Market-based measures (MBM), such as emissions trading or carbon taxes, are a necessary part of combatting aviation’s greenhouse gas (GHG) emissions, but these measures cannot be imposed in isolation, a new study from the World Bank finds. Instead, market-based measures need to be explored in tandem with technology, operations and infrastructure, and governments have a role to play in all of these measures.

The air transport industry has been plagued by low margins for the past decade, which makes investing in new technologies difficult, the report, prepared by World Bank air transport specialist Charles Schlumberger, says. Therefore, any MBM that takes money out of the industry prevents the industry from investing in new, more efficient technologies. Governments must keep this in mind when designing MBMs. This meshes with what the airlines, represented by Airlines for America (A4A), have long said in objection to the EU’s emissions trading system (ETS).

But A4A also has called for a global, sectoral approach administered through the International Civil Aviation Organization (ICAO). The World Bank warns that creating a global system will be a challenge, given existing treaties and bilateral aviation agreements, and multilateral agreements, such as the Kyoto Protocol. The bank suggests that individual countries create national policies that acknowledge a global system, or that countries negotiate pluralistic, or multilateral, agreements, including ones that center on carbon offsetting, rather than emissions trading.

The World Bank proposes four pillars–mirroring the International Air Transport Association’s Four Pillar strategy–to combat emissions. These are investing in technology, including in biofuels and new aircraft technologies; improving operations; improving infrastructure, including air traffic management systems; and applying economic measures.

Fiscal policies are included in the economic measures, and these go beyond MBM. Governments can offer tax breaks to original equipment manufacturers (OEMs) for building new, more efficient airframes and engines. Depreciation incentives would enable airlines to invest in fleet renewal. Lump sums and grants can reward airlines for retiring outdated equipment. Finally, subsidies can help airlines and OEMs develop new technologies, but the report warns that subsidies should be reduced over time as new technologies become available.

Direct taxes, or “green levies,” are not as effective unless they are tied specifically to GHG reduction. The World Bank cites the U.K.’s air passenger duty as an example of a penalty that does not satisfy its aim to reduce emissions by targeting demand for air travel.

ICAO has hinted that it will present proposals for a global MBM system by the end of the year. Meanwhile, the EU faces mounting criticism for its ETS, and industry observers say a formal challenge at ICAO through Article 84 of the Chicago Convention could be imminent.

Nevertheless, the World Bank says emissions reduction is imperative, both in the developed world and in emerging markets. Demand for jet fuel is expected to climb from 12% of all transportation fuels in 2009 to 14% in 2035, the International Energy Agency says. The World Bank notes that airlines contribute just 2% of the world’s GHG now, but concerns remain. “Given the strong growth rate that aviation has enjoyed and will continue to enjoy in the future…these concerns are justified,” the report says.