MPs call on UK Government to increase air passenger duty and renegotiate Chicago Convention over fuel taxes
Tim Yeo, MP, Chairman of the House of Commons Environmental Audit Committee
Wed 25 Mar 2009 – The UK House of Commons all-party Environment Audit Committee (EAC) has called on the UK Government to urgently seek reform of the Chicago Convention so as to allow governments to impose a tax on international aviation fuel. The fall in oil prices makes such a move timely and desirable, it suggests. The committee also expressed “extreme disappointment” with the Treasury’s decision to “backtrack” on a proposal to replace Air Passenger Duty (APD) with a per plane charge.
In its ‘Pre-Budget Report 2008: Green fiscal policy in a recession’, the EAC said it had identified failings of taxation policy with regard to aviation, at a time when emissions from aviation, especially on short-haul flights, had continued to increase. It said the current rate of APD represented a cut in real terms of 30% since March 1997. Although there had been a significant increase in APD receipts in 2007 compared to 2000, the level of duty “would seem unlikely to have a large influence on behaviour”.
The committee had welcomed the Government’s original proposal to change from a charge per passenger to a charge per plane, arguing it would tax air freight for the first time and incentivize airlines to increase the efficiency with which they fill their flights.
“We were therefore surprised and disappointed that the [Treasury’s] 2008 Pre-Budget Report announced that this change will not now take place,” said the EAC’s report. “When asked about this decision, the Exchequer Secretary explained that, according to the Treasury’s analysis, the extra carbon that would have been saved by this reform was marginal, while economically it might have caused difficulties for freight transporters and regional airports.”
The committee said it was unconvinced by the reasoning, the arguments for the reform having been formerly accepted by the Treasury. “We are extremely concerned that the Government is abandoning a proposal that by its own admission would send better environmental signals and better represent environmental costs.”
The report recommends the Treasury to reinstate its plan to reform APD into a per plane tax and asked the Treasury to publish an explanation of why it believes the revised APD charges would discourage unnecessary air travel.
Included in the report is a submission by Virgin Atlantic Airways in which it said it was “very disappointed” that the Government had decided to increase aviation taxation “substantially”. Not only did the amount to be raised by APD far exceed the environmental costs of aviation, it contended, it was also much higher than taxes applied to the industry by any other country.
It was vital, it continued, that the Government does not retain APD after the industry becomes part of the EU Emissions Trading Scheme (ETS). “A failure to end APD when the ETS is introduced would result in double taxation, for which there can be no justification.”
The report quotes a submission to the committee by the Exchequer Secretary (a junior minister in the Treasury), Angela Eagles, in which she told them: “We have certainly been pushing as the UK for a renegotiation of the Chicago Convention, which is plainly anachronistic and prevents the appropriate taxation of fuel for aviation on a worldwide basis in what is clearly a global industry.”
The EAC recommends the Government to seek the support of the new US administration in promoting a reform of the Convention to allow governments to impose a tax on international aviation fuel.
“In the meantime, we note that the Chicago Convention does not extend to fuel for domestic flights, and that most other European countries charge Value Added Tax on domestic flights. We recommend that the Treasury introduces both fuel duty and VAT on domestic flights to encourage modal shift, especially to rail.”
An article in the Aviation Law Professors Blog – edited by three international aviation law experts – responding to the EAC call says that removing the protection of Article 24 of the Convention, which covers duties and taxes, leaves “the opportunity for States to meddle in the orderly development and provision of air services by stuffing their coffers with monies drawn from fuel taxation.”
For airlines to operate “soundly and economically”, as set down in the Convention, they must be placed out of the reach of the opportunistic hands of governments, says the author.
“Any amendment to the Chicago Convention will be accompanied by deliberation and that takes time. By that time, there is no telling where fuel prices will be. An amendment so radical as to allow States to do what they have been rightly barred from doing for over 60 years will not be easily implemented or revoked.”