Aviation and the Global Atmosphere

Aviation and the Global Atmosphere
Markets play a central role in the efficient exchange of commodities, shares, bonds, and financial instruments. Existing international markets have well-established
practices for contracting, delivery, and settlement that could be applicable to emissions trading. Emissions trading differs considerably from the more traditional
standards approach that, for example, has been used by ICAO. Under that approach, a specific emissions limit has been established, and each aircraft must meet the
standard. Under emissions trading, an overall level of emissions production is set, and firms are allowed flexibility to jointly meet that standard. Firms that can achieve
low-cost reductions to meet their requirements have an incentive to reduce below the required levels and sell their excess emissions reductions to other firms. Firms
facing higher control costs can purchase these reductions to comply with their requirements at lower costs than by using alternative means.
A credible system of monitoring and verifying emissions reductions that allows for trading with minimal transaction costs would be needed to achieve the cost savings
potential of these mechanisms. As in other areas of environmental policy, an emissions trading regime would be likely to meet environmental objectives at the lowest
cost because it sets overall environmental goals, provides geographic and temporal flexibility, would allow for flexible trading across industry boundaries, and would
offer incentives for meeting the goals (Dudek and Goffman, 1997).
Among OECD countries, the efficacy of emissions trading in meeting the objectives of the Kyoto Protocol has been compared to direct market and regulatory
intervention. Some observers have suggested emissions trading is difficult to enforce and raises potentially difficult liability issues. Others have expressed concern
about the possibility that companies with excess reductions will not sell them, thus creating a barrier to new entrants in the market. However, successful allowancebased
SO 2 emissions trading among competitive electric power generation companies in the United States favored emissions trading over other options. Monitoring,
reporting, verification, and certification systems need to be explicitly defined and developed.
Emissions trading has been used in the United States in the control of SO2 emissions responsible for acid rain. Flexibility in this program has resulted in pollution
permit prices of about $100 per ton, compared to estimated prices before the program was implemented on the order of $250-400 per ton (Council of Economic
Advisors, 1998a). In addition, modeling indicates that programs using tradable permits could enable more cost-effective control of local and global atmospheric
pollutants than other regulatory options under consideration (IPCC, 1996d; GAO, 1997). Emissions trading has been incorporated in the Montreal Protocol, the
international treaty that limited ozone-depleting substances. Under that treaty, restrictions were placed on several specific chlorofluorocarbon (CFC) compounds as a
group, instead of separate restrictions on each compound. Countries could permit firms to trade among CFCs, reducing those that cost the least first. In addition, in a
separate provision, production permits were allowed to be traded across nations to allow for a lower cost, more orderly phaseout of manufacturing facilities (Montreal
Protocol, 1987).
The Kyoto Protocol (UNFCCC, 1998b) contains emissions trading provisions that provide substantial flexibility for nations to reduce their costs of meeting agreed
emissions goals. As with the Montreal Protocol, targets for greenhouse gases were not set for individual compounds but rather as a single comprehensive goal
combining six major greenhouse gases (sources and sinks). Nations can adopt plans that minimize the costs of meeting this target based on the relative costs of
controls among these different categories of greenhouse gases. The Kyoto Protocol provisions allow developed nations to trade emissions on a project-by-project
basis (Article 6) and through an emissions trading system (Article 17). A clean development mechanism (Article 12) was established to allow developed countries to
support and get emissions credit for actions in conjunction with developing countries that reduce emissions in those countries.
Relevant principles, modalities, rules, guidelines for emissions trading, and the role of governments are being discussed by the Conference of the Parties to the
UNFCCC and its subsidiary bodies, with the goal of reaching agreement before the end of the year 2000. A credible system of monitoring and verifying reductions that
allows for trading with minimum transaction costs will be needed to achieve the cost savings potential of these mechanisms. International aviation emissions are not
covered by the emissions-related targets in the Kyoto Protocol. The prerequisite for emissions trading is adoption of emissions reduction targets or caps. In principle,
the aviation sector could be included in the emissions targets agreed in the Kyoto protocol, but the feasibility of applying an emissions trading regime depends on
establishing a method to allocate international aviation bunker fuels. Emissions trading would likely be available across all industries, allowing progress in emissions
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