## Destination Net Zero: The Urgent Need for a Global Carbon Tax on Aviation and Shipping (clnea2024003)

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### Rationale for global carbon pricing and scope
- Dual rationale:
  - Decarbonization: All energy-consuming sectors, including hard-to-abate international aviation and maritime, need decarbonization by midcentury to achieve Paris Agreement temperature goals (1.5°C to 2°C above preindustrial levels). Carbon pricing provides a cost-effective price signal to promote low-carbon technologies and efficiency.
  - Revenue: Pricing consistent with net zero goals could raise substantial revenues; example: a carbon price rising to $170 per tonne in 2035 would raise about $200 billion a year.
- Additional considerations:
  - Emissions growth: Without mitigation, international transport fuels could reach 15 to 40 percent of total global CO2 emissions if sectors grow at business-as-usual while countries decarbonize per Paris goals.
  - Institutional readiness: ICAO and IMO have decarbonization goals and data collection procedures; enforcement could be delegated to national tax authorities or new global entities.
  - Tax base mobility: Mobility of the tax base (especially maritime) strengthens the case for global coordination.
  - Fiscal anomalies: International aviation and maritime fuels are largely exempt from excises and treated favorably fiscally.
- Scope of note:
  - Rationale, design issues, impacts of carbon pricing on international transport fuels; policy options; modeling of technology and zero-emission fuel adoption; quantification of impacts on emissions, revenue, production and economic costs, zero-emission fuel use, and distributional impacts globally and by country.

### Key 2023 baseline metrics and institutional context
- 2023 emissions:
  - International aviation CO2 emissions: 610 million tonnes (Mt).
  - International maritime CO2 emissions: 850 million tonnes (Mt).
  - Shares: about 1.5 and 2 percent of global fossil fuel CO2 emissions, respectively.
- Projected sector shares (if international transport grows at business-as-usual while countries decarbonize):
  - Under a 2°C scenario: international transport >15 percent of global CO2 emissions by 2030 and 25 percent by 2050.
  - Under a 1.5°C scenario: international transport could account for up to 40 percent of global CO2 emissions by 2030.
- Institutional facts:
  - ICAO and IMO are the specialist UN agencies; emissions largely occur in international airspace/waters outside UNFCCC purview.
  - ICAO and IMO have pledged “net zero” by midcentury; IMO has intermediate targets and policies.

---

### Maritime: current policy, mitigation opportunities, and administrative issues
- Undertaxation and fiscal distortions:
  - International aviation and maritime fuels are not subject to excises or (except by the EU) carbon pricing.
  - Aviation: 1944 Chicago Convention and ICAO resolutions prohibit taxation of fuel already on board by the state where aircraft lands; many bilateral air service agreements provide exemptions.
  - Maritime: longstanding exemption reflects extreme mobility of tax base.
  - Maritime business taxation: subject to tonnage tax regime amounting to about 10 percent of normal corporate income taxes.
- Short-term mitigation opportunities:
  - Engine efficiency improvements, lighter construction materials, maintenance and operational efficiencies (e.g., slower steaming), demand reduction for aviation.
- Long-term mitigation opportunities:
  - Zero-emission fuels: SAFs for aviation; hydrogen-based fuels (hydrogen, ammonia, methanol) for shipping—ideally from green hydrogen or blue hydrogen with CCS.
  - Biofuel blending with current engines: up to 50 percent for aviation and 20 percent for maritime.
  - New planes: major manufacturers committed to producing 100 percent biofuel-capable aircraft by 2030.
  - Electrification feasible for shorter trips; limited for long trips due to battery constraints.
- Biofuel caveats:
  - Production would require land diversion and sustainability certification; ICAO assumes common biomass/waste production methods yield about one-third the lifecycle emissions of jet fuel.
- Data collection frameworks:
  - ICAO: since 2019, qualifying airlines must monitor and annually report emissions.
  - IMO: since 2019, data collection for ships ≥5,000 gross tonnage covering about half of fleet count but almost 90 percent of CO2 emissions.
- CORSIA:
  - Voluntary now; mandatory for ~90 percent of international flights in 2027.
  - Requires airlines to purchase offsets for company-level emissions above 85 percent of 2019 levels (flights to/from small island and vulnerable states exempt).
  - Limitations: not aligned with net zero pathways, relies on offsets with additionality concerns, does not generate revenue.
- IMO regulatory tools:
  - Energy Efficiency Design Index, Energy Efficiency Existing Ship Index, Carbon Intensity Indicator.
  - Limitations: standards lack cost-equalizing incentives across ship classes and are not as cost-effective as carbon pricing.
- Administrative feasibility for global tax:
  - Tax collection options: national tax administrations, or new funds/collectors overseen by ICAO/IMO modeled on IOPC funds.
  - Manageability: large planes and ships are tracked by satellite; operators could remit digitally; example global number of tax collection points (25,000 ships) characterized as modest.
  - Enforcement: denial of airport/port access for noncompliant operators if major states participate.
  - Legal challenges: amendments to bilateral agreements and Chicago Convention may be required.

---

### Instruments: carbon tax, ETS, feebates, TPSs — comparative attributes
- Carbon tax (global on international fuels):
  - Fixed tax rate applied to carbon content (jet or bunker fuel × emissions factors).
  - Provides long-term price certainty; can mobilize large revenues (potentially up to $200 billion a year).
  - To spur zero-emission fuel adoption, tax should be sufficiently high and follow a credible trajectory.
  - Revenue uses: international climate finance (noting $100 billion a year target met in 2023 with about 35/45/20 percent from bilateral/multilateral/private sources respectively), R&D and infrastructure, domestic revenue retention.
- Emissions trading systems (ETS):
  - Potentially workable internationally but administratively more complex (trading markets, monitoring, hedge capacity).
  - Auctioned allowances can raise revenue; free allowances often used for competitive sectors and to incentivize participation.
  - Free allowances create windfall profits and do not reduce unit production cost increases compared with taxed systems.
- Feebates:
  - Implicit carbon pricing charging operator = CO2 price × (operator emission rate − pivot emission rate) × output.
  - Pivot choices affect revenue: pivot = industry average → no revenue; pivot = zero → equivalent to tax.
  - Promote emission-rate reductions; revenue-neutral feebates have limited demand effects and hence may be less cost-effective for aviation mitigation.
- Tradable Performance Standards (TPSs):
  - Fixes tightening emission-rate standards; operators above standard buy credits, below standard sell credits.
  - Equivalent behavioral responses to feebates; not designed to raise revenue.
- Price floors and ceilings in ETS/TPS:
  - Price floors: implemented via minimum bid prices; should ramp predictably.
  - Price ceilings: inject allowances when prices hit a maximum.
- Administrative precedents:
  - IOPC funds, EU ETS inclusion of aviation and maritime (with phased removal of free allowances), Air Ticket Solidarity Levy (ASL) examples.

---

### Quantitative modeling: methodology, assumptions, and policy scenarios
- Modeling approach:
  - Dynamic partial equilibrium models for international aviation and maritime.
  - Captures global demand growth, price responses, energy/emissions intensity improvements, and projected zero-emission fuel costs.
  - Asset lifetimes: planes 30 years, ships 25 years.
  - Sectors disaggregated: maritime (bulk/tanker, container); aviation (passenger, cargo).
  - Only combustion emissions modeled; contrails and other non-CO2 effects discussed in Annex 1.
- Zero-emission fuel assumptions:
  - Aviation: SAFs from biomass/waste and CO2-based fuels; current cost about $40 per gigajoule (GJ). With current engines, max blending 50 percent pre-2030. Model: $285 per ton carbon price needed to achieve 50 percent SAF use in 2040; about $400 per ton achieves price parity with jet fuel in 2050.
  - Maritime: zero-emission fuel price expected to decline from around $70 per GJ in 2022 to $25 per GJ in 2050 (average of green ammonia and methanol). Price parity under a carbon price of $400 and $200 per ton in 2030 and 2050, respectively.
- Baseline projections (no additional measures):
  - CO2 emissions projected to increase by 85 percent for international aviation and 20 percent for international maritime between 2023 and 2040.
  - Zero-emission fuel shares remain about 5 percent through 2050 in baseline.
  - Model projects 2050 emissions of 250 and 29 percent above 2022 levels for international aviation and maritime, respectively.
- Policy scenarios:
  - Two policy families:
    1. Carbon tax (CT) alone.
    2. Carbon tax combined with a revenue-neutral feebate (CT + FB) with stringency split evenly.
  - Two policy stringencies:
    1. Net zero pathway (NZ): carbon price increases linearly from $20 per tonne in 2028 to $170 in 2035 to $500 per tonne by 2050 (aligned with IEA least cost pathway).
    2. Moderate pathway (MOD): carbon prices rise from $10 per tonne in 2028 to $250 per tonne by 2050.

---

### Results — emissions, technology adoption, and decomposition
- Emissions trajectories:
  - Under NZ pathway: aviation and maritime emissions peak around 2030 and decline steadily thereafter.
  - Under MOD: emissions fall only gradually.
  - Carbon tax and CT + FB produce similar emissions reductions.
  - Aviation and maritime emissions remain significant in 2050 due to high abatement costs.
- Aviation decomposition (NZ pathway):
  - Emissions reduced 13 and 63 percent below baseline levels in 2030 and 2040, respectively.
  - 50 percent SAF blending achieved around 2040; further midcentury decarbonization depends on SAF cost parity and 100 percent SAF-capable planes.
  - Relative contributions in 2040: demand reductions dominant; energy efficiency accounts for 20 percent; increased biofuel use accounts for 50 percent.
  - Sensitivity: low SAF price → emissions 20 percent lower; high SAF price → emissions 50 percent higher relative to base case.
- Maritime decomposition (NZ pathway):
  - Emissions reduced 18 and 63 percent below baseline in 2030 and 2040, respectively.
  - By 2040, fuel emissions-intensity improvements account for 60 percent of reductions; energy efficiency for 35 percent.
  - Green electricity required for zero-emissions maritime fuels (assuming current electrolyzer efficiencies and all ammonia green):
    - 500 TWh in 2030;
    - 2,600 TWh in 2040;
    - 4,350 TWh in 2050.
  - Comparison: current global electricity use is 27,500 TWh.
  - Price sensitivity: for a given policy, emissions are 50 percent higher with high prices and about 30 percent lower with low prices.
- Policy certainty effects:
  - Lack of credible future carbon pricing reduces zero-emissions capable ship share (example: 20 percent vs 40 percent with certainty in 2040), worsens ship energy efficiency by 10 percent, and increases emissions (520 million tons vs 380 million tons with certainty in example).

---

### Revenue, price impacts, and distributional outcomes
- Revenue projections and dynamics:
  - By 2035, policies raise large revenues of $65 billion to $200 billion.
  - Net-zero-aligned carbon tax:
    - Raises revenue of $100 billion by 2031.
    - Peaks at $230 billion in 2040.
    - After peak, tax base erosion from switching to zero-emission fuels dominates.
  - CT + FB raises slightly above half the revenue of CT-only.
  - Moderate policies raise about half the revenue of NZ-aligned policies in short-term but generate most revenue by midcentury as emissions reductions lag.
  - Sectoral revenue shares: about half from each sector in 2030; aviation share grows over time.
  - Revenues resilient next decade to lower zero-emission fuel prices; can reach about $300 billion through midcentury if zero-emission fuel prices decline more slowly.
- Price impacts on end-user costs:
  - Aviation: cost of flying increases substantially; pass-through assumed 100 percent.
  - Shipped product prices: increase less than 6 percent; pass-through assumed 95 percent.
  - Carbon tax + feebate leads to about half the near-term price increase.
  - Future zero-emission fuel price uncertainty: minimal effect next decade; by midcentury end-user prices diverge to be about 40–50 higher (lower) for high (low) price assumptions.
- Distributional impacts (economic cost metric = policy-induced loss in surplus before revenue use):
  - Country group impacts under NZ-aligned carbon tax (illustrative magnitudes):
    - Small and developing states (SDS) and tourism-reliant countries most affected.
    - Cargo impacts vary from 0.5 to 1.7 percent of GDP in 2035 for affected countries.
    - Tourism impacts:
      - Small and developing states tourism reliance: 19 percent of GDP vs 7 percent average.
      - If tourism burdens split evenly between destinations and travelers: SDS face economic costs of 0.5 to 6 percent of GDP; top quartile of emerging markets face costs 2+ percent of GDP.
    - CT + FB yields about half the tourism impact of CT alone in 2035.
  - Aggregate distribution (global shares through 2035):
    - About 60 percent of negative economic impacts accrue to advanced economies in dollar terms.
    - 35 percent to emerging markets.
    - Less than 5 percent to low income and small developing states.
  - Within-country distribution: policy likely becomes more progressive as tourism share rises; higher income households do most air travel (example: top two deciles account for over 90 percent of air travel in India, China, Brazil, Indonesia).
- Revenue after compensation (definitions and illustrative results):
  - "Most vulnerable" = low income countries, small developing states, and tourism-reliant emerging markets (tourism-to-GDP >10 percent).
  - Under NZ-aligned carbon pricing:
    - Aggregate economic impacts on most vulnerable countries: $15 billion in 2030, $70 billion in 2040.
    - Annual revenue remaining after full compensation: over $100 billion from 2032 to 2045.
  - If emerging markets also compensated for cargo costs: remaining revenue falls to $50 billion in 2030 and $80 billion in 2035.
  - If emerging markets also compensated for tourism impacts: remaining revenue ≈ $35 billion in 2030 and 2035.
  - CT + FB yields substantially less remaining revenue; example: about $30 billion after compensation in 2035.
  - Toward midcentury, remaining revenues decline as sectors decarbonize; compensation can exceed revenue by early 2040s.
- Illustrative country transfer examples (illustrative allocation, 2035):
  - India: $25 billion;
  - Thailand: $18 billion;
  - Brazil: between $10 to $15 billion;
  - Indonesia: between $10 to $15 billion;
  - Vietnam: between $10 to $15 billion.
  - Transfers as share of current government revenue: reach 9 percent for Sub-Saharan Africa and Latin America & Caribbean in illustrative scenario.
  - Transfers would exceed current Official Development Assistance for 51 countries in illustrative scenario.

---

### Annex highlights: fuel, electricity, technical parameters, and country-level specifics
- Emissions intensity and lifecycle (pre-combustion) estimates:
  - Aviation average pre-combustion emissions:
    - biomass and waste-based biofuels: 21 to 30 kg per gigajoule (GJ).
    - CO2-based biofuels: 13 to 17 kg per GJ.
    - jet fuel: 6 to 16 kg per GJ (ICAO 2022).
  - Maritime zero-emission fuels:
    - produced using low-carbon electricity: 3 kg per GJ.
    - produced with carbon capture and storage: 18 kg per GJ (MMMCZCS 2024).
- Contrails and non-CO2 warming:
  - Contrails and NOx can substantially increase warming: estimates indicate contrails and NOx triple the short-term warming impact of jet fuel and, at minimum, increase warming effects by two-thirds (Lee and others 2021).
  - SAF expected to reduce contrails 50 to 70 percent (Voigt and others 2021), though evidence not conclusive.
- Biofuel and electricity demand projections (net zero scenario):
  - Aviation biofuel in 2023: 600 million liters or 0.02 exajoules (EJ).
  - Biomass and waste-based biofuel demand (aviation + maritime):
    - 1.1 EJ by 2030;
    - 2.6 EJ in 2035;
    - 5.2 EJ in 2040;
    - 7.6 EJ in 2050.
  - Existing biofuel production for road transport: 4.3 EJ (IEA 2024).
  - Electricity intensity assumptions:
    - Direct air capture and electrolysis require 2.0 and 1.7 units of electricity per unit of fuel, respectively, declining about 5 percent through 2050.
    - Assumed all hydrogen is green for calculations.
  - Projected electricity demand for hydrogen and CO2-based maritime fuels:
    - over 1,000 TWh by early 2030s;
    - about 3,000 TWh by 2040;
    - about 6,000 TWh by 2050.
  - Current global electricity production: about 25,000 TWh (note: other figures in text give 27,500 TWh as a comparison for maritime-only electricity).
- Annex Table 4.1 key parameters:
  - Ship purchase price: $80 million per ship.
  - LNG vessel purchase price: 20 percent higher than HFO vessel.
  - Lifetime: 25 years.
  - Discount rate: 6.7 percent.
  - Fuel economy (new ships): 12.5 percent better than average existing ship.
- Sensitivity analysis highlights:
  - Zero-emission fuel price uncertainty yields wide outcome ranges:
    - For given policies, midcentury emissions 50 to 80 percent higher with high zero-emission fuel prices vs 20 percent lower with low prices.
    - Revenue much higher if zero-emissions fuels are more costly; example: about $300 billion in 2040 with NZ carbon prices under high fuel prices.
- Annex 7 country-level table (selected exact entries for 2035, net zero CT and CT + FB scenarios):
  - Afghanistan, CT, 2035:
    - Cargo costs (% of GDP): 0.008%
    - Tourism costs (% of GDP): 0.118%
    - Cargo + tourism costs (% of GDP): 0.126%
    - Compensation (USD billion): 0.031
    - Compensation (% of GDP): 0.126%
    - Climate finance (USD billion): 0.043
    - Climate finance (% of GDP): 0.178%
    - Compensation + climate finance (% of current ODA): 1.901%
    - Compensation + climate finance (% of current revenue): 1.129%
    - Compensation + climate finance (% of GDP): 0.304%
  - Bangladesh, CT, 2035:
    - Cargo costs (% of GDP): 0.534%
    - Tourism costs (% of GDP): 0.042%
    - Cargo + tourism costs (% of GDP): 0.576%
    - Compensation (USD billion): 4.371
    - Compensation (% of GDP): 0.576%
    - Climate finance (USD billion): 1.353
    - Climate finance (% of GDP): 0.178%
    - Compensation + climate finance (% of current ODA): 110.240%
    - Compensation + climate finance (% of current revenue): 9.261%
    - Compensation + climate finance (% of GDP): 0.754%
  - India, CT, 2035:
    - Cargo costs (% of GDP): 0.231%
    - Tourism costs (% of GDP): 0.176%
    - Cargo + tourism costs (% of GDP): 0.406%
    - Compensation (USD billion): 14.128
    - Compensation (% of GDP): 0.231%
    - Climate finance (USD billion): 10.924
    - Climate finance (% of GDP): 0.178%
    - Compensation + climate finance (% of current ODA): 884.862%
    - Compensation + climate finance (% of current revenue): 2.051%
    - Compensation + climate finance (% of GDP): 0.409%
  - Brazil, CT, 2035:
    - Cargo costs (% of GDP): 0.175%
    - Tourism costs (% of GDP): 0.108%
    - Cargo + tourism costs (% of GDP): 0.283%
    - Compensation (USD billion): 4.754
    - Compensation (% of GDP): 0.175%
    - Climate finance (USD billion): 5.772
    - Climate finance (% of GDP): 0.212%
    - Compensation + climate finance (% of current ODA): 1824.228%
    - Compensation + climate finance (% of current revenue): 1.228%
    - Compensation + climate finance (% of GDP): 0.387%
  - Maldives, CT, 2035:
    - Cargo costs (% of GDP): 0.698%
    - Tourism costs (% of GDP): 6.810%
    - Cargo + tourism costs (% of GDP): 7.508%
    - Compensation (USD billion): 0.861
    - Compensation (% of GDP): 7.508%
    - Climate finance (USD billion): 0.020
    - Climate finance (% of GDP): 0.178%
    - Compensation + climate finance (% of current ODA): 740.319%
    - Compensation + climate finance (% of current revenue): 28.539%
    - Compensation + climate finance (% of GDP): 7.686%
  - Tuvalu, CT, 2035:
    - Cargo costs (% of GDP): 0.746%
    - Tourism costs (% of GDP): 4.431%
    - Cargo + tourism costs (% of GDP): 5.177%
    - Compensation (USD billion): 0.004
    - Compensation (% of GDP): 5.177%
    - Climate finance (USD billion): 0.000
    - Climate finance (% of GDP): 0.241%
    - Compensation + climate finance (% of current ODA): 7.001%
    - Compensation + climate finance (% of current revenue): 4.850%
    - Compensation + climate finance (% of GDP): 5.417%
  - Nigeria, CT, 2035:
    - Cargo costs (% of GDP): 0.501%
    - Tourism costs (% of GDP): 0.121%
    - Cargo + tourism costs (% of GDP): 0.622%
    - Compensation (USD billion): 3.076
    - Compensation (% of GDP): 0.622%
    - Climate finance (USD billion): 2.773
    - Climate finance (% of GDP): 0.560%
    - Compensation + climate finance (% of current ODA): 131.633%
    - Compensation + climate finance (% of current revenue): 15.097%
    - Compensation + climate finance (% of GDP): 1.182%

---

### Conclusion: policy recommendation, obstacles, and next steps
- Urgency and recommendation:
  - Urgent global action needed to kick-start decarbonization of aviation and shipping.
  - The time has come for a global tax on international aviation and shipping.
  - Carbon pricing instruments can accelerate decarbonization and raise substantial revenues.
  - Carbon tax preferred: simpler than ETS and provides greater price certainty to mobilize investment in zero-emission fuels.
  - Feebates provide price certainty and may face less political opposition but raise fewer revenues.
  - Revenues could be up to $200 billion by 2035 and support climate finance for developing economies.
- Obstacles to implementation:
  - Legal uncertainties (aviation), tax base mobility (shipping), limited ICAO/IMO administrative experience, political opposition on price trajectories and revenue use.
- Administrative advances that improve feasibility:
  - Digitalized payments, fuel-reporting requirements, satellite tracking, conditioning airport/port access on upfront payments, tax collection by national authorities or specialized ICAO/IMO-supervised funds.
- Coalition and forum strategy:
  - Build coalitions across ICAO, IMO, UNFCCC stocktakes, UN convention on international tax cooperation, and G20.
  - Compromises on revenue allocation and compensation systems will be necessary.
  - Only a coalition of the willing can drive decarbonization of international aviation and shipping.

*IMF staff climate note — clnea2024003*

### Introduction

### Introduction

### Rationale for global carbon pricing in international aviation and shipping
- Dual rationale:
  - Decarbonization: All energy-consuming sectors need to be decarbonized by midcentury to achieve the Paris Agreement’s temperature goals (limiting warming to 1.5°C to 2°C above preindustrial levels), including hard-to-abate sectors such as international aviation and maritime. Carbon pricing can provide the price signal to cost-effectively promote development and deployment of low-carbon technologies while incentivizing increases in efficiency.
  - Revenue: Pricing consistent with net zero goals could raise substantial revenues—for example, a carbon price rising to $170 per tonne in 2035 would raise about $200 billion a year. The revenues could be used to scale up international climate finance (currently about $100 billion a year) or other purposes.
- Additional considerations strengthening the case:
  - Emissions growth: Without mitigation actions, emissions from international transport fuels are set to expand rapidly with growth in the global economy, potentially reaching 15 to 40 percent of total global CO2 emissions if the sectors grow at business-as-usual while countries decarbonize at rates aligned with Paris Agreement goals.
  - Global oversight: ICAO and IMO have set decarbonization goals for the sectors and established necessary data collection procedures from plane and ship operators for applying pricing systems (enforcement could be delegated to national tax authorities or newly created global entities).
  - Tax base mobility: The tax base for international transport fuels is mobile, especially for maritime, providing a strong rationale for a globally coordinated price.
  - Fiscal anomalies: International aviation and maritime fuels are not subject to excise and are treated favorably from a broader fiscal perspective.

### Policy instruments and political considerations
- Carbon pricing instruments:
  - Carbon tax (levy): Simplest administrative approach for applying global carbon pricing and can provide long-term price certainty.
  - Emissions trading system (ETS): Reasonable alternative and potentially workable at an international level (recent inclusion of international aviation and maritime in the EU ETS cited), though requires more administrative and firm compliance capacity.
  - Feebates: Sliding scale of fees/rebates on operators with emissions rates above/below a pivot point; alternatives that can accelerate adoption of zero-emission fuels, be designed to raise some revenues, have smaller impacts on prices, and hence less need for compensating vulnerable states.
- Political hurdles:
  - Difficulty agreeing on a common price (carbon tax) or emissions level (ETS) among ICAO’s 193 and IMO’s 175 member states.
  - Divergent preferences for revenue use: some negotiators want revenues allocated to climate finance (after compensation for affected states such as small island, tourist-reliant countries), others prefer R&D funding or remittance to national treasuries.

### Scope of the note
- Content coverage:
  - Rationale, design issues, and impacts of carbon pricing for international transportation fuels.
  - Broader range of policy options and more sophisticated modeling using recent assessments of zero-emission fuel technologies.
  - Quantification of pricing system impacts on emissions, revenue, production costs, economic costs, zero-emission fuel use, and distributional impacts, globally and across countries.
  - Concluding remarks on moving policy forward.

*IMF staff climate note — Introduction (clnea2024003)*

### Background: emissions, trajectories, and institutional context
- 2023 emissions:
  - International aviation CO2 emissions: 610 million tonnes (Mt).
  - International maritime CO2 emissions: 850 million tonnes (Mt).
  - Shares: about 1.5 and 2 percent of global fossil fuel CO2 emissions, respectively.
- Comparative scale: Combined, these sectors contributed more CO2 emissions than all but four countries (Figure 1, panel 1).
- Projected trajectories (if international transport grows at business-as-usual while countries decarbonize):
  - Under a 2°C scenario: international transport will account for over 15 percent of global CO2 emissions by 2030 and 25 percent by 2050.
  - Under a 1.5°C scenario: international transport could account for up to 40 percent of global CO2 emissions by 2030, rising rapidly thereafter (as countries’ net emissions theoretically go negative).
- Scope: Discussion focuses on CO2 emissions from fuel combustion (contrails and other non-CO2, climate-affecting emissions discussed in Annex 1).
- Institutional roles:
  - ICAO and IMO are specialist UN agencies responsible for setting targets and strategies to decarbonize the sectors.
  - Emissions from the sectors are generated largely in international airspace and waters which are beyond the purview of the UNFCCC and hence not covered by the Paris Agreement.
  - ICAO and IMO have pledged to achieve “net zero” emissions by midcentury or thereabouts; IMO has set intermediate targets for emissions and zero-emission fuels and implemented intermediate policies.

### Current mitigation policies and targets (high-level)
- Aviation:
  - Emissions: Aspirational goal of net zero CO2 emissions by 2050.
  - Intermediate emissions target: None (per table).
  - Zero CO2 emissions fuels: None (per table).
  - Implemented policy: Operators required to buy international offsets for emissions exceeding 85% of 2019 levels out to 2035 (CORSIA).
  - Emissions pricing schemes: Under consideration.
- Maritime:
  - Emissions: Zero CO2 emissions “close” to 2050.
  - Intermediate emissions targets: Reduce CO2 20–30% by 2030 and 70–80% by 2040, relative to 2008.
  - Zero-emission fuels target: 5–10% of energy used by 2030.
  - Implemented policies: New ship fuel efficiency and existing ship carbon intensity standards; emission pricing schemes under consideration.
- Note: For aviation, international offsets can count toward reducing net emissions but not for maritime.

### Sectoral differences relevant to pricing and policy design
- Fuel intensity in prices:
  - Fuel input costs contribute about 20 percent to airline passenger ticket prices.
  - Fuel input costs contribute only 3 to 5 percent to the price of landed imports from ships and planes; shipping costs account for about 10 percent of landed import prices and fuel costs are about 50 percent of shipping costs (depending on international oil prices).
  - Implication: Higher fuel prices from carbon pricing can significantly affect international air travel prices and demand, but have smaller direct effects on shipped product prices.
- Product type and demand composition:
  - International air travel is largely a consumer good: leisure travel accounts for about 70 percent of trips; business travel makes up 10 to 15 percent of tickets.
  - Maritime is mostly an intermediate input: cargo accounts for 95 percent of maritime emissions; within shipping, emissions intensity and baseline growth rates differ across container, dry bulk, and tankers.
- Tax base mobility:
  - Maritime: Extreme mobility—high-volume ships can undertake long voyages on a single bunkering of fuel, enabling refueling at ports with lower fuel prices without significant operational cost increases; this limits scope for differentiated pricing across countries.
  - Aviation: Mobility moderated by costs of diverting planes for refueling and carrying extra fuel; some scope for differential pricing across countries (e.g., phased pricing for advanced economies).
- Developing economies’ role and exposure:
  - Developing (mostly emerging market) economies account for 45 and 35 percent of global aviation and maritime supply of final fuel use, respectively.
  - Small developing states (see Annex 7 for classifications), most vulnerable to international fuel charges, account for only about 0.15 and 0.35 percent of international aviation and maritime bunker fuels, respectively.
  - Some smaller economies with hub ports (Belgium, The Netherlands, Singapore, and the United Arab Emirates) supply large amounts of maritime fuel (less applicable to aviation, aside from the United Arab Emirates).

### 2. Maritime

### 2. Maritime

### Undertaxation and fiscal distortions
- International aviation and maritime fuels are largely undertaxed from environmental and fiscal perspectives.
- Fuel/carbon taxation:
  - International transportation fuels are not subject to excises or (except by the EU) carbon pricing.
  - Aviation: the 1944 Chicago Convention and subsequent ICAO resolutions prohibit taxation of fuel already on board an aircraft by the state where the aircraft lands; many bilateral air service agreements provide similar exemptions.
  - Maritime: longstanding practice of exemption reflects the extreme mobility of the tax base.
- Consumption taxation:
  - International airline operators charge no tax on sales but receive a full refund, zero-rating, or VAT exemptions on their inputs.
  - Applying value-added tax to digital transactions is becoming more feasible but would require agreement on allocation of receipts among flight origin, transit, and destination countries.
- Business taxation:
  - International maritime is excluded from global minimum and domestic corporate taxes and is instead subject to a tonnage tax regime amounting to only about 10 percent of the normal corporate income taxes charged on profits in other industries.

### Mitigation opportunities (short-term and long-term)
- Shorter term:
  - Improvements in engine efficiency and use of lighter construction materials in new builds.
  - Better maintenance and operational efficiency (for example, slower steaming for ships).
  - Reducing travel demand for aviation.
- Longer term:
  - Zero-emission fuels (SAFs for planes) are ultimately needed for both sectors.
  - For ships: hydrogen-based fuels (hydrogen, ammonia, methanol) ideally from “green” hydrogen or “blue” hydrogen with CCS; challenges include lower energy content per unit weight (only half to a third of fossil fuels), safety of onboard storage and propulsion, and infrastructure needs.
  - Hydrogen-based fuels are further from market for aviation due to aviation’s greater sensitivity to fuel costs and significant aircraft design changes required.
  - With current engines, biofuels blends can reach up to 50 and 20 percent for aviation and maritime, respectively.
  - The maximum biofuel share is expected to grow to 100 percent for new planes, as all major aircraft manufacturers have committed to producing such aircraft by 2030.
  - Electrification has some potential for shorter trips but limited potential for long trips due to battery range and weight constraints.
- Biofuels caveats:
  - Biofuel production would require substantial diversion of land away from forestry or agriculture; ideally biofuel use would be certified as coming from emissions-neutral farming practices, waste products, and captured CO2 and gases with capture technology powered by zero-emissions electricity.
  - ICAO assumes the most common production methods (from biomass and waste) result in about one-third of the lifecycle emissions of jet fuel.

### Data collection and current monitoring frameworks
- ICAO:
  - Since 2019, qualifying airlines in ICAO member countries are required to monitor and annually report their emissions (as verified by accredited third parties) to their national government.
- IMO:
  - In 2019 the IMO introduced a data collection system for fuel consumption, tons of cargo capacity, and miles travelled from individual shipping voyages for ships of at least 5,000 gross tonnage—these ships account for about half of the operational fleet of 50,000 vessels, but almost 90 percent of its CO2 emissions.
- Capacity and trip distance are recorded for large planes/ships by satellite.

### CORSIA: scope, mechanics, and limitations
- CORSIA features:
  - Currently voluntary; will become mandatory for about 90 percent of international flights in 2027.
  - Under the scheme, flight operators are required to purchase international offsets for any company-level emissions above 85 percent of 2019 levels (flights to and from small island and vulnerable states are exempt).
  - Offset projects include mainly renewable energy deployment, clean cooking technologies, methane capture, and forestry projects.
- Key limitations:
  - Net emissions targets: not aligned with long-term global net zero; example given — under a pathway reducing emissions by the same absolute amount each year beginning in 2019 and reaching zero in 2050, aviation emissions in 2035 would be capped at about 50 percent (rather than 85 percent) of 2019 emissions, or 350 billion tons.
  - Offsets and additionality: if carbon credits are not additional (projects would have gone ahead anyway or are double-counted toward seller’s pledges), allowing their use increases global emissions compared to abatement-only options.
  - Uncertainty over future offset prices could deter investment in zero-emission fuels with high upfront costs and long-range emissions reductions.
  - Revenue: CORSIA does not generate revenue since offsets are purchased directly by airlines from third-party sellers and there is no tax on these transfers.

### IMO regulatory approach and limitations
- IMO measures:
  - Energy Efficiency Design Index (tightens standards for new ships every five years).
  - Energy Efficiency Existing Ship Index (one-time minimum energy efficiency for existing ships).
  - Carbon Intensity Indicator (requires emissions intensity improvements for low-performing ships).
- Limitations:
  - Standards lack incentives to reduce energy or CO2 intensity beyond the standard and do not incentivize increased load factors.
  - They are not cost-effective compared with carbon pricing because they lack an automatic mechanism for equating incremental CO2 reduction costs across ship classes and manufacturers.
  - Various emissions-pricing proposals have been debated at IMO meetings but no firm implementation plans exist presently.

### Mitigation instrument choices and comparative attributes
- Instruments discussed: carbon taxes, ETSs, feebates, tradable performance standards (TPSs), offsets, and energy efficiency standards.
- Carbon tax (global on fuels used in international aviation and maritime):
  - Applies charges to carbon content of fuel use (jet or bunker fuel times emissions factors).
  - Fixed tax rate; quantity of emissions determined by market responses.
  - Price increases are mostly passed through into flight ticket prices and shipped product prices, incentivizing demand reductions and other behavioral responses.
  - To be effective, tax should be sufficiently high and follow a credible future trajectory to spur zero-emission fuels and efficiency investments.
  - Carbon taxes could mobilize large and sustainable revenues; potential revenues from international transportation could be up to $200 billion a year.
- Revenue uses for a carbon tax could include:
  - International climate finance: the target amount of climate finance ($100 billion a year) was met in 2023, with about 35, 45, and 20 percent from bilateral, multilateral, and privately leveraged sources respectively.
  - R&D and infrastructure investment: grants, prizes, concessional loans, and catalyzing private investment—particularly in developing economies facing higher international interest rates.
  - Domestic revenue needs: countries could retain revenues collected from charges on fuel disbursements for domestic needs.
- Political and negotiation challenges over revenue use are likely; developing economies may oppose using revenues for climate finance and countries with large aviation/maritime industries may push for keeping revenue within the sectors.
- Revenue-raising impacts and compensation needs:
  - Unit production costs under explicit carbon pricing increase for two reasons: (1) abatement costs (integral under marginal abatement cost curve) and (2) charges on unabated emissions (product of emissions price and remaining emissions per unit of output); the latter is much larger initially.
  - Higher production costs are borne by countries as higher flight and shipped import prices; compensation systems may be needed to offset burdens on vulnerable countries (Annex 3 referenced).

### Administrative feasibility, enforcement, and design choices for a global carbon tax
- Key administrative elements:
  - Basic design choices (tax trajectories and revenue allocation) could be agreed at international fora such as ICAO, IMO, UNFCCC, and G20.
  - Data collection and transfer: fuel use and emissions data collected by ICAO and IMO could be digitally transferred to tax collection entities.
  - Tax collection options:
    - Collected directly from plane or ship operators by national tax administrations, analogous to enforcement of the EU ETS, CORSIA, and air ticket solidarity levy.
    - Alternatively, new funds or tax collection consultants could be established and overseen by ICAO and IMO, following the model of the International Oil Pollution Compensation Funds (IOPC), but the collection agency would require audit capacity, powers to fine, and dispute procedures.
  - Manageability: large planes and ships are continuously tracked by satellite; operators could remit the carbon tax digitally on an individual-route or annual basis; initial global number of tax collection points (for example, 25,000 ships) is described as modest.
- Enforcement:
  - If all major airport or port states were party to the scheme, enforcement could be achieved through denial of airport or port access to any operator unable to provide invoices verifying upfront payment of the tax.
- Legal and political challenges:
  - Aviation: bilateral agreements providing reciprocal fuel tax exemptions may need amendment and the Chicago Convention may need amendment (requiring approval by two-thirds of ICAO members).
  - Revenue disbursement: remittance of revenues for climate finance to entities like the Green Climate Fund would require recipient capacity to absorb funds.
  - Compensation schemes: agreement on workable compensation options complicates negotiations.
  - Political resistance from member states concerned about higher transport costs, tax rate trajectories, and revenue use is a major obstacle.

### Precedents and administrative models (selected examples)
- International Oil Pollution Compensation (IOPC) funds:
  - Collects funds from oil-receiving entities in ports and disburses them as compensation for oil spill damages; administered as a specialized fund under IMO supervision.
- Aviation in the EU ETS:
  - Airlines operating flights within the EEA, Switzerland, and UK are required to monitor, verify, report emissions and surrender ETS allowances; free allowance allocations for airlines will phase out by 2027.
- Maritime in the EU ETS:
  - Ship operators must monitor, verify, report and acquire allowances for 50 percent of emissions from voyages starting or ending outside the EU and 100 percent for trips within EU ports. Free allowances (initially 60 percent of 2024 emissions) will phase out by 2027.
- Air ticket solidarity levy (ASL):
  - Imposes charges of $1/$10/$40 for economy/business/first-class tickets respectively to outbound international flights—proceeds finance health improvements in low-income countries. Participants include Cameroon, Chile, Congo, France, Madagascar, Mali, Mauritius, Niger, Norway, and Korea. Airlines collect tax on ticket purchases and remit to the implementing government, who allocates to international initiatives.
- CORSIA:
  - Requires airlines to offset emissions growth above 2019 levels, with mandatory participation from 2027; administered and overseen by ICAO (monitoring, reporting, verification, compliance).
- Global minimum corporate income tax:
  - Ensures multinationals pay at least 15% tax; administered by individual countries within their jurisdictions.

*Source: IEA (2024); IMF Staff Climate Notes material as provided in the source content.*

### 1. Price floors: These limit the quantity of allowances when prices fall to a minimum level and could be

### clnea2024003 - 1. Price floors: These limit the quantity of allowances when prices fall to a minimum level and could be

### Price floors, price ceilings, and ETS design
- Price floors:
  - Limit the quantity of allowances when prices fall to a minimum level.
  - Can be implemented through minimum bid prices in allowance auctions.
  - Ideally ramp up predictably over time.
  - Can improve compatibility of ETSs with overlapping instruments.
- Price ceilings:
  - Put extra allowances into the system when prices reach a maximum level.
- Revenue and cost effects:
  - ETSs could raise similar revenues as equivalently scaled carbon taxes and cause similar increases in production costs for aviation and maritime.
  - Allowances can be auctioned to raise revenue (examples given: California, EU, Korea, New Zealand).
  - Sectors subject to intense international competition are usually granted (at least temporarily) some free allowance allocations.
  - Free allowances act like lump-sum transfers to operators and create windfall profits at the margin because generating emissions forgoes revenue operators could have earned from selling free allowances.
  - For global (rather than country or regional) systems, the case for free allowances for firms is less compelling because higher production costs are generally passed forward in higher prices for all plane and ship operators rather than passed back in lower profits.
  - Even with free allowance allocations, unit production cost increases for plane and ship operators would be essentially the same.
  - Free allowances might be granted to certain countries to encourage their participation in a global ETS; similar incentives could be provided under a carbon tax by remitting revenues to them.
- Administrative complexity:
  - A global ETS would be more complex administratively than a carbon tax.
  - EU ETS provides precedent for an internationally administered ETS.
  - Extra administration includes establishing and monitoring trading markets and private costs to operators of ships and planes participating in trading markets.
  - For maritime, establishing capacity to buy, sell, and hedge emission allowances could significantly increase overheads for small companies using only a few ships.
  - There could be risks of allowance market manipulation given concentration in the maritime sector—eight companies account for about 60 percent of shipping capacity (UNCTAD 2023).
- Interim interactions:
  - As international aviation and maritime become covered by a global pricing system they should become exempt from the EU ETS in principle.
  - Coverage by both systems may be appropriate for an interim period if prices in the EU system (currently about $70 per ton) substantially exceed those in the global system.
  - Rebating in the regional system for allowance purchases in the global system could avoid double charging.

### Feebates and Tradable Performance Standards (TPSs)
- Feebates (fee and rebate systems):
  - Implicit carbon-pricing option.
  - Charges on operators equal to the product of:
    1. a CO2 price;
    2. the difference between their CO2 emission rate per unit of output (passenger- or ton-mile) and an exogenous “pivot point” emission rate (at which there is no tax or rebate);
    3. their output (for aviation and maritime, output could be passenger or plane miles and ton-miles of freight, respectively).
  - Whether operators pay taxes or receive subsidies depends on whether their emission rates are above or below the relevant pivot point.
  - For maritime, emission rates differ significantly by segment (bulk, tanker, container shipping: 7, 9.5, and 12.5 grams of CO2 per ton-mile, respectively); separate pivot points for different segments may improve acceptability.
  - The feebate price can be aligned with emissions goals; the pivot point can be aligned with revenue objectives:
    - If pivot point = industry average emission rate → no revenues raised.
    - If pivot point = zero → feebate is equivalent to a tax.
  - Administration at ICAO and IMO would be similar to carbon taxes but the assessment formula is more complex because it depends on output and CO2 emissions for each plane or shipping trip.
  - Feebates promote reductions in emission rates but may have limited demand effects:
    - A revenue-neutral feebate would not impose a new charge on remaining emissions for the average operator, so average production cost increases—and hence price impacts for flights and landed imports—would be much smaller than under explicit carbon pricing at lower levels of decarbonization.
    - Limited demand response is a significant drawback for cost-effective mitigation in aviation.
    - Feebates might be designed to have more impact on ticket prices through setting a lower pivot point or complemented by ticket taxes or scaling up the air ticket solidarity levy.
- Tradable Performance Standards (TPSs):
  - Similar to feebates but fix quantities rather than prices.
  - Administering authority specifies a progressively tightening emission rate standard.
  - Operators exceeding the standard must purchase credits for excess emissions; operators below the standard can sell credits.
  - Standards may differ by ship category.
  - TPS promotes the same behavioral responses as a feebate and has equivalent impacts on production costs.
  - TPS could be administered by ICAO or IMO with similar capacity requirements (plus need to monitor credit trading).
  - TPS is not designed to raise revenue.
  - The need for price stability measures may be less pressing for TPSs than ETSs because shifts in demand do not affect credit prices in a TPS.
  - Price floors and ceilings in a TPS could still take the form of giving firms subsidies (in lieu of selling credits) or paying out-of-compliance fees (in lieu of purchasing credits).

### Transitioning aviation policy instruments
- Transition from offsetting to explicit or implicit carbon pricing is administratively straightforward for aviation.
- Transitioning to a TPS or feebate requires:
  1. Expressing the current benchmark as an emission rate (dividing allowed industry emissions by total passenger/plane miles).
  2. Operators with emission rates above the standard purchase credits from operators below the standard (TPS) or pay fees (feebate).
- The standard could be tightened over time.
- Under an ETS or carbon tax, the ICAO would monitor operators’ absolute emissions, specify limits on industry emissions or tax rates, and phase out the use of offsets.

### Quantitative analysis — methodology and assumptions
- Modeling approach:
  - Dynamic, partial equilibrium models of international aviation and maritime sectors.
  - Models capture changes in global demand from growing income and changing end user prices, improvements in energy- and emissions-intensity from mitigation policies and exogenous technical improvements, and projected costs of zero-emission fuels.
  - Lifetimes: planes 30 years, ships 25 years.
  - Only combustion emissions are modeled.
  - Maritime disaggregation: bulk/tanker and container shipping.
  - Aviation disaggregation: passenger and cargo.
  - Baseline emissions projections and behavioral responses align with other industry models and empirical studies.
  - See Annex 4 for details and sensitivity analysis.
- Zero-emission fuels assumptions:
  - Aviation:
    - SAF blending shares modeled based on price gap between biomass- and CO2-based fuels.
    - Planes purchased prior to 2030 limited to maximum 50 percent blending.
    - Hydrogen and electrification excluded from explicit calculations given limited expected deployment through 2050 (ICAO 2022).
    - Most SAF sourced from biomass and waste, facing an upward sloping (but gradually flattening) supply curve; currently cost about $40 per gigajoule (GJ).
    - A carbon price of $285 per ton is needed to achieve 50 percent SAF use in 2040.
    - About $400 per ton achieves price parity with jet fuel in 2050.
  - Maritime:
    - Share of ships capable of using both fossil and zero-emission fuels increases with mitigation policies and declining zero-emission fuel prices.
    - Ships can reduce emissions intensity through biofuel blending up to 20 percent and, for dual-firing LNG and zero-emission ships, using a share (or all) LNG or zero-emission fuel.
    - Price of zero-emission fuel expected to decline from around $70 per GJ in 2022 to $25 per GJ in 2050 (average of projected green ammonia and methanol prices).
    - Price parity under a carbon price of $400 and $200 per ton in 2030 and 2050, respectively.
  - Results provided for low and high price assumptions owing to uncertainty.
- Baseline emissions projections (no new or tightening measures):
  - CO2 emissions from international aviation and maritime projected to increase by 85 and 20 percent between 2023 and 2040, respectively.
  - Large increase in aviation emissions (in absence of CORSIA) driven by demand growth of about 4 percent per year due to annual GDP growth of slightly over 3 percent and high responsiveness of demand to income; income responsiveness is much lower for maritime products.
  - Energy efficiency improves in both sectors from gradual replacement of less efficient older planes and ships; emissions intensity of fuel declines as share of LNG grows in maritime.
  - Zero-emissions fuel shares remain at about 5 percent through 2050 in baseline given costs are 2.5–3 times those for oil-based fuels.
  - If zero-emission fuel prices fall faster than expected, baseline emissions are about 15 percent lower; slower price declines do not materially affect emissions because of limited zero-emission fuel in base case.
  - The model used projects 2050 emissions of 250 and 29 percent above 2022 levels for international aviation and maritime, respectively.

### Policy scenarios modeled
- Two policy families modeled for aviation and maritime:
  1. Carbon tax (CT) by itself.
  2. Carbon tax combined with a revenue-neutral feebate (CT + FB); policy stringency split evenly across instruments (equivalent to a feebate alone with appropriately scaled pivot point).
- Feebate design in scenarios:
  - Sliding scale of subsidies (taxes) for planes/ships with emission-intensities below (above) previous year’s average, promoting energy efficiency and lower carbon fuel intensity.
- Two policy stringencies:
  1. Net zero pathway:
     - Carbon price increases linearly from $20 per tonne in 2028 to $170 in 2035 to $500 per tonne by 2050.
     - Puts aviation and maritime emissions reductions in line with IEA’s least cost pathway to achieve net zero (IEA 2023).
  2. Moderate pathway:
     - Carbon prices rise from $10 per tonne in 2028 to $250 per tonne by 2050.

### Results — emissions
- Emissions trajectories:
  - Aviation and maritime emissions peak around 2030 and decline steadily thereafter under the net zero pathways.
  - Emissions fall only gradually under moderate policies.
  - Both the carbon tax and the carbon tax/feebate policies achieve similar emissions reductions.
  - Under the least cost pathway to net zero, aviation and maritime emissions remain significant in 2050 given relatively high abatement costs.
  - Near-term price responsiveness of aviation and maritime emissions is less than for CO2 emissions from domestic fossil fuel use.
- Modeling note:
  - Figures and further decompositions referenced (Figure 5, Figure 6, Annex Figures) provide graphical and sensitivity detail (see source).

*IMF | Staff Climate Notes*

### 2. Decomposition

### 2. Decomposition

### Aviation: emissions and drivers
- Under the net zero pathway (NZ), emissions are reduced 13 and 63 percent below baseline levels in 2030 and 2040, respectively.
- 50 percent SAF blending is achieved around 2040, after which the emissions decline slows due to limited SAF blending capabilities for older planes.
- Deeper decarbonization by midcentury occurs as:
  - policy stringency increases;
  - SAF supply constraints lessen allowing SAF to achieve cost-parity with jet fuel;
  - a greater share of planes become 100 percent SAF capable.
- Relative contributions in 2040:
  - Demand reductions are the dominant factor (energy efficiency improvements play a minor role compared with demand reductions and increased biofuel use).
  - Energy efficiency accounts for 20 percent in 2040.
  - Increased biofuel use accounts for 50 percent in 2040.
- Under the moderate carbon tax (MOD), emissions fall slowly, with stronger policy needed to promote SAF demand closer to the mid-2030s.
- Sensitivity to SAF prices:
  - Low SAF price assumptions result in 20 percent lower emissions relative to the base case scenario.
  - High SAF price assumptions result in 50 percent higher emissions relative to the base case scenario.

### Maritime: emissions, technology, and electricity needs
- Under the net zero pathway, emissions are reduced 18 percent and 63 percent below baseline levels in 2030 and 2040, respectively.
- By 2040, fuel emissions-intensity improvements account for 60 percent of emissions reductions; energy efficiency accounts for 35 percent.
- Emissions trend toward zero by midcentury driven by:
  - continuing reductions in green ammonia and methanol production costs;
  - strengthening policies achieving cost-parity between fossil and zero-emissions fuels;
  - steady penetration of zero-emissions fuel capable ships with retirement of heavy fuel oil only ships.
- Moderately stringent policies do not achieve cost-parity nor immediate shift to zero-emissions fuel ship purchases, resulting in emissions about 120 percent higher than the net zero policies by midcentury.
- Price sensitivity for green hydrogen and methanol:
  - For a given policy, emissions are 50 percent higher with high prices.
  - For a given policy, emissions are about 30 percent lower with low prices.
- Estimated green electricity required for zero-emissions maritime fuels under current electrolyzer efficiencies and assuming all ammonia is green:
  - 500 TWh in 2030;
  - 2,600 TWh in 2040;
  - 4,350 TWh in 2050.
- Comparison note: current global electricity use is 27,500 TWh.

### Policy certainty and asset investment
- Large and predictable price signals are needed because planes and ships are long-lasting assets; purchasers consider expected policy impacts over asset lifetimes.
- Model assumption: energy efficiency and zero-emissions capabilities of new ships/planes incorporate future increases in policy stringency (a purchase in 2030 would consider carbon price path from 2030 to retirement).
- Effects of lacking credible future carbon pricing (example comparison under net zero carbon price scenario in 2040):
  - Share of zero-emissions capable ships drops to 20 percent (compared with 40 percent with policy certainty).
  - Energy efficiency of ships is 10 percent worse.
  - Emissions are 520 million tons (compared to 380 million tons with policy certainty).
- Policy uncertainty also likely slows investment in zero-emission fuels, causing slower declines in production costs and more costly abatement (consistent with high price scenarios in Figure 6).
- Volatility of ETS and offset prices could have similar impacts but are not explicitly modeled.

### Revenue projections and dynamics
- By 2035, policies raise large amounts of revenue at $65 billion to $200 billion.
- Net-zero-aligned carbon tax (CT):
  - Raises revenue of $100 billion by 2031.
  - Peaks at $230 billion in 2040.
  - After peak, revenue losses from tax base erosion (mainly switching to zero-emission fuels) dominate revenue gains from higher tax rates.
- Carbon tax/feebate (CT + FB) combination raises slightly above half the revenue of carbon-tax-only policy.
- Moderate policy stringencies raise about half the revenue of net-zero-aligned policies in the short-term but generate the most revenue by midcentury as emissions reductions lag those of more stringent policies (especially in aviation, since SAF prices still exceed jet fuel by about 40 percent in 2050).
- Sectoral revenue shares:
  - About half of revenue comes from each sector in 2030.
  - Share from aviation grows as aviation emissions exceed those of maritime.
- Revenue resilience and sensitivity:
  - Revenue over the next decade is somewhat resilient to lower zero-emission fuel prices since emissions reductions from zero-emission fuel use primarily occur closer to 2040.
  - Revenue continues to increase through midcentury to about $300 billion if zero-emission fuel prices decline more slowly than expected.

### Price impacts on end-user costs
- Price increase drivers: higher fuel costs and switching to costlier lower-emission fuels; share of fuel costs in end user prices; energy efficiency improvements; investments in zero-emission fuel bunkering, storage, and plane/ship infrastructure; pass-through of costs to end users.
- Aviation vs maritime:
  - Cost of flying increases substantially.
  - Shipped product prices increase less than 6 percent.
  - Aviation’s larger price increases are caused primarily by:
    - the higher share of fuel in end user costs (about five times higher than for maritime);
    - a bigger policy-induced fuel cost increase since switching to less-emission-intensive fuel is more costly;
    - somewhat limited energy efficiency improvements.
- Pass-through assumptions:
  - 95 percent pass-through for maritime.
  - 100 percent pass-through for aviation (based on empirical studies).
- Net-zero-aligned policies lead to maritime price increases peaking slightly after 2040 under base case assumptions when zero-emissions fuels become cheaper than fossil alternatives and zero-emissions ship share grows.
- Carbon tax-feebate combination leads to about half of the price increase in the near-term, with prices converging as abatement costs grow.
- Impact of future zero-emissions fuel price uncertainty on end-user prices:
  - Minimal effect through the next decade due to limited zero-emissions fuel use.
  - By midcentury, end-user prices diverge to be about 40–50 higher for high price assumptions and about 40–50 lower for low price assumptions (reported as "about 40–50 higher (lower)").

### Distributional impacts across countries and sectors
- Economic cost metric: policy-induced loss in surplus (before any revenue use) from:
  1) reductions in consumption and production of shipped products and tourism;
  2) higher consumer costs paid and lower producer prices received for remaining consumption/production of shipped products and tourism.
- Results are illustrative and sensitive to data and methodological uncertainties; Annex 5 contains methodological details and sensitivity analysis.
- Country group impacts (illustrative magnitudes under net-zero-aligned carbon tax):
  - Small and developing states (SDS) and tourism-reliant countries are most affected.
  - Shipped products (cargo):
    - Small and developing states face higher impact because of higher transport costs and greater reliance on air and sea transport (10 and 40 percent above average, respectively).
    - Impacts vary from 0.5 to 1.7 percent of GDP in 2035 under the net-zero-aligned carbon tax.
    - Low-income countries and emerging markets affected moderately (above-average transport costs offset by less reliance on traded goods).
    - Advanced economies are least affected because transportation costs are 40 percent below average.
    - Feebate + carbon tax combination yields slightly above half of the impact of carbon tax alone in 2035; burdens converge over time.
  - Tourism:
    - Largest impacts relate to tourism due to relatively large reduction in flying for leisure (price elasticities for leisure flying estimated to be two to three times higher than for business).
    - Tourism share examples:
      - 21 countries have tourism-to-GDP shares greater than 20 percent.
      - Small and developing states have tourism reliance of 19 percent of GDP compared with 7 percent on average.
      - Low-income and advanced countries have tourism-to-GDP of 3 percent on average.
    - If tourism burdens are split evenly between tourist destinations and travelers:
      - Small and developing states face economic costs of 0.5 to 6 percent of GDP.
      - Top quartile of emerging markets faces substantial costs (2+ percent of GDP).
    - Feebate + carbon tax combination yields about half the tourism impact of carbon tax alone in 2035.

### Aggregate and distributional shares (global and by country group)
- Most of the negative economic impacts accrue to advanced economies when measured in US dollars:
  - About 60 percent of the economic impacts accrue to advanced economies through 2035.
  - 35 percent accrue to emerging markets through 2035.
  - Less than 5 percent accrue to low income and small developing states through 2035.
- Over time, burden shifts slightly to emerging markets due to relatively fast economic growth, but advanced economies still account for more than half through midcentury.
- Tourism and business air travel share of global impact:
  - Rises from 45 percent to 60 percent of the impact from 2030 to 2050.
- Within-country distribution: policy likely becomes more progressive within countries as tourism share rises since higher income households disproportionately spend on tourism (example: top two deciles account for over 90 percent of air travel in India, China, Brazil, and Indonesia according to cited evidence).

### Revenue after compensation and illustrative transfers
- Definition: "Most vulnerable" = low income countries, small developing states, and tourism-reliant emerging markets (tourism reliance measured as tourism-to-GDP shares of greater than 10 percent).
- Under net-zero-aligned carbon-pricing scenario (aggregate impacts on most vulnerable countries and resulting remaining revenue):
  - Aggregate economic impacts on the most vulnerable countries are $15 billion in 2030.
  - Increase to $70 billion in 2040.
  - Annual revenue remaining after full compensation is over $100 billion from 2032 to 2045.
- When emerging markets are also compensated for cargo costs:
  - Remaining revenue falls to $50 billion in 2030 and $80 billion in 2035.
- When adding compensation for emerging markets’ tourism impacts as well:
  - Remaining revenue further declines to about $35 billion in 2030 and 2035.
- Feebate/carbon price scenario:
  - Leaves substantially less revenue remaining; example: about $30 billion in revenue after compensation in 2035 (less than half that available from carbon pricing only since feebate does not generate revenues).
- Toward midcentury:
  - Revenues remaining decline as sectors decarbonize and economic costs from higher transport costs rise (primarily due to more expensive zero-emission fuels).
  - Compensation exceeds revenue under most policies by the early 2040s.
- The moderate carbon tax:
  - Results in less remaining revenue after compensating the most vulnerable and cargo costs in emerging markets over the next decade, plateauing at around $50 billion in 2035.

### Potential scale of international transfers and illustrative allocation
- Under an illustrative allocation where:
  - Most vulnerable countries are compensated for all costs;
  - Other emerging markets are compensated for cargo costs;
  - Remaining revenue allocated based on regional climate finance flows apportioned by GDP within region;
- Largest dollar transfers (examples given in illustrative scenario for 2035):
  - India: $25 billion;
  - Thailand: $18 billion;
  - Brazil: between $10 to $15 billion;
  - Indonesia: between $10 to $15 billion;
  - Vietnam: between $10 to $15 billion.
- When expressed as share of current government revenue:
  - Transfers reach 9 percent for Sub-Saharan Africa and Latin America & Caribbean countries (reflecting lower current revenue-to-GDP ratios and a larger share of countries receiving compensation).
- Transfers would exceed current Official Development Assistance for 51 countries in the illustrative scenario.

### Additional considerations and unmodeled impacts
- Not captured explicitly in quantified estimates:
  - Loss for oil exporters from reduced oil demand and prices.
  - Benefits to (future) zero-emission fuel producers.
  - Benefits of smaller global temperature increases and less local air pollution, noise, and distortions caused by under-taxation of aviation and maritime.
  - Producer surplus losses to aircraft and maritime providers.
  - Differential impacts across airlines and shipping companies based on emissions-rates, cost of capital, and other firm-level factors.
- International aviation and maritime current oil use and scenario:
  - International aviation and maritime make up about 4 and 5 million barrels of oil per day (mbpd), respectively, compared with total oil consumption of 102 mbpd in 2023.
  - Under business as usual, oil demand grows to 6 mbpd each in 2040.
  - Under net zero aligned scenario, consumption falls to about 2.5 mbpd each.
- Public R&D and investment notes:
  - ICAO (2022) estimates public R&D support for aviation decarbonization needs are roughly $100 billion through 2050 (or $4 billion a year on average).
  - Total investment needs examples: $1.4 to $2 trillion for maritime (Krantz and others 2020) versus $5 trillion for aviation (WEF 2023).
  - Domestic policies (for example, SAF tax credits under the US Inflation Reduction Act) provide R&D support and reduce need for international support.

*Source: IMF staff calculations as presented in "2. Decomposition" (clnea2024003).*

### Conclusion

### Conclusion

### Urgency and policy recommendation
- There is an urgent need for global action to kick-start the sectors’ decarbonization.
- The time has come for a global tax in international aviation and shipping.
- Carbon pricing instruments examined in this note can accelerate decarbonization (via technological development of for example zero-emission fuels and efficiency improvements) while raising substantial revenues.
- A carbon tax is the most desirable instrument overall—it is simpler than an emissions trading regime and provides more certainty over future prices, which is important for mobilizing investment in zero-emission fuels.
- Revenues raised could be up to $200 billion by 2035, which could make a substantial contribution to climate finance for developing economies.
- A feebate also provides price certainty and may face less political opposition but raises fewer revenues.

### Obstacles to implementation and administrative feasibility
- Obstacles:
  - Legal uncertainties (for aviation).
  - Extreme mobility of the tax base (for shipping).
  - Lack of experience and administrative capacity at the ICAO and IMO for overseeing a global tax or similar regime.
  - Opposition by several countries to establishment of robust price signals, disagreements on carbon price trajectories and use of potential revenues.
- Administrative feasibility advances:
  - Recent innovations that could make systems administratively feasible include digitalized payments, fuel-reporting requirements, satellite tracking of planes/ships, airport/port access conditional on upfront payments, and tax collection by national authorities or new specialized funds supervised by the ICAO and IMO.

### Coalition building and multilateral fora
- Moving forward, dialogue across multiple forums could establish a broad coalition of support for carbon pricing.
- Platforms for consultations include regular meetings of the ICAO and IMO, stock-taking and dialogue at UNFCCC meetings, discussions at a future UN convention on international tax cooperation, and meetings of the G20.
- Coalition building requires awareness of:
  - The lack of alternative effective policy options for decarbonization (aside from outright bans on conventional planes and ships).
  - The need for robust price signals to level the playing field for zero-emission fuels.
  - The role of compensation systems for vulnerable countries.
  - Trade-offs between explicit pricing and feebate-type approaches.
- Compromise over revenue allocations may be needed, with revenues split across multiple objectives.
- Only a coalition of the willing can steer the world toward finally decarbonizing international aviation and shipping.

### Lifecycle emissions, non-CO2 impacts, and fuel-production footprints (Annex 1 highlights)
- Pre-combustion emissions and lifecycle considerations:
  - Pre-combustion emissions are significant and expected to increase as aviation and maritime decarbonize, highlighting the importance of strong sustainability criteria and standardized emissions reporting for zero-emissions fuels.
  - For aviation (average pre-combustion emissions):
    - biomass and waste-based biofuels: 21 to 30 kg per gigajoule (GJ)
    - CO2-based biofuels: 13 to 17 kg per GJ
    - jet fuel: 6 to 16 kg per GJ (ICAO 2022)
  - For maritime zero-emission fuels:
    - produced using low-carbon electricity: 3 kg per GJ
    - produced with carbon capture and storage: 18 kg per GJ (MMMCZCS 2024)
  - Pre-combustion emissions estimates are highly uncertain and likely vary substantially by fuel source.
- Contrails and non-CO2 warming:
  - Contrails and NOx can have a significant warming impact.
  - Estimates show contrails and NOx triple the short-term warming impact of jet fuel and, at a minimum, increase the warming effects by two-thirds (Lee and others 2021).
  - SAF is expected, but not conclusively studied, to reduce contrails significantly—Voigt and others (2021) estimate switching from jet fuel to SAF reduces contrails by 50 to 70 percent.
  - Additional policy options: higher taxes on flights more likely to produce contrails (for example, those in the early evening and night) and taxes or requirements to lower aromatic content of fuel within safe ranges.

### Biofuel and zero-emissions fuel demand and energy implications
- Biofuel demand and projections:
  - Current aviation biofuel use: 600 million liters in 2023 or 0.02 exajoules (EJ) for aviation in 2023.
  - Under the net zero scenario modeled here, biomass and waste-based biofuel demand for aviation and maritime increases to:
    - 1.1 EJ by 2030
    - 2.6 EJ in 2035
    - 5.2 EJ in 2040
    - 7.6 EJ in 2050
  - Existing biofuel production used primarily for road transport: 4.3 EJ (IEA 2024).
  - The majority of projected biofuel use is for aviation, given relatively low-cost potential of other zero-emissions fuels in maritime.
- Electricity and green-hydrogen implications:
  - Producing biofuels from carbon and green hydrogen requires large amounts of electricity for direct air capture and electrolysis.
  - Assumed electricity intensity: direct air capture and electrolysis require 2.0 and 1.7 units of electricity per unit of fuel, respectively, declining by about 5 percent through 2050 (in line with ICAO 2022).
  - It is assumed all hydrogen is produced using green electricity for the calculations here.
  - Projected electricity demand for hydrogen and CO2-based maritime fuels:
    - over 1,000 terawatt hours (TWh) of (green) electricity by the early 2030s (maritime fuels)
    - aviation demand is negligible in the early 2030s
    - electricity demand for hydrogen and CO2-based zero-emissions is expected to increase to about 3,000 TWh by 2040 and 6,000 TWh by 2050
  - Current global electricity production is about 25,000 TWh.
- Policy implication:
  - Large land and electricity demands need to be managed; extending carbon-pricing systems to incorporate lifecycle emissions and allocating revenue on pre-combustion emissions to the fuel-producing country are potential approaches.
  - Improved and standardized measurement of pre-combustion emissions, including for oil and natural gas, would be needed to operationalize such policies.

### Compensation schemes for vulnerable countries (Annex 3 highlights)
- Aviation compensation options:
  - Low-income countries retain revenues from charges on fuel disbursements within their borders for international flights (about half of the total fuel consumed for a flight to and from another country).
  - Rebate ICAO-collected revenues to low-income countries based on inward passenger kilometers traveled as a share of global passenger kilometers traveled.
  - Trade-offs: first scheme simpler and likely adequate in many cases; first scheme may incentivize hub development, second may incentivize more passengers.
- Maritime compensation options:
  - Reimbursing vulnerable countries for charges on their maritime fuel sales—reasonable in most cases but may overcompensate hub ports and undercompensate small islands that do not refuel ships.
  - Basing compensation on countries’ shares of global import values—may disadvantage poor countries importing low value products because import value tends to be negatively corrected with CO2.
  - Compensation based on cross-country distributional impact studies by external experts.
  - Overall: some form of acceptable compensation system should be feasible given the modest impact of carbon pricing on landed import prices, despite import price increases potentially being approximately twice as high for low-income countries and small island developing states because maritime transport costs as a share of landed import prices are about double those for other countries (UNCTAD 2017).

*IMF | Staff Climate Notes — Conclusion (content unit: clnea2024003)*

### Annex Figure 4.1. Prices of Aviation Fuels over Time

### Annex Figure 4.1. Prices of Aviation Fuels over Time

### Emissions intensity of aviation
- Fuel price elasticity of −0.2 (Keen, Parry, and Strand 2013) is used to model changes in fuel intensity.
- Behavioral response split: 20 percent from changes to maintenance and operations of existing aircraft versus purchase of more efficient new aircraft (in line with ICAO 2022).
- Biofuel blending assumption: relationship between carbon prices and biofuel blends aligned with the ICCT (2022); "$300 per ton of CO2 is needed to achieve 50 percent SAF use in 2050 under base case assumptions".
- Energy efficiency assumptions:
  - Energy efficiency of new planes is 15 percent better than that of the average existing plane.
  - All planes have an annual exogenous energy efficiency improvement of 0.5 percent.
- Emissions intensity values (well-to-tank and tank-to-wake) for jet fuel and SAF are taken from ICAO (ICAO 2022).

### Activity per plane (passenger and cargo)
- Price elasticity of ticket prices: −0.6 for passenger travel (ICAO 2022; ICCT 2022) and −1 for cargo.
- Fuel cost shares under baseline fuel price assumptions:
  - Fuel costs make up 25 percent of ticket prices for passengers.
  - Fuel costs make up 3 percent of shipped product value for cargo.
- Pass-through of taxes to end user prices is assumed to be complete (Keen, Parry, and Strand 2013; Wozny 2024).

### Maritime: capital stock and vessel decisions
- 2023 ship fleet counts assumed:
  - About 6,000 container ships.
  - About 45,000 bulk ships (UNCTAD 2023).
- Present orderbook composition: 64 percent HFO-only, 22 percent dual-powered LNG and HFO, and 14 percent HFO-and-zero-emission-capable (BRS 2024).
- Lead times are 3 to 4 years.
- After the existing orderbook is fulfilled in 2027, portion of new ships by capability is determined by TCO for a representative vessel using Annex Table 4.1 parameters.
- Total quantity of new ships equals number retired in previous year; additional demand determined using income elasticity:
  - 0.5 for bulk products.
  - 0.8 for container products.
- Distance traveled per ship adjusted using shipped good’s price elasticity of −1 and fuel cost shares in shipped goods value:
  - 4 percent for tankers/bulk.
  - 6 percent for containers under current price levels.

### Annex Table 4.1: Total Cost of Ownership parameters (selected)
- Ship purchase price: $80 million per ship (UMAS 2023).
- LNG vessel purchase price: 20 percent higher than HFO (UNCTAD 2023).
- Lifetime: 25 years (in line with the NavigaTE model, MMMCZCS 2023).
- Discount rate: 6.7 percent (Damodaran 2024).
- Fuel economy (new ships): 12.5 percent less than that of the average, existing ship (UNCTAD 2023).
- Fuel economy improvement of new ships implies fleet fuel economy increases at 0.5 percent per year.

### Fuel prices and cost pass-through
- Maritime fuel price projections:
  - Fossil fuels from the IMF WEO.
  - Zero-emission fuels from the Mærsk McKinney Møller Center (MMMCZCS 2024).
- HFO prices assumed to move in tandem with crude oil.
- LNG price: average of Japanese and European natural gas prices reported by the WEO, with an additional $6 per ton added to account for liquefaction costs.
- Zero-emission fuel price: average of green ammonia in Europe, Asia, and the US reported in MMMCZCS (2024), with an additional $2 per GJ included to account for $150 billion investments in bunkering infrastructure and CO2 transport (WEF 2023).
- Of the price changes from policies, 95 percent is assumed to be passed through to end user prices (Keen, Parry, and Strand 2013).

### Emissions intensity of shipping and behavioral response
- Fuel price elasticity for shipping fuel intensity: −0.45 (based on McCollum, Gould, and Greene 2009; Smith and others 2016).
- Behavioral response attribution:
  - 75 percent to changes made to existing ships (reduced speeds, better maintenance).
  - 25 percent to factors determined at time of purchase (engine and ship design).
- Additional emissions reduction channels:
  1. Biofuel blending: IEA relationship where a $1 per ton of CO2 results in 0.08 percent biofuel blending.
  2. LNG use for dual-powered LNG–HFO ships: share of LNG increases from 0 to 100 percent as relative price of LNG increases from −3 to 3 per GJ.
  3. Zero-emissions fuels for dual-powered zero-emissions capable ships: zero-emissions share increases linearly from 0 to 100 percent as post-tax prices reach parity.
- Emissions intensity per fuel (well-to-tank and tank-to-wake) from the Mærsk fuel cost calculator (MMMCZCS 2024).

### Sensitivity analysis: zero-emissions fuel price uncertainty and scenarios
- Significant uncertainty in future price trajectory of zero-emissions fuels.
- High and low price scenarios presented:
  - Maritime prices: low and high scenarios from UMAS 2023.
  - Aviation prices: high and low prices are 25 above and below, respectively, and the low case has no supply constraint.
- Finding: zero-emissions fuels do not achieve price parity with fossil fuel alternatives even under lower price assumptions.

### Emissions sensitivity results
- Business-as-usual emissions increase under all price scenarios due to lack of significant zero-emissions fuel diffusion, but magnitudes differ:
  - Aviation: emissions are 40 percent lower in 2050 with low SAF prices but 4 percent higher under high SAF prices (baseline has little SAF use).
  - Maritime: differences smaller; little zero-emissions fuel use under all price scenarios.
- When comparing similar policies across price scenarios:
  - Midcentury emissions are 50 to 80 percent higher with high zero-emissions fuel prices (larger differences in aviation).
  - Emissions are 20 percent lower with the low price scenario.

### Revenue sensitivity results
- Revenue trends across price scenarios:
  - Much higher revenue if zero-emissions fuels are more costly because emissions (tax base) remain larger.
  - If prices are high, revenue is about $300 billion in 2040 with net zero aligned carbon prices and peaks only around midcentury (compared to peaking in the early 2040s for low and base case prices).
  - Little difference across price scenarios until after 2035.
  - For the moderate carbon price and low zero-emissions fuel combination, revenue is much lower through midcentury than for the base and high prices since emissions decline significantly.

### Distributional analysis (traded products and tourism)
- Traded products: country-level impact determined by change in prices of imports and exports, trade openness, and price elasticities (following Keen, Parry, and Strand 2013).
  - Higher import prices raise consumer prices: consumer burden = loss from foregone consumption + higher prices of remaining consumption.
  - Higher export prices reduce exports and domestic producer surplus.
- Key equations (conceptual):
  - Cm = tm * Vm * [ (nx_ROW) / (nx_ROW + nm_A) ]  (Equation (1) in text context)
  - Cx = tx * Vx * [ (nm_ROW) / (nm_ROW + nx_A) ]  (Equation (2) in text context)
  - Variables defined in text: t_m and t_x are increases in product costs proportionate to import and export prices; V_m and V_x are import/export values as share of GDP; nx_ROW and nm_ROW are rest-of-world elasticities; nm_A and nx_A are domestic import and export elasticities.
- Important distributional assumptions and caveats:
  1. Import and export elasticities are not country-specific.
  2. Oil treated similarly to any other good despite maritime and aviation oil demand currently making up between 10 and 15 percent of global oil consumption.
  3. Possible small domestic producer benefit from more expensive imports.
  4. Import and export shares/compositions fixed at 2019 values.
  5. Producer burden from lack of full pass-through not considered; pass-through expected to be nearly complete.
- Tourism analysis:
  - Approach follows Keen et al. 2013 using analogous equations.
  - Variables:
    - tx = change in price of flying induced by the policy.
    - Vx and Vm = share of GDP received from tourism and spending of tourists.
    - nx_ROW and nm_ROW = absolute value of rest-of-world price elasticity of demand and supply of tourism.
    - nm_A and nx_A = price elasticity of demand and supply of domestic tourists and tourism supply.
  - Data: UN Tourism Statistics Database (UN 2024); cruise visitors spend seven times less than non-cruise visitors.
  - Fuel cost shares and assumptions:
    - Fuel cost share of 25 percent for aviation.
    - Fuel cost share of 12 percent for cruises (average of three large cruise companies).
  - Tourism demand adjusted based on country-level GDP growth projections; tourism supply considers global economic growth only.
  - Assumed price responsiveness of international tourism demand: −1 (IATA 2008).
  - Tourism supply elasticity assumption: −1 (implying tourism supply decreases over time relative to BAU as flying prices increase).
- Sensitivity analysis for tourism supply elasticity explores three scenarios:
  1. Full burden on tourist destinations (inelastic tourism supply).
  2. Equal share between destinations and tourists (main text assumption).
  3. All burden falling on tourists (inelastic tourists / destinations can diversify).

*Source: IMF staff calculations using data from ICAO 2022 and IMF WEO 2024.*

### Annex Figure 5.1. Distributional Impact of Tourism-Related Impacts

### Annex Figure 5.1. Distributional Impact of Tourism-Related Impacts

### Chart panels and depiction
- Two panels:
  - 1. Full Burden on Tourist Destinations
  - 2. Full Impact on Tourists
- Visualization elements shown (as described in the notes):
  - 10th percentile (end of the bottom line)
  - 25th percentile (bottom of grey box)
  - Median (intersection of grey and yellow box)
  - 75th percentile (top of yellow box)
  - 90th percentile (end of the top line)
- Grouping/labels shown on the horizontal axis area: LICEMAESDS
- Vertical axis labels (left panel): 0.0, 1.0, 2.0, 3.0, 4.0, 5.0, 6.0, 7.0, 8.0, 9.0, 10.0 — unit: Percent of GDP
- Vertical axis labels (right panel): 0.0, 0.5, 1.0, 1.5, 2.0, 2.5 — unit: Percent of GDP

### Abbreviations and scenario labels (as presented)
- AE = advanced economy
- CT = carbon tax
- EM = emerging market
- FB = feebate
- LIC = low-income country
- SDS = small developing state
- NZS = Net zero pathway
- MOD = Moderate pathway
- CTCT + FB appears as a repeated label in the figure

### Key interpretive notes (from figure caption)
- The chart reports distributional outcomes across countries within each country group using the 10th, 25th, median, 75th, and 90th percentiles as defined above.
- Percent of GDP is the reported metric for both panels.

*Source: IMF staff calculations.*

### Annex 7.  Country-Level Classifications and Impacts of Mitigation Policies

### Annex 7. Country-Level Classifications and Impacts of Mitigation Policies

### Methodology and scope
- Country-level impacts of mitigation policies are shown for 2030 and 2035, following the methodology discussed in the main text (for example, Figure 9) and Annex 5.
- Compensation is assumed to cover the full economic burden for low income countries and small developing states and the cargo costs for emerging markets.
- Remaining revenue is allocated based on existing regional climate finance flows, following CPI 2023.
- Results here differ slightly from the main text because country-level GDP trends, rather than regional trends, are used.
- Results are shown only for the net zero carbon tax ("CT") and carbon tax–feebate combination ("CT + FB") in 2035 in the table below; authors can provide more years and scenarios upon request.

### Table structure (columns in the source)
- Country
- SDS (sustainable development scenario indicator in source)
- Policy (CT or CT + FB)
- Year
- Cargo costs (% of GDP)
- Tourism costs (% of GDP)
- Cargo + tourism costs (% of GDP)
- Compensation (USD billion)
- Compensation (% of GDP)
- Climate finance (USD billion)
- Climate finance (% of GDP)
- Compensation + climate finance (% of current ODA)
- Compensation + climate finance (% of current revenue)
- Compensation + climate finance (% of GDP)

### Selected country-level impacts (2035, exact values from the table)
- Afghanistan, 0CT, 2035
  - Cargo costs (% of GDP): 0.008%
  - Tourism costs (% of GDP): 0.118%
  - Cargo + tourism costs (% of GDP): 0.126%
  - Compensation (USD billion): 0.031
  - Compensation (% of GDP): 0.126%
  - Climate finance (USD billion): 0.043
  - Climate finance (% of GDP): 0.178%
  - Compensation + climate finance (% of current ODA): 1.901%
  - Compensation + climate finance (% of current revenue): 1.129%
  - Compensation + climate finance (% of GDP): 0.304%

- Afghanistan, 0CT + FB, 2035
  - Cargo costs (% of GDP): 0.005%
  - Tourism costs (% of GDP): 0.066%
  - Cargo + tourism costs (% of GDP): 0.070%
  - Compensation (USD billion): 0.017
  - Compensation (% of GDP): 0.070%
  - Climate finance (USD billion): 0.014
  - Climate finance (% of GDP): 0.057%
  - Compensation + climate finance (% of current ODA): 0.795%
  - Compensation + climate finance (% of current revenue): 0.472%
  - Compensation + climate finance (% of GDP): 0.127%

- Bangladesh, 0CT, 2035
  - Cargo costs (% of GDP): 0.534%
  - Tourism costs (% of GDP): 0.042%
  - Cargo + tourism costs (% of GDP): 0.576%
  - Compensation (USD billion): 4.371
  - Compensation (% of GDP): 0.576%
  - Climate finance (USD billion): 1.353
  - Climate finance (% of GDP): 0.178%
  - Compensation + climate finance (% of current ODA): 110.240%
  - Compensation + climate finance (% of current revenue): 9.261%
  - Compensation + climate finance (% of GDP): 0.754%

- Bangladesh, 0CT + FB, 2035
  - Cargo costs (% of GDP): 0.350%
  - Tourism costs (% of GDP): 0.023%
  - Cargo + tourism costs (% of GDP): 0.374%
  - Compensation (USD billion): 2.835
  - Compensation (% of GDP): 0.374%
  - Climate finance (USD billion): 0.431
  - Climate finance (% of GDP): 0.057%
  - Compensation + climate finance (% of current ODA): 62.890%
  - Compensation + climate finance (% of current revenue): 5.283%
  - Compensation + climate finance (% of GDP): 0.430%

- India, 0CT, 2035
  - Cargo costs (% of GDP): 0.231%
  - Tourism costs (% of GDP): 0.176%
  - Cargo + tourism costs (% of GDP): 0.406%
  - Compensation (USD billion): 14.128
  - Compensation (% of GDP): 0.231%
  - Climate finance (USD billion): 10.924
  - Climate finance (% of GDP): 0.178%
  - Compensation + climate finance (% of current ODA): 884.862%
  - Compensation + climate finance (% of current revenue): 2.051%
  - Compensation + climate finance (% of GDP): 0.409%

- Brazil, 0CT, 2035
  - Cargo costs (% of GDP): 0.175%
  - Tourism costs (% of GDP): 0.108%
  - Cargo + tourism costs (% of GDP): 0.283%
  - Compensation (USD billion): 4.754
  - Compensation (% of GDP): 0.175%
  - Climate finance (USD billion): 5.772
  - Climate finance (% of GDP): 0.212%
  - Compensation + climate finance (% of current ODA): 1824.228%
  - Compensation + climate finance (% of current revenue): 1.228%
  - Compensation + climate finance (% of GDP): 0.387%

- Brazil, 0CT + FB, 2035
  - Cargo costs (% of GDP): 0.114%
  - Tourism costs (% of GDP): 0.060%
  - Cargo + tourism costs (% of GDP): 0.174%
  - Compensation (USD billion): 3.091
  - Compensation (% of GDP): 0.114%
  - Climate finance (USD billion): 1.837
  - Climate finance (% of GDP): 0.068%
  - Compensation + climate finance (% of current ODA): 854.136%
  - Compensation + climate finance (% of current revenue): 0.575%
  - Compensation + climate finance (% of GDP): 0.181%

- Maldives, 1CT, 2035
  - Cargo costs (% of GDP): 0.698%
  - Tourism costs (% of GDP): 6.810%
  - Cargo + tourism costs (% of GDP): 7.508%
  - Compensation (USD billion): 0.861
  - Compensation (% of GDP): 7.508%
  - Climate finance (USD billion): 0.020
  - Climate finance (% of GDP): 0.178%
  - Compensation + climate finance (% of current ODA): 740.319%
  - Compensation + climate finance (% of current revenue): 28.539%
  - Compensation + climate finance (% of GDP): 7.686%

- Tuvalu, 1CT, 2035
  - Cargo costs (% of GDP): 0.746%
  - Tourism costs (% of GDP): 4.431%
  - Cargo + tourism costs (% of GDP): 5.177%
  - Compensation (USD billion): 0.004
  - Compensation (% of GDP): 5.177%
  - Climate finance (USD billion): 0.000
  - Climate finance (% of GDP): 0.241%
  - Compensation + climate finance (% of current ODA): 7.001%
  - Compensation + climate finance (% of current revenue): 4.850%
  - Compensation + climate finance (% of GDP): 5.417%

- Nigeria, 0CT, 2035
  - Cargo costs (% of GDP): 0.501%
  - Tourism costs (% of GDP): 0.121%
  - Cargo + tourism costs (% of GDP): 0.622%
  - Compensation (USD billion): 3.076
  - Compensation (% of GDP): 0.622%
  - Climate finance (USD billion): 2.773
  - Climate finance (% of GDP): 0.560%
  - Compensation + climate finance (% of current ODA): 131.633%
  - Compensation + climate finance (% of current revenue): 15.097%
  - Compensation + climate finance (% of GDP): 1.182%

- Nigeria, 0CT + FB, 2035
  - Cargo costs (% of GDP): 0.314%
  - Tourism costs (% of GDP): 0.067%
  - Cargo + tourism costs (% of GDP): 0.382%
  - Compensation (USD billion): 1.889
  - Compensation (% of GDP): 0.382%
  - Climate finance (USD billion): 0.883
  - Climate finance (% of GDP): 0.178%
  - Compensation + climate finance (% of current ODA): 62.370%
  - Compensation + climate finance (% of current revenue): 7.153%
  - Compensation + climate finance (% of GDP): 0.560%

### Observations apparent in the table
- The annex reports higher cargo and tourism cost shares for many small island and tourism-dependent economies (examples: Maldives, Tuvalu, Palau, Seychelles, Antigua and Barbuda, Barbados).
- Compensation amounts (USD billion) and their percentages of GDP vary widely: some large economies show multi-billion USD compensation (e.g., India 14.128; Brazil 4.754), whereas small states show compensation as very small USD amounts but large percentages of GDP.
- The CT + FB scenario generally shows lower cargo + tourism cost shares and lower compensation requirements (USD billion and % of GDP) compared with CT alone for the same country-year in the table.

*Annex 7. Country-Level Classifications and Impacts of Mitigation Policies (table entries and notes as presented in the source).*

### References

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- Xiong, J., and P. Wu. 2009. “An Analysis of Forecasting Model of Crude Oil Demand Based on Cointegration and Vector Error Correction Model (VEC). In 2008 International Seminar on Business and Information Management, ISBIM 2008, 485–88.

### International organizations, policy reports, and datasets
- BRS. 2024. Annual Review 2024. BRS Shipbrokers. Publications • BRS Shipbrokers.
- CPI. 2023. Global Landscape of Climate Finance 2023. Climate Policy Initiative. Global-Landscape-of-Climate-Finance-2023.pdf (climatepolicyinitiative.org).
- Damodaran, Aswath. 2024. Cost of Equity and Capital (US). https://www.stern.nyu.edu/~adamodar/New-Home-Page/data.html
- Dominioni, Goran, and Dominik Englert. 2022. “Carbon Revenues from International Shipping: Enabling an Effective and Equitable Energy Transition-Technical Paper.” World Bank Group, Washington, DC.
- EASA. 2022. “European Aviation Environmental Report 2022.” European Union Aviation Safety Agency. https://www.easa.europa.eu/eco/sites/default/files/2023-02/230217_EASA%20EAER%202022.pdf
- EIA. 2024. Spot Prices. U.S. Energy Information Administration. https://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm
- European Commission. 2024. Energy, Climate Change, Environment: Transport. European Commission. Transport - European Commission (europa.eu).
- GloMEEP and IMarEST. 2018. “Ship Emissions Toolkit Guide No.2: Incorporation of MARPOL Annex VI into National Law.” GEF-UNDP-IMO Global Maritime Energy Efficiency Partnerships Project and the Institute of Marine Engineering, Science and Technology. London. https://glomeep.imo.org/wp-content/uploads/2018/10/ship_emissions_toolkit-g2-online.pdf.
- Graver, Brandon, Kevin Zhang, and Dan Rutherford. 2019. CO2 Emissions from Commercial Aviation, 2018. The International Council on Clean Transportation.
- IATA. 2008. IATA Economics Briefing No 9: Air Travel Demand. International Air Transport Association. https://www.iata.org/en/iata-repository/publications/economic-reports/air-travel-demand/
- IATA. 2023. “Sustainable Aviation Fuel Output Increases, But Volumes Still Low.” International Air Transportation Association. https://www.iata.org/en/iata-repository/publications/economic-reports/sustainable-aviation-fuel-output-increases-but-volumes-still-low/
- IATA. 2024. Global Outlook for Air Transport. International Air Transport Association. iata.org/en/iata-repository/pressroom/fact-sheets/industry-statistics/
- ICAO. 2013. Assembly Resolutions in Force. Doc 10022. Montreal. www.icao.int/Meetings/GLADs-2015/Documents/A38-18.pdf
- ICAO. 2022. Report on the Feasibility of a Long-Term Aspirational Goal(LTAG) for International Civil Aviation CO2 Emissions Reductions. International Civil Aviation Organization. https://www.icao.int/environmental-protection/LTAG/Pages/LTAGreport.aspx
- ICAO. 2024. Air Traffic Monitor January 2024. International Civil Aviation Organization. https://www.icao.int/sustainability/Pages/Air-Traffic-Monitor.aspx
- ICCT. 2022. Vision 2050 Aligning Aviation with the Paris Agreement. International Council on Clean Transportation. https://theicct.org/wp-content/uploads/2022/06/Aviation-2050_report_final_v2.pdf
- ICCT. 2023. “Would a frequent flying tax be progressive?” International Council on Clean Transportation, Washington, DC. Would a frequent flying tax be progressive? - International Council on Clean Transportation (theicct.org).
- ICCT. 2024. Lifetime Emissions from Aircraft under a Net-zero Carbon Budget. International Council on Clean Transportation. https://theicct.org/wp-content/uploads/2024/07/ID-188-%E2%80%93-Committed-emissions_wp_final.pdf
- IEA. 2023. “Net Zero Roadmap: A Global Pathway to Keep the 1.5°C Goal in Reach.” International Energy Agency. Paris. https://www.iea.org/reports/net-zero-roadmap-a-global-pathway-to-keep-the-15-0c-goal-in-reach
- IEA. 2024. “Extended Energy Balances.” International Energy Agency, Paris. https://www.iea.org/data-and-statistics/data-product/world-energy-balances.
- IMF. 2011. “Market-based Instruments for International Aviation and Shipping as a Source of Climate Finance.” International Monetary Fund and World Bank Group, Background Paper for the Report to the G20 on Mobilizing Sources of Climate, Washington, DC.
- IMF. 2024. “G20 Note on Alternative Options for Revenue Mobilization.” International Monetary Fund, Washington, DC. https://www.imf.org/external/np/g20/062424.htm.
- IMF WEO. 2024. World Economic Outlook Database April 2024. International Monetary Fund, Washington, DC. World Economic Outlook Database, April 2024 (imf.org).
- IMO. 2009. “Second IMO GHG Study 2009.” International Maritime Organization, London.
- IMO. 2011. “Reduction of GHG Emissions from Ships. Report of the Expert Group on Feasibility Study and Impact Assessment of Possible Market-based Measures.” Marine Environment Protection Committee, MEPC 62/5/14. International Maritime Organization, London.
- IMO. 2016. “IMO: The International Maritime Organization. What It Is, What It Does, How It Works.” International Maritime Organization, London.
- IMO. 2020. “Fourth IMO Greenhouse Gas Study”. International Maritime Organization, London. Fourth IMO GHG Study 2020 - Full report and annexes.pdf.
- IMO. 2023. 2023 IMO Strategy on Reduction of GHG Emissions from Ships. London: International Maritime Organization. https://wwwcdn.imo.org/localresources/en/MediaCentre/PressBriefings/Documents/Clean%20version%20of%20Annex%201.pdf.
- IOPC Funds. 2023. Annual Report 2023. The International Oil Pollution Compensation Funds, iopcfunds.org/wp-content/uploads/2024/04/Annual-Report-2023_e.pdf
- Krantz, Randall, Kasper Søgaard, and Tristan Smith. 2020. “The Scale of Investment Needed to Decarbonize International Shipping.” Global Maritime Forum. https://globalmaritimeforum.org/news/the-scale-of-investment-needed-to-decarbonize-international-shipping/.
- MMMCZCS. 2023. “NavigaTE Explainer.” Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping. NavigaTE Explainer | Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping.
- MMMCZCS. 2024. Fuel Cost Calculator. Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping. https://www.zerocarbonshipping.com/cost-calculator/?s=0
- OECD. 2024. “Developed Countries Materially Surpassed Their USD 100 Billion Climate Finance Commitment in 2022—OECD.” Organisation for Economic Cooperation and Development, Paris, France. https://www.oecd.org/en/about/news/press-releases/2024/05/developed-countries-materially-surpassed-their-usd-100-billion-climate-finance-commitment-in-2022-oecd.html
- UMAS. 2023. “Cost of zero emissions container freight shipping: a study on selected deep-sea and short-sea routes.” University Maritime Advisory Services. Cost of zero emissions container freight shipping: a study on selected deep-sea and short-sea routes (u-mas.co.uk).
- UMAS-ETC. 2020. “The Scale of Investment Needed to Decarbonize International Shipping.” University Maritime Advisory Services and Energy Transitions Commission. www.globalmaritimeforum.org/news/the-scale-of-investment-needed-to-decarbonize-international-shipping.
- UNCTAD. 2017. “Review of Maritime Transport 2016.” United Nations Conference on Trade and Development.
- UNCTAD. 2023. “Review of Maritime Transport 2023.” United Nations Conference on Trade and Development.
- UNCTAD. 2024. “Trade-and-Transport Dataset.” United Nations Conference on Trade and Development.
- Unitaid. 2013. “French levy on airline tickets raises more than one billion euros for world’s poor since 2006.” Unitaid, Geneva. French levy on airline tickets raises more than one billion euros for world’s poor since 2006 - Unitaid.
- Voigt, C., J. Kleine, D. Sauer et al. 2021. “Cleaner burning aviation fuels can reduce contrail cloudiness.” Commun Earth Environ 2, 114 (2021). https://doi.org/10.1038/s43247-021-00174-y.
- WEF. 2023. “Net Zero Industry Tracker 2023. World Economic Forum.” https://www.weforum.org/publications/net-zero-industry-tracker-2023/in-full/aviation-industry-net-zero-tracker/.
- World Bank. 2012. “Air Transport and Energy Efficiency.” Transport Papers, TP-38. World Bank Group, Washington, DC.

### Technical reports, datasets, and online tools
- Damodaran, Aswath. 2024. Cost of Equity and Capital (US). https://www.stern.nyu.edu/~adamodar/New-Home-Page/data.html
- EIA. 2024. Spot Prices. U.S. Energy Information Administration. https://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm
- IEA. 2024. “Extended Energy Balances.” International Energy Agency, Paris. https://www.iea.org/data-and-statistics/data-product/world-energy-balances.
- IMF WEO. 2024. World Economic Outlook Database April 2024. International Monetary Fund, Washington, DC. World Economic Outlook Database, April 2024 (imf.org)
- MMMCZCS. 2024. Fuel Cost Calculator. https://www.zerocarbonshipping.com/cost-calculator/?s=0
- UMAS. 2023. Cost of zero emissions container freight shipping: a study on selected deep-sea and short-sea routes. (u-mas.co.uk)

*Notes: Destination Net Zero: The Urgent Need for a Global Carbon Tax on Aviation and Shipping — IMF STAFF CLIMATE NOTES 2024/003*

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_Source: https://www.imf.org/-/media/files/publications/staff-climate-notes/2024/english/clnea2024003.pdf_