uses.<sup>66</sup> There is an important trade off here: the more extensive is compensation, the less public revenue will remain for climate finance or other productive purposes.

113. **Under a more flexible approach with a floor price of $15 per tonne, annual revenues raised would be approximately $14 billion** (after setting aside the same proportion for compensation). Conversely, revenues would be higher under more aggressive emissions pricing, say $40 per tonne of CO2; but securing international agreement would doubtless be correspondingly more challenging.

114. **MBIs are the best instruments from an environmental perspective** . Under the auspices of the International Civil Aviation Organization (ICAO) and the International Maritime Organization (IMO), both industries are taking important steps to improve the fuel efficiency of new planes and vessels and economize on fuel use during operations. Nonetheless, raising fuel prices through MBIs would reinforce these efforts while also reducing the demand for transportation (relative to trend) and promoting retirement of older, more polluting vehicles.

115. **The principles of good design of MBIs for international aviation and maritime activities are the same for other sectors** . For emissions trading, this means auctioning allowances to provide a valuable source of revenue, and including provisions to limit price volatility. For emissions taxes, it means keeping the focus on environmental considerations and applying the tax to fuel (rather than passenger tickets, or arrivals/departures). In either case, a critical issue in containing policy costs is to use revenues (whether for climate finance or other purposes) productively, for socially desirable spending, fiscal consolidation, or to reduce broader taxes that distort incentives for work effort and capital accumulation.

116. **Failure to price emissions from either industry should not preclude pricing emissions in the other** . Though commonly discussed in combination, the two sectors are not only different in important respects—for example, ships primarily carry freight while airlines primarily serve passengers—but they also compete directly only to a limited degree. Nonetheless, simultaneous application to both is preferable, and could enable a common charging regime (further enhancing efficiency).

# **_Cooperation, incidence, and compensation_**

117. **Extensive cooperation in designing and implementing international**

**transportation fuel charges would be needed—especially for shipping—to avoid revenue erosion and distortions** . Underlying the current tax-exempt status of fuels used in international transportation fuels is a fear that unilateral taxation would harm local tourism, commerce, and the competitiveness of national carriers, raise import prices and reduce the demand for exports, as well as leading fuelling to take place in countries without similar policy measures. When governments set emission charges unilaterally, they are under pressure to set lower rates than in other countries, so as to protect their domestic industries

> 66 Some part of the revenue (perhaps 5–10 percent) should also be retained by the collecting agency to cover administrative costs and provide performance incentives.

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