation and Shipping as a Source of Climate Finance

The international aviation and maritime
sectors today enjoy relatively favorable tax treatment, as
their fuels are not taxed and the sectors are not subject to
any value-added tax or turnover tax. Nor are these fuel uses
subject to any global measures to reduce their associated
CO2 emissions, even though they represent at least 5 percent
of the global greenhouse gas emissions. A carbon charge on
fuels for international aviation and shipping equal to $25
per tonne of emitted CO2 could raise about $12 billion from
aviation and about $26 billion from shipping by 2020.
Market-based instruments ought to be used to raise such
revenue, preferably charges based on the carbon contents of
fuels. Such charges would also scale back emissions by at
least 5-10 percent. Developing countries ought to be able to
keep their own tax revenue, and additional compensation to
them for the economic burdens of these carbon charges may be
warranted. Such compensation would constitute at most 40
percent of the raised global revenue. Implementing these
charges can be a challenge, especially for aviation, where a
large number of bilateral air-service agreements would need
to be rewritten.