For more than a decade, a battle has brewed over how to tackle aviation emissions as a part of various efforts to mitigate climate change. Domestic emissions from aviation are naturally part of each national government's policy process; the EU, for example, has chosen to include aviation emissions in their regional emission cap-and-trade program, the EU-ETS (EU Emissions System). Emissions from international flights are trickier, and international climate negotiators handed that effort over to ICAO, the International Civil Aviation Organization. Frustrated with their lack of progress, the EU proposed to simply lump international flights to and from Europe into their own domestic trading program beginning in 2012, creating quite a furor. In response, ICAO agreed to develop and vote on a market-based program for international flights in 2016 and the EU agreed to suspend regulation of international flights until then.

Does tackling aviation emissions make sense?

Aviation emissions are small compared with emissions from road transport and electricity generation, but are potentially large compared with other sectors. In 2010, emissions from aviation were about 2.5 percent of global greenhouse gas (GHG) emissions (slightly more than half being international), compared to 17 percent for road transport and 35 percent for electricity. Even with a growth rate of around 3 percent per year, forecasts suggest these emissions would be perhaps 5 percent of global emissions by 2050. After electricity and road transport, however, one quickly reaches sectors that are emitting only 5 percent of total emissions (e.g., petroleum refining is about 5 percent). What has likely propelled aviation ahead is the fact that emissions from international aviation fall outside the purview of any single country's jurisdiction, making them a ripe target for international negotiations.

Another consideration is that emission pricing alone may not reduce emissions very much in the aviation sector. Generally, airlines are already sensitive to energy use and their related emissions. Fuel represents about more than 30 percent of operating costs, up from only 14 percent a decade earlier. It is therefore not surprising that aircraft manufacturers have responded: Newer aircraft, like the Boeing 747-800 and 787 use 30 percent less fuel per passenger-mile than older aircraft. Moreover, likely carbon prices from a market-based program would be only a small increase in fuel costs. A gallon of jet fuel now costs about $3 per gallon — which would go up about 30 cents with a $30 per ton of CO2 carbon price (this is the highest carbon price we have seen in recent history and is in the ballpark of central estimates for the U.S. social cost of carbon). This suggests a total cost increase of about 3 percent from including aviation emission in a market-based mechanism — an increase unlikely to change many decisions about whether or not to fly. Other actions, such as improving airport and air traffic control operations to reduce fuel use and emissions along with research on biofuels, could also be valuable.

Despite the lack of significant, direct, cost-effective emission reductions, regulating aviation could have important indirect mitigation consequences in two other ways. First, emission limits in aviation could be tied to offsets or trading with other sectors. That is, given that reducing aviation emissions itself may be expensive, the sector could be asked to buy cheaper mitigation elsewhere through a flexible market mechanism. This was a key topic in a recent ICAO study. Second, levying fees on aviation emissions or auctioning permits could raise revenue, in part, for targeted climate activities. This might include international climate finance (suggested by the 2009 report of the U.N. High Level Advisory Group on Climate Change Financing) or further research on low-carbon jet fuel.

Global market-based measures

If we are going to regulate aviation emissions, it is important to treat air travel equally and equitably in a number of dimensions. It would be a bad idea, for example, to treat European and non-European carriers differently when they fly in and out of Europe: Three percent may be a small increase in the overall cost, but it would be a huge difference in profits. Air travel could quickly shift to unregulated carriers. It would also be a bad idea to treat flights transiting through European hubs differently than flights transiting elsewhere: Flights could be encouraged to shift to less-regulated routes, perhaps even increasing travel distances and emissions. Thus the ICAO idea of a global system makes sense, and economics has long demonstrated that flexible market-based measures encourage emission reductions at the lowest possible cost.

In general, the two principal options for market-based measures are a cap-and-trade system and a fixed levy on emissions. A cap-and-trade fixes emissions and lets the market price adjust to achieve the cap, while a levy fixes the price airlines face and allows emissions to adjust. A simple cap on emissions could be tricky in the aviation sector by itself; limited opportunities for direct emission reductions and uncertain growth could lead to volatile prices. This would not be cost-effective if cheaper mitigation opportunities exist elsewhere in the economy. As noted above, a better design would link a cap in the aviation in other sectors (as in the EU ETS) or allow for offsets.

A key question for market-based programs is either how to allocate allowances in a cap-and-trade program or how to spend revenue under a levy. Giving out allowances to airlines for free in a competitive industry like aviation is likely to generate windfall profits, as occurred in deregulated power markets in the EU ETS. Auctioned allowances and levies will raise revenue for the government that could be used to reduce other taxes. Alternatively, a portion of the revenue could be spent on targeted climate activities, such as international climate finance and biofuel research.

All of this points to a policy that (a) applies equally to all destinations (either within a country or, for international aviation, across all countries); (b) prices carbon dioxide emissions in a way that avoids volatility — either a fixed levy or a cap with the flexibility to pay for cheaper mitigation elsewhere; (c) directs revenue to reducing other taxes and targeted climate activities including international climate finance and biofuel research; and (d) couples this with attention to non-market opportunities, such as improved operations and traffic control.

Pizer holds joint appointments as a faculty fellow at the Nicholas Institute for Environmental Policy Solutions and as a professor in the Sanford School of Public Policy at Duke University. His current research examines how public policies to promote clean energy can effectively leverage private-sector investments, how environmental regulation and climate policy can affect production costs and competitiveness, and how the design of market-based environmental policies can be improved.