The environmental impact of growing air traffic, especially the effect of aircraft operations in the upper atmosphere, has caused some concern. Consequently airlines may become the target for environmental taxes based on 'polluter must pay' principle. The aim of this paper is: (a) to investigate the likely reaction of airlines to emission taxes; (b) to assess the optimum tax level that minimizes the economic penalties on airlines whilst maximizing the reduction of fuel emission; and (c) to suggest how the taxes might be spent to be of benefit to both airlines and the environment. Of all the reactions to the tax, the one with the highest potential benefit to the environment was found to be the modernization of the aircraft engine. The optimum tax level that would encourage airlines to pursue such a policy would be very similar to that of the Swedish emissions tax imposed on domestic flights in 1989. The revenue generated out of emission taxes would be best spent on reinvesting in the aviation industry in areas where both airlines and the environment would benefit. (Author/publisher).
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