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Giovanni Bisignani, chief executive of the International Air Transport Association, has warned that the EU aviation emissions levy, which was recently endorsed by Members of the European Parliament, has little chance of success and could incite a trade war with the United States. "The scheme has no chance. Why are we wasting so much time instead of building a global, harmonised emissions trading scheme?" said Bisignani, echoing calls from airlines for the International Civil Aviation Authority to be given more time to draw up a global proposal.

The European levy, which is a highly watered down version of initial proposals, requires that as of 2012 airlines travelling in Europe must cut their CO2 emissions by 3% of 2004-06 levels and achieve a 5% cut by 2013. In effect, aviation emissions in Europe will be capped at 97% of previous levels in the first year and 95% in the second, with the added possibility of the cap being reduced further in later years. The legislation also requires airlines buy 15% of the available carbon credits, which will bring the aviation industry in-line with other European polluters, for whom carbon-trading is already a reality.

While potentially reducing emissions, the scheme is likely to increase the cost of flying. The European Commission has estimated that the scheme will lead to an additional £31 on the cost of a long-haul return flight and £7 on a short-haul return; increases that will most likely be passed on to passengers. An EU spokeswoman said the inclusion of airlines in EU emissions-trading was necessary to create "a level playing field" among polluting industries.

The civil aviation industry has criticised the EU's decision however, and feels that the auctioning of carbon credits is an unaffordable expense. A recent industry-funded study concluded that airline profits may fall by as much as 40 billion Euros over a decade as a result. The hope now for airlines is that non-EU governments are able to successfully challenge the measure under various international agreements. The US has threatened to challenge the scheme at the International Civil Aviation Organisation as a breach of international aviation agreements, such as the 1944 Chicago Convention, and is also considering a challenge under a violation of the EU's World Trade Organisation commitments.

U.S. officials maintain that legislative changes are not the answer to cutting emissions, and that CO2 reductions would be better realised through improvements in air traffic control systems and investments in environmentally-friendly aviation technologies.

The US Department of Transport (DOT) has recently provided the X Prize Foundation, which awards prizes for successful innovation, with a planning grant of $500,000 to kickstart a search for an environmentally sustainable alternative to jet-fuel. "The race to refuel American aviation is on and our hope is that the X Prize Foundation will jumpstart investment and spur innovation," said Mary Peters, secretary of the DOT.

The X Prize Foundation will offer $10m to any developer who can produce a sustainable replacement for jet-fuel. The Foundation has achieved success in a number of fields to date, including spaceflight and genome sequencing. Sarah Evans, vice-president for communications, said they intended to bring experts in aviation and the green technology sectors together to decide on the exact details of the competition, with the aim of announcing the brief in the summer of 2009.

Friends of the Earth campaigner, Richard Dyer said: "New technology has a role to play in moving towards a low-carbon future and we need to encourage innovators to come up with genuinely green solutions,". He added: "But urgent government action is also needed to cut the growth in air travel and make the cost of aviation reflect its impact on climate change."