A few days ago, Simple Flying reported that Germany’s government was considering doubling the country’s domestic aviation tax. With anti-flying movements and discussions on various aviation taxes all the rage these days, we must ask ourselves if fiscal tools are an effective answer to climate change.
The supposed purposes of aviation taxes
Aviation taxes can serve various purposes. Aside from general sales-taxes, such as VAT, airfares can also see the imposition of various distinguishable forms of taxation.
Ticket taxes for one, such as the UK’s Air Passenger Duty, are imposed on all passengers and go to government treasuries. Likewise, fuel taxes, directly imposed on kerosene, may be used to internalize the environmental cost of fossil-fuel or to prop up general funds.
For many aviation tax advocates, increased levies on the industry have a three-pronged impact. On one hand, taxes could end what Transport and Environment call “aviation’s tax holiday”. On the other, taxes could put a ceiling on aviation’s environmental impact by both dampening demand and internalizing environmental costs.
The impacts of aviation
The impact of aviation taxes is, to put things simply, a hotly debated topic.
Political considerations aside, the variety of aviation taxes, the amounts charged, the differing imposed parties, and the diverse socioeconomic contexts in which the taxes are applied, make analysis challenging.
That said, here are some general findings on the effectiveness of aviation taxation.
Aviation taxes and the industry
According to a 2019 European Commission report, the impact of a tax increase on air travel demand within the studied countries is dependent on various factors. These factors include, but are not limited to, price elasticity and the share of international vs intra-European flights.
On average, however, the report found that a 10% increase in ticket prices results in 9-11% reduction demand. For airlines, this finding is bad news. The same EC report states that ” new or increased aviation taxes would generally have a negative impact on the aviation industry”.
Indeed, the introduction of new taxes would not only dampen demand but would also have a negative impact on sector employment and direct VAT.
For airlines, who generally operate on thin margins, around 1.5-6% (depending on the region), additional taxation would materialize into a significant financial burden. In the worst case scenarios, burdensome taxes, such as the UK’s APD, can make otherwise profitable routes impossible.
Aviation taxes on GDP
Though airlines operate on tight margins, the relationship between aviation and the economy is evident. According to the European Commission, for every euro spent in the aviation sector, three euro are generated for the overall economy.
“The wider supply chain, flow-on impacts and jobs in tourism made possible by air transport show that at least 65.5 million jobs and 3.6% of global economic activity are supported by [the aviation] industry.” – Michael Gill, Executive Director, Air Transport Action Group (ATAG)
The relationship between taxing this economically enabling industry and the subsequent impacts of said taxation is, however, more complicated.
According to the European Commission report, increased aviation taxation’s impact on GDP is dependent on the structure of a national economy. In some cases, aviation tax increases have a GDP impact of less than 0.1%. For others, however, increased taxation could lead to a GDP contraction of 0.6%.
Indeed, according to a 2017 PWC report commissioned by Airlines for Europe, the abolition of air passenger taxes could generate €25 billion in additional GDP across the EEA by 2030 and a 97% fiscal return.
The report argues that the abolition of air passenger taxes will induce other forms of economic activity which, in turn, will lead to higher spending in the general economy.
Aviation taxes and the environment
While aviation taxes may hinder economic growth and negatively impact airlines, these phenomena could largely be forgiven if they achieve their desired effect. That is, if aviation taxes successfully limit and mitigate the aviation industry’s environmental impact.
According to IATA, however, “no government that introduced a ticket tax has been able to demonstrate that such tax reduced CO2 emissions.”
Indeed in the UK, for example, passenger numbers have increased by 138.7% between the introduction of the APD and 2017. Assuming a positive, though decreasing, relationship between passenger growth and emissions, the APD seems to have been unable to curb the industry’s environmental impact.
Similar results can be found in other jurisdictions, be they France, Germany, Austria or Italy.
To overcome climate change, taxes alone are not the answer
The economic welfare of nations is undeniably dependent on the environment. The other side of the same coin, however, states that climate change mitigation may require a robust economy.
Aviation thus has a unique role to play as both a polluter, and major economic enabler. In turn, any environmental, fiscal, economic, and social response to aviation must take into consideration the industry’s unique position and multifaceted impacts.
Here, quantitative constraints on emissions and cap-and-trade schemes offer states an effective tool. For the aviation industry, those schemes are CORSIA, and in Europe, the Emissions Trading Scheme (ETS).
Indeed, the ETS is a perfect case in point. Thanks to binding emissions caps, aviation growth within the Union has been carbon-neutral, and emissions have been decoupled from growth.
Moreover, while passenger kilometers flown within the EU have increased 60% since 2005, the average fuel consumption of commercial flights has decreased by 24 percentage points in the same period.
CORSIA on the other-hand aims to offset and reduce the industry’s CO2 emissions on a global scale. According to the International Civil Aviation Organization (ICAO), CORSIA will help the industry meet its goal of global carbon-neutral growth from 2020 onwards.
To overcome climate change, the industry and arguably society need government policies which support, not hinder, the development of sustainable technologies and efficient operations.
“European governments should support aviation’s ongoing initiatives to decarbonise by providing economic incentives for sustainable jet fuels and low carbon aircraft” – Thomas Reynaert, Managing Director, Airlines for Europe (A4E)
The implementation of the Single European Sky, for example, would reduce emissions in Europe 10% according to A4E.
Burdensome taxes, which inhibit development and lead to perverse incentives, however, largely fail to meet these long-term objectives.