How to tax aviation to curb emissions

1. Ticket taxes.

Taxes on departing and even arriving passengers are commonplace around the world and the recent Commission report shows that with only seven in place in Europe, the EU is undertaxed compared to its main aviation partners. Applying ticket taxes evenly across the EU 28 would require unanimity, which is hardly likely. So the best approach, as discussed at the conference in The Hague, is to promote coordination and harmonisation across member states, possibly using similar consultative mechanisms that have been used for road pricing. Ticket taxes can be set to differentiate between EU, medium and long-haul flights. The UK was the first country to introduce a ticket tax in 1993, largely as an easier way to raise revenue than applying VAT. It also has a more indirect effect on emissions reductions than a fuel tax. The Netherlands is now proposing a variant to passenger taxes; a per flight tax on all cargo aircraft.

2. Fuel taxes

The oft-cited Chicago Convention is not, in fact, an obstacle to taxing fuel uplifted into an aircraft – as confirmed by the European Commission’s own report. The inclusion of provisions excluding the taxation of fuel in almost all intergovernmental air services agreements over the past 60 years, however, is a barrier. These were superseded for flights between EU member states in the 2003 Energy Tax Directive which allowed fuel taxation on a bilateral basis but some foreign carriers still operating within the EU remain fuel tax exempt. This issue can be solved by de minimis tax provisions and, if necessary, by exempting all-cargo flights. Taxing fuel within Europe is analogous to the US, Australia, Brazil, Japan, India and others taxing domestic fuel, and the next step would be starting the process to renegotiate the international mutual fuel tax exemptions.

3. Bilateral and multilateral agreements to tax jet fuel

The Energy Tax Directive allows for EU countries to agree between two or more of them to tax jet fuel on flights between those states. So the immediate step is to build on the momentum of the conference in The Hague and for smaller groups of EU countries to agree to tax fuel on flights between them. Such ‘coalitions of the willing’ – perhaps neighbouring states – can lead the way without requiring the whole EU needing to agree at one time. That, afterall, is how ticket taxes have developed and T&E says this faces the fewest political and legal hurdles at EU level. In fact, the Dutch and Swedes already support this approach as it’s a neat way to price carbon and brings aviation into line with other sectors.

4. Strengthening the ETS

Airlines’ emissions on flights within Europe are already covered by the EU’s emissions trading system (ETS). (Officially, flights exiting and arriving into the EU are also covered, but this has been on hold since 2012 due to threats of a trade war by the US and others.) The system limits the amount of carbon airlines can emit and requires them to buy allowances for anything over their (controversial) free allowance.

At present, the cost of the ETS for airlines is about €800 million a year. This is a fraction of the benefit enjoyed by the kerosene tax exemption, which totals €27 billion for all aviation kerosene uplifted in the EU, according to the Commission study, or €8 billion on intra-EU flights only – as T&E’s online calculator shows.

Now the aviation ETS is under review and the new Commission is expected to propose that airlines pay for all of the carbon they emit. As the ETS is not a tax, reforming it does not require unanimity. Removing airlines’ free allowances would finally see airlines pay for all of their emissions (within Europe). The massive weakness of the ETS is that carbon is much too cheap to drive down emissions: around €26 per ton. Analysts reckon it would need to double for polluters to get serious about their climate impact. Taxing fuel or forcing airlines to buy multiple carbon credits would allow lawmakers to set an effective aviation carbon price.