This paper reviews the problem of environmental externalities in air transportation. Several types of externalities in aviation are discussed and their empirical relevance is assessed. Next, it is argued that economic evaluation of environmental effects is essential in order to arrive at an efficient solution to the problem of externalities. An evaluation framework is presented, containing the cause-effect relations between air transport output and environmental degradation, as well as the monetary valuation of the environmental goods affected. © 2001 Elsevier Science Ltd. All rights reserved.