EU States gather to discuss imposition of climate taxes and carbon pricing on European aviation sector
Wed 26 June 2019 – A coalition of EU States came together last week in the Netherlands to discuss how carbon pricing and taxes could be applied to Europe’s air transport sector. At a conference convened by the Dutch government, the country’s finance minister, Menno Snel, said it was unfair aviation escaped taxes compared to other transport sectors and called on States to work together to create a European aviation tax and carbon pricing system. His stance was supported in presentations by ministers from Sweden and France, who called for a carbon tax on fossil aviation fuel and that the next European Commission tackle the issue as a priority. The EU Commissioner responsible for taxation, Pierre Moscovici, said the Commission was ready to work with States willing to impose a fuel tax on flights between them. A researcher from Oeko-Institut estimates if flights covered by the EU ETS were taxed on their fuel, it would raise around €8.7 billion ($9.9bn) annually for European treasuries.
“Travelling by plane allows us to cross as many borders as we like – the world is at our feet and that is good – but there are also problems caused by flying, and the pollution doesn’t stop at our borders,” Snel told invited EU government representatives and academics. “Some might say creating an aviation tax won’t make a big difference but I think if we do it together, it really can.”
The Dutch government is planning to impose a ticket tax of €7 per flight, despite having pulled back from imposing such a tax a decade or so ago after a downturn in passenger traffic at Schiphol airport and travellers reportedly choosing to take flights from neighbouring countries. Snel said it was better for States to tackle the aviation pollution issue together.
“An EU-wide approach will make carbon pricing and aviation taxes even more effective,” he said. “It will prevent cross-border effects and create a level playing field where we can all share the same benefits at the same time. It makes sense to tax things that are undesirable than things that are desirable, such as more jobs. We want to shift the tax burden and putting a price on emitting carbon is a good way to do it. We also have an idea how we can do this although they are not set in stone and everything is up for debate.”
Snel said it was commonly believed international civil aviation’s Chicago Convention prevented States from taxing jet fuel (kerosene) on international flights. “It’s true the Convention doesn’t allow us to tax the fuel already onboard once a plane arrives but the restriction does not apply to fuel taken onboard before departure,” he argued. “That’s good news for all of us. Imposing a fuel tax would be a strong incentive for carriers to develop cleaner fuels. More importantly, it’s only fair that they pay.”
He was supported by Sweden’s Minister of Finance, Magdalena Andersson, who said the Convention had been good for trade and economic growth but new challenges were now having to be faced.
“Our view is that taxing aviation fuel would make a lot of sense,” she told delegates. “Just as a carbon tax on other fossil fuels, it doesn’t just address climate change, it also addresses the imbalances that exist today between different modes of transportation. All we have is this huge exception for the aviation sector and this is clearly a harmful subsidy. A tax on aviation fuel would meet the ‘polluter pays’ principle and raise public funds that could be used for important investment and climate-friendly technologies. It would also be easier to administer both for authorities and companies.
“A tax would both stimulate energy efficiency and the reduction of fossil fuels as we would only tax the fossil content of the fuel, and this would encourage the much-needed production of biofuels for airlines.
“Of course, it can also change people’s behaviour and a reminder that when we are flying, we are polluting our climate and so we need to pay for it. High income households do fly more frequently and longer distances than those on lower incomes, so the tax would be paid mainly by high income earners.”
Andersson said she expected there would be challenges to such a policy at ICAO but Sweden was willing to take the initiative “and we would be happy if we could have more friends in those discussions.”
She added the EU ETS only applied within the EU and did not ensure aviation contributed sufficiently to the goals of the Paris Agreement.
“We also have CORSIA but as I see it, it can only be a relevant policy tool if it is ambitious enough and what has been outlined so far is by no means sufficient in order to tackle climate change. So we clearly need stronger action nationally, bilaterally and internationally. We need to fill up the aviation taxation toolbox and it’s urgent.”
French ecology minister Brune Poirsson, whose government has been confronted by the ‘gilets jaunes’ mass movement that initially started as a public protest against rising environmental taxes on fuel, told the conference via a video: “It makes no sense for the majority of citizens to pay significant taxes on their car fuel in order to commute to work in their daily lives, while aviation fuel is not taxed for people who fly thousands of kilometres to go on vacation. This creates a feeling of deep injustice and unfairness and it hampers social acceptability for environmental policies.”
She acknowledged aviation had already taken action to reduce its emissions within the EU ETS and the future implementation of CORSIA.
“It’s a good first step and France has been fully supporting the successful implementation of CORSIA because it represents a unique opportunity for the aviation sector to curb CO2 emissions on a global level,” she said. “But we need to go further and faster. It is therefore crucial the sector intensifies its efforts, in particular in R&D investment in disruptive low-carbon technologies.
“At the government level, a coordinated European approach would be the best way to avoid negative impacts, especially on our competitiveness. We are only at the beginning of the debate and all the relevant policy tools should be discussed, such as a direct tax on aviation fuel, strengthening the EU ETS by reducing the free allocation [of allowances] for airlines and ticket or plane taxes.
“France strongly supports the initiative of the Netherlands, Luxembourg and Belgium to open a discussion on this topic. It should become a key part of the next European Commission’s work programme. If an agreement cannot be found within the EU within a reasonable timeframe, then France would be open to becoming part of a ‘coalition of the willing’ on aviation taxation.”
Other major aviation European countries like Germany, Spain and the United Kingdom have yet to express a public view on an EU-wide common approach to aviation taxation.
In addition to the Chicago Convention, another challenge in imposing jet fuel taxes on intra-EU flights is the EU’s own energy tax directive adopted in 2003 that exempts aircraft fuel from excise duty. As domestic aviation is outside the remit of the Convention, any country can charge a fuel tax or duty on domestic flights and EU Member States can also tax aviation fuel used in intra-EU flights but only by means of bilateral agreements.
EU Commissioner Pierre Moscovici said the exemption was in stark contrast with the environmental objectives of the European Union.
“I can assure you the Commission is ready to work alongside Member States to explore all possibilities,” he told the conference via a video. “These include amending the directive to remove the exemption for aviation and maritime transport. In 2011, the Commission proposed to amend the directive in order to introduce taxation based on CO2 emissions and on the energy content of fuels. Unfortunately, the proposal had to be withdrawn in 2015 in view of the lack of unanimous support in the Council.”
Efforts to overcome the unanimity lock on EU energy taxation have so far failed although the Commission recently proposed a move towards qualified majority voting.
“I know it will be difficult to get this proposal adopted because in order to end unanimity, unanimity is required,” he reported. “But the important thing for us was to launch the discussion. We wanted to encourage Member States to take a stand and then be accountable to their citizens who had clearly expressed their concerns about climate issues in the recent European elections. We must live up to their expectations.”
Moscovici said the Commission could assist Member States willing to sign bilateral agreements by providing guidelines. He added the EU could work towards removing the fuel exemption from bilateral air service agreements with third countries by agreeing to tax fuel on a reciprocal basis. He named India, Japan, Brazil, Australia and the United States as examples since they already taxed aviation fuel domestically.
New aviation taxes should be looked at alongside other measures that include emissions trading, offsets, alternative fuels and operational improvements, he advised.
“The choice of measures should be based on the most effective way of achieving emissions reductions with the lowest impact on connectivity,” he said. “One thing is clear – the implementation of a modern energy tax system in line with our environmental objectives is undoubtedly one of the biggest challenges that will face the next European Commission. It is essential this difficult work gets underway now.”
The conference also heard presentations by representatives from the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD).
Ludger Schuknecht, Deputy Secretary General at the OECD, said carbon pricing was key for a cost-effective climate policy and was an economically and politically sound strategy. However, he said, there was currently almost a complete absence of carbon price signals in aviation.
“Asking aviation to share in the decarbonisation effort like other sectors of the economy would seem fair,” he said. “There are no simple answers but leaving aviation out of the equation is definitely not the answer. Stepping up pricing efforts in aviation seems both fair and efficient, and should complement broader carbon pricing efforts across all sectors, A tax on jet fuel, or its carbon content, is technically the most straightforward way. Coordination at the European and global level is crucial when it comes to a fuel tax, which is politically challenging.
“CORSIA can create incentives to price additional emissions but in its present guise it is not geared towards reaching the goals of the Paris Agreement or the decarbonisation of the aviation sector. Apart from a fuel tax, emissions trading is the most effective way to induce carbon abatement.
“Ticket-based carbon charges have the same demand effect as carbon prices but the effect on efforts to reduce CO2 emissions per unit of travel is less direct. They are also vulnerable to regulatory competition and require a coordinated effort across jurisdictions and should apply to all flights in the region, but they may offer a relatively straightforward approach to a fair and reasonably efficient carbon pricing for aviation.
“We need to convince citizens that what is at stake is a shift, not a loss, in economic activity – money we don’t spend on planes is not lost, it goes somewhere else in the economy.”
Ruud de Mooij, head of IMF’s tax policy division, said carbon pricing was effective and efficient, and induced behavioural changes in terms of fuel efficiency, fuel switching and consumption patterns. It could also offset the anomalous tax treatment of aviation, which along with international shipping, created large distortions. He suggested both sectors were natural sources of global climate finance.
The European Commission’s Director for Aviation, Filip Cornelis, said there was no one silver bullet measure that would decarbonise aviation and a basket of measures was required.
“It is something we have been working on for a number of years, maybe not fast and deep enough but a lot of different activities and measures are ongoing in technological developments to improve the fuel efficiency of airplanes, and much progress has been made,” he said.
“There is merit in looking at taxation but what I would argue is that we have to look at the efficiency of a measure in achieving decarbonisation. The uptake of sustainable fuels, for example, costs more than kerosene and will increase the cost of flying but they will reduce emissions very substantially. This is something we so far have not been able to do because the production of these fuels is very low. If we can address those two questions, we will be able to achieve very real emissions reductions while continuing to fly. Flying provides connectivity and we have made a lot of progress in our society in the last 25 years through having more opportunities to travel. Of course, we want to have the impact of that minimised.”
Cornelis said a study by the Commission showed the weighted average passenger ticket tax across EU States was already €11 ($12.50), adding that more work should be done to understand what impact ticket taxes had on demand, connectivity and emissions. “Of course, we can calculate what the revenues are from such taxes but the impact on emissions we still have to prove,” he said.
Maria Teresa Fabregas Fernandez, Director of Indirect Taxation and Tax Administration at the Commission, said taxation can play a key role in incentivising innovation in new technology and changing behaviours to achieve climate change objectives.
Beatriz Yordi, the Commission’s Director for European and International Carbon Markets, with responsibility for the EU ETS, said: “The measures we have in place will not help us reach Paris. We will need to step up ambition and take more measures – this is clear.”
On CORSIA implementation in Europe, Cornelis said: “We are working on a process worked out by the Parliament and Council that is written into the ETS directive, which says we need to produce a report within one year from the adoption of CORSIA, possibly coupled with proposals, on how we implement the scheme. We are in the early stages of that process and we will be moving forward with a public consultation and studies in the coming months.”
Added Yordi: “We are already proactive in adopting the monitoring provisions of CORSIA and we in Europe are working together on its environmental integrity and achieving a solid international agreement, although we do have some worries.”
Dr Eckhard Pache, Professor of Commercial and Administrative Law at the University of Wurzburg, said although the EU energy tax directive allowed for bilateral or multilateral agreements between EU Member States to remove the aviation fuel tax exemption for intra-EU flights, air service agreements (ASAs) with third countries had to be respected. Third country aircraft operators falling under those agreements that carried out intra-EU flights, must be exempted from fuel taxation, he said.
He estimated there were around 100 such non-EU operators but very few with more than single-digit intra-EU flights a week, with the exception of two major US freight operators, FedEx and UPS, which operated around 100 flights per week.
To avoid violating ASAs with third countries there were two possibilities, he said. One was to exempt all freight operators from the tax and the other was to include an exemption for all operators falling under a certain maximum number of weekly flights that would allow capture of all intra-EU flights from non-EU operators. As well as complying with ASAs, he said, this would ensure equal treatment for all operators in the EU aviation market.
"This would be compatible with not only the Chicago Convention but also with those existing ASAs. There would be no legal impediment for introducing this,” he reasoned.
Emissions allowances (EUAs) under the EU ETS are currently trading at around €25/tonne CO2e ($28) is equivalent 6.3 eurocents per litre of jet fuel, said Jakob Graichen, a senior energy and climate protection researcher at Öko-Institut. Under minimum excise duties stipulated under the energy tax directive, aviation fuel must be taxed at no lower than 33 eurocents per litre, so equivalent to an EUA price of €130.95/tonne.
On a 400km typical flight from London to Paris, Graichen estimates an additional per economy class passenger cost of €1.15 to cover the EUA price of €25/tonne. However, a fuel tax would add €6.02 per passenger, most of which would likely be passed on to the traveller, he said. A flight between Amsterdam and Rome would incur a fuel tax equivalent to €16.37 per passenger. If all flights covered by the EU ETS in 2017 had been taxed on fuel usage at 33 eurocents/litre, total revenues would have amounted to €8.7 billion ($9.9bn), calculated Graichen.
Commenting after the Dutch conference, Bill Hemmings, Aviation Director at Transport & Environment, said: “Member states have had a unique opportunity to assess what needs to be done about aviation’s climate impacts and it’s clear the kid glove treatment of the sector must end – starting with stepped up taxation on fuels and tickets and a further strengthening of the ETS. The call for a level playing field on taxing fuel between sectors came across loud and clear. The fact that some 82% of carbon is yet to be taxed in the ETS and fossil fuels are subsidised to the tune of €350 billion should be a wakeup call to all.”
In a statement issued ahead of the conference, trade body Airlines for Europe (A4E) said aviation taxes were not an effective tool to reduce CO2 emissions and that a number of ‘green taxes’ introduced in some EU Member States had neither helped reduce emissions nor been used to fund environmental initiatives.
A4E members Airbus, Air France, easyJet and Norwegian said the best way for aviation to address climate change was through continuous investment in technology for new aircraft, sustainable fuels and reformed air traffic operations.
“Taxes weaken airlines’ ability to further invest and also hurt consumers by making it more expensive to fly,” said Bjørn Kjos, CEO of Norwegian Air Shuttle.
The statement added that airlines had been paying for their emissions since 2012 through the EU ETS and was the only transport sector in the scheme.