Price of aviation

The result of subsidies in the aviation sector is artificially cheap ticket prices, which serves to drive up demand and reduce incentives for more sustainable aviation. Removing these subsidies is key to creating a more sustainable aviation sector.

Some of the subsidies include aid given to airports by local, regional or national authorities. Oftentimes this aid is in breach of EU guidelines concerning state aid. Aid is also granted to aircraft manufacturers, including at EU and national level. This aid is provided despite the absence of meaningful CO2 efficiency standards, resulting in a missed opportunity to mandate greater CO2 savings from new aircraft.

But perhaps the biggest subsidy is the aid enjoyed by airlines through tax exemptions on their fuel and tickets. Airlines, unlike motorists across Europe, pay zero duty on their fuel. Plane tickets sold are mostly exempt from VAT. These subsidies total tens of billions of euro each year, money which could be reinvested in greening the economy or lowering labour taxes. In addition, Europe’s carbon market for aviation – the Emissions Trading System (EU ETS) – exempts the majority of flights departing from Europe and provides generous free allowances to airlines.

Find out how much each member state loses in aviation taxes each year in our Tax Gap study.

The EU’s carbon market for aviation – the Emission Trading System (ETS) – is one of the few measures in place attempting to address the sector’s soaring emissions. Carbon markets are trading systems in which carbon credits are sold and bought. Aviation was brought into the EU ETS in 2012, covering all flights to and from EU airports. Following significant international and industry pressure, the scope was reduced to cover intra-EU flights only (known as “stop the clock”) to give time for the UN agency which regulates aviation, ICAO, to agree on a global measure.

At its 2016 triennial assembly, ICAO adopted the outline of a global offsetting scheme known as Corsia. However the environmental integrity and economic viability of that scheme today is severely questioned. 

In October 2016 ICAO agreed the outlines of a global market-based measure to address CO2 emissions from international aviation, starting as a voluntary measure from 2021. The Carbon Offsetting and Reduction Scheme for International Aviation (Corsia) aims to stabilise CO2 emissions at 2019  levels. The measure will be mandatory from 2027 but the lack of enforcement mechanism weakens the scheme as a whole. 

However its target will be achieved through the purchase of cheap offsets or alternative fuels. Offsets involve paying other sectors to reduce their emissions, rather than reducing your own. It has failed to work in the past, with the vast majority of offset credits purchased by entities subject to the EU ETS failing to deliver emission reductions. And it won’t work in the future as the Paris Agreement requires all-sectors to cut their emissions. It is highly unlikely that ICAO will put in place the effective safeguards needed to ensure only clean alternative fuels are used to deliver real emission reductions.

Corsia risks being used as an exercise in greenwashing, with states citing the need to respect a global consensus as an excuse not to adopt more effective policies. Research conducted for the EU institutions highlight that implementing Corsia would be the worst option for the climate.

Each year, airline polluters have to surrender a number of permits under the EU ETS equivalent to the amount of CO2 they emitted in the preceding year. Polluters acquire permits through an annual allocation system and many of these permits are issued by member states for free. If airlines don’t have enough allowances to acquit their previous year’s emissions, they can buy additional permits at auction or from other companies having a surplus.

Unlike Corsia, the EU puts a maximum cap on the CO2 emissions that can be emitted by restricting the number of permits available on the market. However emissions from aviation have grown over the cap since 2013, which meant the system provided no incentive for them to reduce their emissions.

What flights are covered by the EU ETS? The carbon market is limited to intra-EEA flights and fails to to include long-haul flights in the pricing scheme. As a result, 58% of Europe’s aviation CO2 emissions will remain unaccounted for. Free allowances to airlines will be phased out by 2026, meaning airlines will have to pay for all the carbon they emit.

This means that international aviation is one of the only sectors of the EU economy that will not fall under an emissions cap or price. Power plants, steel makers, the chemicals industry and international shipping will be regulated by the EU carbon market (EU ETS).

Not at present. Until recently the ETS suffered from a gross over-allocation of permits, causing the price of allowances to crash. This gave airlines effectively unlimited access to cheap ETS credits, the cost of which hardly impacted on growth in any way.

However, reforms of the ETS in late 2017 resolved some of these issues, and saw prices almost triple in the space of a few months. They’re still short of the price level needed to drive significant reductions, so further reforms are needed. For example, the rate at which allowances are removed from the scheme could be sped up.

But the fact that the ETS only covers intra-EEA flights means that two-thirds of aviation emissions are not priced. To discover the amount of flights priced under the ETS in the last few years, please consult our 2020, 2021, 2022 and 2023 analyses.