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

This paper responds to the request from the G20 to explore the potential for raising climate finance from charges on fuels used in international aviation and maritime transport—with a particular focus on minimizing the impact on low-income countries and on issues of implementation. The paper makes but does not linger on the case for introducing some form of carbon pricing in these sectors. This is widely recognized, given their growing share of emissions and their exclusion from both national fuel tax regimes and from the quantified country-level emissions targets under the 1997 Kyoto Protocol.1 In part, this reflects the difficulty of allocating emissions from sources that are internationally mobile and, moreover, arise largely in international waters and airspace.2 The focus here, instead, is on the consequences of, and possibilities for, introducing such charges.

In doing so, the paper extends the analysis of such charges by the High-level Advisory Group on Climate Change Financing to the U.N. Secretary General (AGF, 2010a and b). That analysis was focused on the revenue potential of these charges. The analysis here, consistent with the request from the G20, takes forward the debate in three main ways.

First, the paper clarifies and, where possible quantifies, the key issue of ‗incidence,‘ paying particular attention to the impact on lower income countries. Specifically, it examines whether reasonably practicable compensation rules can be found that would be sufficient to ensure that developing countries are made no worse off by the global adoption of such charges.

Second, the paper examines key challenges to implementation and reaches broad conclusions on how these might best be addressed. These range from fundamental issues of sovereignty and governance that can be no more than raised here through to questions of routine administration and legal frameworks, on which clearer views can be reached.

Third, the analysis places these charges in the context of the wider circumstances and characteristics of these sectors. It stresses that, while the sectors are commonly grouped together and do indeed have important similarities relevant to carbon pricing issues, they also have important differences, including their treatment under national tax systems.

The focus is entirely on MBIs, whether in the form of carbon taxes or emissions trading schemes (ETSs). Under the auspices of the ICAO and the IMO, and as will be summarized below, efforts are underway to reduce CO2 emissions through technical and operational measures; by, for example, efficiency improvements to new planes and ships. While constructive and important, such efforts can—as in other sectors—have only limited environmental effectiveness, and will need to be supported by carbon pricing schemes. More

World Bank. Author: Keen, Michael; Parry, Ian;Strand,Jon. Document Date: 2012/01/01.Document Type: Policy Research Working Paper. Report Number: WPS5950

Market-based instruments for international aviation and shipping as a source of climate financex