Removing tax breaks

A leaked study from the European Commission showed that the aviation sector is chronically undertaxed in the EU, particularly when compared to the aviation markets around the world. By doing so, the EU has effectively subsidised air travel, one of the most emissions-intensive forms of transport possible. The report found that taxing the aviation industry is possible at 10% without impacting GDP. 

Therefore policy-makers must reconsider airline taxation in three key areas: 

1. Ticket taxes – ticket taxes are levied unevenly around the EU and depends on destination, fare class and collection method. Within the EU/EEA, ticket taxes average at €11 per ticket, which is relatively low compared to major markets worldwide. Ticket taxation must be addressed and adjusted to a level that accounts for the intense emissions produced by air travel.
2. Value Added Tax – VAT on passenger flights within Europe was zero-rated before the inception of the Union, and that system was grandfathered in through EU Directive (2006/112/EC). Although member states have instituted taxation on domestic and extra-EU flights, rates remain low at an average of €4 per ticket. 
3. Kerosene taxes – exemptions and subsidies on fuel continue to subsidise air travel by artificially deflating costs and increasing demand and must be reformed to reflect the actual cost of air travel.

Such low taxation rates and continued insistence on fuel subsidies create a market in which air travel costs are artificially low and do not reflect the actual environmental and social cost of air travel. Policy makers must reform ticket taxes, VAT, and fuel subsidies to encompass the total cost of air travel. 

Examples

Australia has a comprehensive taxation regime for the airline industry, particularly regarding ticket taxes. Australia institutes a Passenger Movement Charge (PMC) for both domestic and international departures at a flat rate of AUD 60 (~€40) for international departures in addition to other taxes and charges. Domestic departures are subject to a different rate of taxation, but all classes of flights within and outside of Australia are subject to several taxes regardless of destination.

The United Kingdom recently reformed flight taxation, cutting Air Passenger Duty taxes on domestic flights from GBP 13 (€16) to GBP 6.50 (€8) while increasing APD on ultra long haul international flights to a minimum of GBP 91 (€109) per ticket. 

Additional charges

Europe is particularly notorious for low-cost air travel, which often incentivises taking a plane over other much more efficient forms of transport such as a train. One solution to this would be to introduce additional carbon charges or “eco-taxes” on plane tickets to additionally disincentivize travel by plane when not necessary. The additional cost of taxing aviation fuel can outweigh the price of cheap tickets on European routes. The European Commission makes no secret of the fact that the reduction in CO2 emissions will be paid for by passengers, which will reduce the demand for sky travel. Airlines are calling for incentives instead of penalties. The announced ‘Fit for 55’ climate programme involves taxing aviation fuel and withdrawing free carbon emission rights for the industry. As taxes on fuel increase and subsidies decrease, airlines are expected to pass on most if not all of the increased cost to consumers. Although taxes may be introduced on airlines, the incidence is effectively placed on consumers and demand will likely drop as consumers face higher prices and better alternatives elsewhere. 

Additional fees may also be instituted on the consumer side to further disincentivize flying, so-called green-fees. These taxes could take several forms, including:

• Taxation based on distance for flights out of Europe
• Taxation based off of the carbon content and emissions of a particular flight and fuel

By taxing flights and tickets by their environmental impact, both airlines and customers can be nudged towards making more environmentally friendly decisions, and in the case of consumers, potentially using other more efficient forms of transportation

Examples:

France is introducing an EUR 18 “eco tax” per business ticket outside the EU; a subsequent proposal could raise these fees in addition to an aviation “eco tax” EUR 1.50 per economy ticket within the EU. The fees are applied to flights outside of France and not within the country, however. It is expected to generate around EUR 180 million per year in revenue.

Sweden introduced an aviation tax in 2018 which levies a fee based on final destination and flight distance. Flights to Appendix I countries (continental Europe, the United Kingdom, and Iceland among others) have a fee of 64 SEK (~6 EUR) per passenger, flights to Appendix 2 countries are subject to a 265 SEK (~25 EUR) fee, and all other destinations incur a 424 SEK (~40 EUR) tax. 

Reducing subsidies

A revision of the EU’s Aviation Guidelines in 2014 by the EC, still in force, allows state subsidies for regional airports and the airlines servicing them, mostly low-cost airlines. Exemptions to state aid limits are permitted for airports with annual traffic below 3 million passengers per annum until 2024, and airports that serve fewer than 700,000 passengers can sustain operating losses subsidised up to 80%. On top of this, owing to the pandemic, the European Commission has approved several state aid schemes from which regional airports can benefit, starting in March 2020. 

Regional airports – often owned by local authorities – benefit from local public subsidies, regardless of performance indicators, vicinity to other airports, alternative means of transport and other factors. Regional airports have no incentive to perform as long as subsidies are available, mainly as direct subsidies and local public administrations’ tax exemptions. As a consequence of this and other factors, such as competition between low-cost airlines, aeroplane tickets stay cheap and therefore, rail cannot compete on short-haul routes.

By affecting regional airports around Europe, the pandemic might have created an opportunity for discussion around the economic and emission performance of regional airports around Europe, as post-pandemic recovery might take years and even more public subsidies. Investments in domestic train routes (infrastructure, electrification, rolling stock) through the RRF and other European and national funds, as well as citizens’ concerns about climate change, might also lead to a push in reducing subsidies for underperforming regional airports. A levelling of the playing field between planes and trains should include a toughening of the Commission’s guidelines for regional airports and changes in priorities at the national level in master plans and strategies involving transport.

Governments should also grant state aid measures for regional airports or subsidies going through regional airports to airlines, considering the distance between regional airports that offer similar flight routes and a suitable train connection. This measure will impact emissions and load factors for both trains and aeroplanes.

Stopping new airport construction

As air travel is incredibly emissions intensive, reducing the number of flights is critical to reducing emissions in the air sector, and a key part of this is stopping the construction of new airports. The construction process alone is incredibly environmentally destructive and instead of building new airports to facilitate more flights, resources should be shifted to improve more environmentally responsible transportation options. 

The movement to stop construction of new airports has had significant impact on airport expansion and construction plans recently, with some cities stopping airport expansion plans (including Leeds, New York and Paris). It’s noteworthy however, that since the preceding sentence was written, New York has allowed construction to go ahead. 

In Paris construction was blocked due to arguments around meeting national emissions reduction targets, the new terminal was unnecessary to manage current air traffic, and nearby residents would suffer from increased pollution and noise. However, French Government remains committed to work on a new terminal project and stays in favour of a future increase of air traffic at Roissy airport. In addition, Construction of a new airport in Lisbon is being blocked due to environmental concerns from local authorities. The government intends to change the law to stop local authorities from vetoing big projects. 

Local and national governments have not been the only actors in conflict over the construction of new airports, as the citizenry has been increasingly displeased with plans to build new airports, citing concerns about environmental destruction and noise pollution in residential areas. Citizens have been organising through legal protests and petitions, and civil disobedience has played a role in campaigns to block airport construction, e.g. Paris & Lisbon. New airport construction is likely to additionally generate significant public displeasure, particularly among constituents who live in the area directly surrounding the potential site. 

Finally, Paris Agreement obligations have raised the likelihood of litigation against the construction of new airports, as has been the case with the expansion of Heathrow airport in London (the court originally blocked construction due to Paris obligation not being considered, but the block has since been overturned. Yet Heathrow is the first of what will likely be a growing trend). This will increase costs and slow down the process, even if construction is permitted in the end, making the construction of new airports deeply unappealing to local and national actors.