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Ending international aviation’s $65 billion fuel tax exemption an essential step towards decarbonisation

Ending international aviation’s $65 billion fuel tax exemption an essential step towards decarbonisation | Andrew Murphy,T&E

Thu 16 Apr 2015 – With the Paris COP only eight months away, the expectation remains that an agreement to cover all Parties, all sectors and all emissions can be reached. The objective is to limit any global temperature increase to below 2 degrees C, with many calling for a more ambitious target. Whatever the exact target, there is broad acceptance that it can only be achieved by the widespread decarbonisation of the world economy. This approach is now well recognised including by the key actors, China, the EU and the US, who are engaging on a serious energy transition to renewables.

 

For aviation, decarbonisation must include phasing out the fuel tax exemption which is inflating demand but is without any rational economic basis. This exemption, as Alejandro Piera points out in his recent GreenAir article, is rooted in legal agreements, but that is no reason to exempt it from scrutiny, argues Andrew Murphy.  

 

Efforts to combat climate change are often short on good news. However, the recent statement from the International Energy Agency that emissions have stabilised in 2014, even though global economic growth continues, shows that it is possible to decouple the two. Carbon emissions from international aviation though continue to grow unabated. With international air passenger demand projected to grow annually at around 4.1% – and potentially more if oil prices stay low – any regulatory and technological moves to reduce emissions will surely be outstripped by growth from the sector. Demand is growing at a greater clip than global economic growth partly due to the fuel tax exemption, which is a distortive subsidy driving demand above what it otherwise would be.

 

ICAO is now in its fifth year of developing a CO2 standard for new aircraft that is intended to reduce emissions from these aircraft beyond the business-as-usual scenario. States have a responsibility to push back on manufacturers’ – and incredibly IATA’s – opposition and adopt a standard that actually reduces emissions and contributes to ICAO’s goal to improve fleet-wide fuel efficiency by 2% annually. Applying the standard only to new aircraft types and based upon 2016 state-of-the-art technologies – as insisted upon by industry – would provide absolutely no benefit for either the environment or consumers who would end up paying more and potentially having to fly less to reduce emissions. But you may never be able to prove that because ICAO intends to keep all the real details secret.

 

To bridge the gap between emissions growth and reduction measures, ICAO and industry plans a global offsetting scheme for emissions over 2020 levels (the global market-based mechanism proposed at the 2013 ICAO Assembly) coupled with an increase in the use of alternative fuels. The offsetting scheme is due to be approved at the 2016 Assembly and come into force in 2020.

 

However, prospects for ICAO to agree stringent quality criteria for offsetting are poor: at worst they will accept all programmes, including voluntary carbon offsets, and at best they will merely defer to the UN’s Clean Development Mechanism (CDM), including its flawed rules on proving that its emissions reduction offsets are additional to the business-as-usual scenario. Even so, offsets by their nature will not see emissions reductions in the aviation sector, nor is a 2020 carbon neutral growth target anywhere near in line with the global objective of limiting a temperature increase to under 2 degrees C. A failure to act by international aviation will place a greater burden on all other sectors of the economy.

 

The airline industry predicts a massive increase in the use of alternative fuels, although most experts predict an uptake of only a few percentage points in the coming years. More optimistic projections remain purely speculative at the moment. Whether these alternative fuels will actually lead to emissions reductions on a lifecycle basis and after taking into account of indirect land use change are major question marks ICAO is yet to resolve.  

 

All these issues point to aviation remaining a persistent laggard in efforts to decarbonise the world economy, meaning further measures are required. One obvious measure is to finally end aviation’s generous fossil fuel subsidies.

 

As the Piera article outlines in detail, international aviation benefits from a fuel tax exemption that is rooted partially in the 1944 Chicago Convention, but is largely the result of ICAO and industry lobbying to enshrine the exemption in thousands of bilateral Air Service Agreements (ASAs). This exemption amounts to the mother of all global sectoral fossil fuel subsidies – matched only by international shipping – that is artificially inflating the growth of international aviation.

 

International air transport, for all the economic and social benefits it brings, remains the preserve of a privileged minority – some 140-280 million – of the world’s population. These travellers overwhelming constitute the wealthiest percentile.

 

Based on converting international aviation CO2 emissions totalling 477 million tonnes in 2012 into fuel and taxed at €0.33 ($0.35) per litre (the minimum kerosene tax stipulated under the EU Fuel Directive, but which has never been implemented for the legal reasons outlined in this article), we calculate the fuel tax exemption amounts to an annual subsidy of €61 billion ($65bn) per annum to the sector. Using ICAO’s carbon calculator, which estimates a return flight between Europe and the US generates 782kg of CO2 per economy passenger, this works out at a generous subsidy of almost $102. All the while, those worst affected by climate change remain the world’s poorest and most vulnerable, as demonstrated by the recent Pacific cyclones. Legal realities may explain, but they cannot justify, what is essentially a hefty tax break enjoyed by the corporate world and the world’s wealthiest at the expense of its poorest.

 

Piera describes ICAO’s support for this exemption as a “logical approach” given the organisation’s mission to develop international aviation. However there is nothing “logical” about this subsidy especially when aviation is by far the most carbon intensive form of transport and climate change now the greatest challenge facing mankind. The IMF and the World Bank have not held back in describing the fuel tax exemption as an anomaly, and with negative consequences for the environment. While the exemption may have had some merit at the dawn of international aviation in the aftermath of WWII, it has no place in the 21st century, when the greatest challenge is to decarbonise our economies and arrest the growth in global emissions.

 

Piera identifies a path towards indirectly ending the exemption by increasing embarkation (departure) taxes on passengers, which are levied by many countries around the world. It is certainly an option, though once again such a move is likely to be predictably opposed by the airline industry as US airline trade body A4A has done with its legal challenge to the German departure tax.

 

Efforts to end this subsidy must target that subsidy’s origin – the relentless, outdated and counterproductive lobbying by ICAO and industry, a product of institutional bias and the airline sector’s profound failure to appreciate that its only future is a sustainable one. ICAO continues to promote the fuel tax exemption, highlights it as a key element for inclusion in all ASAs and restates its position in various Council Resolutions. The organisation founded to oversee the peaceful development of civil aviation continues to see fit to lecture States on national tax policies. 

 

As the world – both developed and developing – steps up efforts to decarbonise their economies, such policies are increasingly unacceptable. It is essential States move to reform ICAO’s position on fuel subsidies to bring them into line with well-established global objectives to phase out subsidies for fossil fuel consumption. This should begin with ending ICAO’s opposition to fuel duty in the form of an updated Council Resolution, which should garner support from those States leading on climate change, and those States facing its worst effects.

 

Change will not materialise overnight, but without first steps it will never come. Such a move should be matched by increased departure taxes, the introduction of fuel duty in the major economies starting with intra-EU flights and an increase in the US domestic aviation gasoline tax – the world’s two largest aviation markets. What an irony that the two largest domestic aviation fuel taxes worldwide are levied in India and Brazil while foreigners jetting in pay nix.  

 

Piera describes the legal barriers to this outcome, but the reality is that most measures to rein in international aviation emissions face legal barriers. It is still unclear, for example, how a global market-based mechanism to offset emissions above 2020 levels will be legally established. Maybe the model ICAO paragraph that so embeds the fuel tax exemption in ASAs will need to be deployed. In such a laborious but potentially necessary process, perhaps one could replace the other?

 

Legal barriers cannot be ignored and a strategy to overcome them must be drafted. They should not, however, be used as an excuse for inaction. This fossil fuel tax exemption, so long as it exists, will continue to run counter to global efforts to decarbonise and has no place in the 21st century. 

 

 

The author, Andrew Murphy, is with Brussels-based NGO Transport & Environment (T&E).

 




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