The world’s most climate-vulnerable countries scored a victory at COP28 when delegates agreed to implement a Loss and Damage Fund. The fund aims to collect money from wealthier countries and provide it to developing nations contending with the worst impacts of global warming.

But to have a real impact, the fund needs diverse and long-lasting revenue streams, in addition to pledges already made by some national governments. That’s why various taxes have been proposed over the years, including levies on aviation, maritime shipping, and financial transactions.

In light of the COP developments, we analyzed how much revenue a tax on airplane tickets could raise for the Loss and Damage Fund. Such a tax would provide a more stable and scalable funding source than voluntary, typically one-off financial assistance from wealthier countries.

Table 1 shows that $164 billion could be raised in a year if economy-class tickets were taxed at $30 each and premium-class tickets at $120 each. We selected $30 for economy seats based on the air passenger levy proposed by the United Nations Special Rapporteur on Human Rights and the Environment. In a 2021 policy brief, the special rapporteur (an independent expert appointed by the United Nations) outlined a tax of $10 to $75 for economy and business tickets to help pay for climate-related losses, damages, and adaptation. We put the levy at $120 for premium-class seats because our research shows that premium seating is 2.6 to 4.3 times more carbon-intensive per person than economy seating. Exempting economy tickets to and from lower-income countries would help ensure that the tourism industry and nascent aviation market in those countries are not unduly burdened. Such an exemption would reduce the total tax revenue collected by $19 billion. Taxing just international flights still results in a sizeable chunk of revenue: $68 billion a year or, with the exemption, $58 billion a year.

Table 1. Example ticket tax revenues raised by flight type, seating class, and country income levels.

a Flights are attributed to “lower-income” countries if they depart from or arrive in a country that is classified as low income or lower middle income by the World Bank; the remaining flights are attributed to “higher-income” countries for the purpose of this analysis.

b These are example tax rates for modeling purposes, not ICCT policy proposals.

c Number of tickets and potential revenue exempted if economy-class tickets for flights to and from lower-income countries are not taxed.

There are already examples of such taxes. The French “solidarity tax on airplane tickets” charges €2.63-63.07 per ticket to finance efforts by the global health initiative Unitaid to combat infectious diseases in the Global South. The tax raised over €1 billion in its first decade. Though this tax is only one example, it suggests that aviation taxes can be used to raise significant funds for international causes.

Moreover, the ICCT’s previous research found that certain aviation tax policies can be a more equitable way to raise revenue from those most responsible for the sector’s emissions. A tax on frequent flyers would raise 90% of its revenue from the richest 10% of the global population.

There are, however, competing needs for the revenues from a potential aviation ticket tax. Decarbonizing international aviation will require up to $5 trillion in technology investments by 2050. We recently published an analysis showing that these investments—in order to have the greatest and quickest impact on reducing greenhouse gas emissions—should be prioritized early in any taxation scenario and focused on emerging technologies.

Policymakers could, therefore, consider frontloading aviation tax revenues for mitigation in the near term and then gradually shift toward financial assistance related to loss and damage and to helping developing nations adapt to climate change. In addition, revenue from a domestic ticket tax could be earmarked for subsidizing sustainable aviation fuels within the country, while an international ticket tax can fund mitigation, adaptation, and loss and damage. Figure 1 illustrates how revenue could be apportioned over 30 years, using the same per-ticket taxes as outlined above.

Figure 1. Example allocation structure of aviation ticket tax revenue, assuming 50% of the revenue from international flights initially and an increasing share of all revenues (up to 80% domestic and 100% international) can potentially be used to help vulnerable countries with adaptation efforts and loss and damage.

Even if new aviation taxes went solely to the Loss and Damage Fund, the revenues will likely fall short of the need. Some studies project loss and damage needs of at least $400 billion each year. But even limited funding could have a huge impact for some countries. Small island developing states (SIDS) are typically extremely climate vulnerable but need less funding per disaster because of their small populations and geographic areas. Damage mitigation for the 2022 floods in Pakistan was estimated at $16.3 billion, 92 times higher than the $177 million requested by the island nation of Vanuatu for the entire country’s loss and damage that year.

In the best-case scenario, aviation can contribute to the funding mix for loss and damage, as long as such taxes are equitably designed with the goals of both decarbonizing the industry and helping those nations most injured by climate change.

Last week brought long-awaited tax-credit guidance about sustainable aviation fuels (SAFs) from the U.S. Treasury Department. It found that, as configured, the Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model does not “satisfy the requirements to calculate the emissions reduction percentage” to determine which fuels qualify for the lucrative credit for SAFs in the Inflation Reduction Act (IRA). In the brief guidance, Treasury also tasked multiple agencies with collaborating on an update of GREET that would fit the requirements. While this interagency working group might seem like a nod to the agricultural industry and corn ethanol producers who have been pushing for use of this model, there’s still little clarity about how life-cycle greenhouse gas (GHG) emissions will ultimately be calculated for different SAFs.

GREET can be a useful analytical tool for evaluating the life-cycle emissions of a variety of different fuels on a consistent basis, but it’s always dependent on the quality of the assumptions and inputs. In past work, the ICCT explained how using GREET can allow users to incorporate a variety of optimistic external assumptions and inputs that have not undergone regulatory scrutiny. The model has many possible configurations and data sources, and its impact on the SAF tax credit will heavily depend on the three key data inputs and assumptions discussed below. All of these will be determined by the interagency working group that will finalize the version of GREET used for the tax credit:

1. The indirect land-use change emission factor used for crop-derived biofuels. Demand for biofuels can lead to cropland expansion, but the magnitude of the expansion and the associated emissions remain the subject of vigorous academic debate. Depending on how GREET is configured, the estimated indirect land-use change (ILUC) emissions for SAF’s can range from one-quarter to one-third of the values assessed by the U.S. Environmental Protection Agency (EPA) for the Renewable Fuel Standard, by California for its Low-Carbon Fuel Standard, and by the International Civil Aviation Organization (ICAO) for its Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

To qualify as a SAF under the IRA, a fuel’s life-cycle emissions must be below approximately 45 grams CO2e per MJ of fuel. The difference between assuming an ILUC emission factor of ~7 gCO2e/MJ and ~30 gCO2e/MJ for a feedstock like soy can make a big difference in the total emissions, all without the producer having demonstrated any improvements in their fuel-conversion process. (To view a range of possible values, see Figure 2 here.) A key outcome of the interagency working group process will be the determination of which emission factor will be used for feedstocks like corn and soy. Will it be a low estimate selected from the literature, an estimate consistent with the other regulatory assessments, or something in between?

2. The guidance around soil carbon modeling and climate-smart agricultural practices. Though carbon offsets and offset programs have recently taken somewhat of a beating in the public imagination, they’ve nevertheless attracted substantial interest from the Biden Administration, which has described activities like planting cover crops and reduced tillage of crops that have been shown to improve soils as “climate-smart” practices. However, the exact change in soil carbon that results from such practices is uncertain and difficult to credit, and a recent article in Science highlighted warnings from soil carbon modelers about the uncertainties and research gaps in their current work.

This is important because one module in the GREET model allows biofuel producers to use modeled soil carbon change estimates to credit individual biofuel projects. The size of these credits can be substantial and can allow producers to claim large emissions reductions. Rather than a conventional supply chain LCA, this module looks into the future to determine shifts in soil carbon content based on an assumed 30 years of consistent practices. Crediting these reductions would thus necessitate a new dimension to Treasury’s guidance, as Treasury would have to verify the shifts in soil carbon, ensure their permanence, and develop a system for clawing back tax credits if producers fail to keep up the promised practices for the full 30 years. Given that many existing carbon-offset schemes have recently been criticized for the lack of rigor of their soil carbon offsets, Treasury may opt to steer clear.

3. The guidelines for book-and-claim accounting for natural gas and electricity. There’s been a lot of recent focus on the “three pillars” of demonstrating renewable electricity use as it pertains to producing green hydrogen for the IRA’s 45V tax credit. Such focus is also relevant for aviation. What constitutes a “renewable” electron? Under “book-and-claim” accounting, a fuel producer can purchase the rights to renewable energy somewhere else in the economy and attribute it to their specific process. The three pillars help to create guardrails to ensure that those renewable attributes are (1) truly additional to the status quo; (2) not being double counted; and (3) are closely correlated with the energy demand for the fuel pathway. If Treasury determines that hydrogen producers must demonstrate the three pillars for the renewable electricity used to generate hydrogen, will it hold renewable inputs to SAF production to the same standard?

Depending on how flexible the guidelines are for SAF’s, producers may opt to meet their GHG reduction threshold outside of their immediate supply chain by purchasing the rights to renewable electricity or natural gas generated somewhere else. It’s even conceivable that with a particularly loose interpretation of book-and-claim without additionality safeguards, a SAF producer could purchase the rights to highly GHG negative “moo hydrogen” made from dairy manure as an input to their SAF pathway. Even if the additionality of that moo hydrogen was dubious (say, for example, the dairy biogas facility long predates the IRA), the carbon offsets for the avoided methane could be used to adjust the carbon intensity of SAF pathways looking to cross the 50% GHG reduction threshold.

As the above helps to illustrate, suggesting that GREET is a kind of definitive “method” of conducting an LCA is not much different from suggesting that Microsoft Excel is the most accurate method for conducting an LCA or that Microsoft Word is the best tool for writing a screenplay. Treasury’s recent guidance provides no answers about how the United States will ultimately handle these thorny-but-important questions. Answering them is not just a matter of collecting data and updating GREET, but also establishing the government’s tolerance for risk in assessing what constitutes a GHG reduction and what behavior justifies a tax credit. Until those questions are answered in March, we’re left with the status quo.