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Reports from IMF and French economists call for climate taxes on international aviation fuel or air travel

Reports from IMF and French economists call for climate taxes on international aviation fuel or air travel | COP21,IMF,Paris School of Economics

Fri 15 Jan 2016 – Two reports, one an International Monetary Fund (IMF) internal discussion note and the other by the Paris School of Economics (PSE), suggest taxing international aviation fuel or air travel could provide an equitable solution to raising global finance for climate mitigation and adaptation. The IMF says there is an immediate need for governments to follow up the Paris Agreement reached last month with fiscal policies that put carbon pricing “front and centre” in efforts to reduce carbon emissions. Substantial amounts – upwards of $25 billion – could be raised from charges on international aviation and maritime fuels, says its discussion note. The PSE paper by Lucas Chancel and best-selling author Thomas Piketty estimates a €180 ($200) levy on business class tickets and €20 ($22) on economy class would raise around €150 billion ($165bn) a year for climate adaptation. However, an effort to include a call for a levy on the aviation and shipping sectors was rejected by countries in the lead-up to the Paris climate negotiations.

 

After the successful outcome of Paris COP21, IMF Managing Director Christine Lagarde said the agreement was “a critical step forward for addressing the challenge of global climate change in the 21st century” and now governments had to put words into practice by implementing policies to effect the mitigation pledges they had made.

 

“That is why my key message is to price carbon right and to do it now,” she commented. “Charging for the emissions of fossil fuels puts in place the needed incentives for low-carbon investments; it also provides revenues to safeguard the poor, reduce debt, and lower the burden of other taxes on households and businesses.”

 

Carbon pricing through taxes or trading systems designed to behave like taxes, defines the IMF, are potentially the most effective mitigation instruments, are straightforward to administer, raise timely revenues and establish the price signals that are central for redirecting technological change towards low-emission investments, says its staff discussion note. In addition, carbon pricing in developing countries would establish price signals needed to attract private flows for mitigation.

 

International aviation and maritime fuels are a growing source of emissions, are underpriced and charges would exploit a tax base not naturally belonging to national governments, say the IMF authors. They note that tourism, one of the beneficiaries from air and sea transport, will be impacted by exposure to climate change and related extreme weather events. They argue different patterns of tourism flows at the regional level will be created, resulting in losses for most developing countries, while high-latitude advanced economies would gain.

 

Charges on “rapidly rising” international emissions from the aviation and maritime sectors are a promising source of climate finance, says the paper. The need for international coordination is a challenge, it admits, as are the legal issues in the case of aviation due to treaties (the Chicago Convention) and bilateral air service agreements that limit fuel taxes. “But the practicalities should be manageable,” it contends.

 

The IMF researchers estimate a global $30 per ton CO2 charge on international fuels from the two sectors could have raised around $25 billion for climate finance in 2014, even after compensation for developing countries.

 

The PSE study examines the global distribution of greenhouse gas emissions (CO2e) between world individuals from 1998 (the Kyoto Protocol dates from 1997) and 2013, and comes up with different scenarios and strategies for contributing to a global climate adaptation fund based on efforts shared among high emitters rather than high-income countries. The study shows that inequalities between individuals in terms of global GHG emissions has decreased since Kyoto due the rise of top and mid income groups in developing countries and the relative stagnation of incomes and emissions of the majority of the population in industrialised economies. Over the period, however, income and GHG emissions inequalities have increased within countries.

 

The two economists estimate the top 10% emitters contribute to 45% of global emissions, while the bottom 50% contribute to just 13% of global emissions. These top 10% emitters live on all continents, with one third of them from emerging countries. The middle and upper classes of emerging countries increased their GHG emissions more than any other group within the past 15 years. In addition, there is now a greater inequality between the bottom of the distribution and the middle.

 

“While these trends, if continued, are positive from an income point of view – the emergence of a global middle class – they constitute a real challenge for future global CO2e emissions levels,” they say.

 

“Our estimates also show that within-country inequality in CO2e emissions matters more and more to explain the global dispersion of CO2e emissions. In 1998, one third of global CO2e emissions inequality was accounted for by inequality within countries. Today, within-country inequality makes up 50% of the global dispersion of CO2e emissions. It is then crucial to focus on high individual emitters rather than high emitting countries.”

 

The report suggests strategies to increase global climate adaptation funding, in which individual CO2e emissions, rather than national CO2e or income averages, are the basis for contributions. One of these scenarios is through a generalised progressive tax on air tickets. This might prove the easiest solution to implement, argue Chancel and Piketty, although less well targeted at top emitters.

 

The effort-sharing in contribution would be borne largely by air passengers in North America (29.1%), EU (21.9%) and China (13.6%).

 

ICAO and the aviation industry has resisted calls for the sector to contribute through a levy to climate finance. The governing ICAO Council issued a Declaration that was circulated at COP21 calling for international aviation not to be targeted as a revenue source “in a disproportionate manner” (see article).

 

“There have been a number of calls for global air transport revenues to be taxed by States for use in non-aviation-related climate change mitigation programmes,” said Council President Dr Olumuyiwa Benard Aliu. “The ICAO Council, through this Declaration, wished to stress very clearly … that this is an unfair approach and one which is ultimately counter-productive given the historic and exemplary environmental performance of our sector and the significant socio-economic benefits it brings to States and Regions all over the world.”

 

At the industry’s Global Sustainable Aviation Summit in Geneva last September, Michael Gill, Executive Director of the Air Transport Action Group (ATAG), said using aviation as a source of climate finance would hit hard those countries, particularly developing and small island states, heavily reliant on air transport for their connectivity and economy (see article).

 

“Such a blunt instrument will not have any measurable environmental benefit,” he told delegates. “Therefore, we will continue to insist that a global market-based measure developed through ICAO is a way to not only ensure fair distribution of responsibility, but also environmental integrity and financing to climate projects all over the world.”

 

 

Links:

IMF – ‘After Paris: Fiscal, Macro-economic, and Financial Implications of Climate Change’

PSE – ‘Carbon and inequality: from Kyoto to Paris’

 

 



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