Briefing

How the undertaxed, polluting aviation sector can help fix the EU budget

February 26, 2018

Transport is Europe’s biggest climate problem, representing 27% of the bloc’s greenhouse gas emissions. In order to meet its climate targets and avoid the severe impacts of climate change, stronger EU action on transport emissions is needed and fiscal policy has a key role to play – especially in the aviation sector which enjoys fuel tax and VAT exemptions and copious amounts of state aid.

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The EU is now drafting its post-2020 budget with a proposal expected in May 2018. The annual €10-14 billion gap that will be left as a result of the UK’s departure from the EU has triggered debate on alternative sources of revenue for the EU budget.

Taxing climate-intensive transport would encourage smarter transport behaviour and accelerate the uptake of cleaner technologies. The potential revenue from such taxation is just over €50 billion per year – and of that €38 billion could potentially come from the aviation sector. A small part of these revenues could be used as EU own resources – where it should be earmarked for climate spending. But the bulk would become available to member states to reduce labour taxes or other economically harmful taxes.

T&E estimates that taxing aviation fuel for domestic and intra-EU flights at the EU mimimum rate of 33 cents/litre set by the Energy Tax Directive could generate about €9.5 billion in additional revenues each year. Abolishing the exemptions and applying a 15% VAT to all passenger transport could generate a further €17 billion while a common ticket tax on EU departures could generate around €11 billion – or more. Ticket taxes are widely levied around the world.