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:
- 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.
- 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.
- 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.
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.
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
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.
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.
All three Lithuanian international airports due to comparatively short distances between them have overlapping coverage areas. Since they belong to the same state company Lithuanian Airports (Lietuvos oro uostai) they do not compete with each other. Before the COVID pandemic all of them had passengers and flights beyond their planned capacity. Projecting that number of passengers will be growing in future, a strategy for further development has been prepared. Two options have been suggested: broadening of current infrastructure and capacity and construction of new airport. Pandemic drastically cut passenger flows (from 5 mln to 1,3 mln in Vilnius airport). Since numbers are increasing recently, the following important factors having a negative effect on passenger numbers should be considered before any decisions taken:
- Changed geopolitical situation. Russian war against Ukraine and following EU sanctions closed door for Russians and Belorussians;
- Policies against short-haul flights. Governments across the European Union are imposing bans or taxes on short-haul flights. Discussions already started on EU level also.
- Rail Baltic. Rail Baltic in some extend could be a priority alternative for travelers, especially to those who travel to adjacent countries.
- Aviation fuel tax. The European Commission is going to set an EU-wide tax for aviation fuels from 2023. Tax rate would increase gradually over a 10-year period.
- Changes in consumers choices. Raising understanding of ecological footprint and travels contribution to climate change shifts consumers preferences. Companies responding to pressure from employees and investors reduce nonessential business travel and invest in technologies to replace many in-person meetings.
Stopping new airport construction
Due to its high emissions intensity, reducing the number of flights is critical to reducing emissions from passenger transport. Stopping the construction of new airports, especially in distant regions where they undermine the competitiveness of railways, is essential to reduce the activity levels for this mode of transport.
The movement to stop the construction of new airports has significantly impacted airport expansion and construction plans recently, with some cities stopping airport expansion. In Paris, residents successfully blocked construction due to arguments around meeting national emissions reduction targets. The new terminal was unnecessary for managing current air traffic, and nearby residents would suffer from increased air and noise pollution. However, the French government remains committed to working on a new terminal project and favouring a future increase in air traffic at Roissy airport. The construction of a new airport in Lisbon is currently blocked due to environmental concerns from local authorities. The government intends to change the law to stop local authorities from vetoing big projects.
Paris Agreement obligations increased the likelihood of litigation against the construction of new airports. An example is the expansion of London’s Heathrow airport, which has been subjected to a block. The threat of litigation will increase costs and slow down the construction of new airports or expand existing ones.
Another example was the expansion of the Vienna International Airport, which was subject to significant controversy and litigation following the proposed addition of a third runway. The expansion was first proposed in 2001, and the government initially submitted the plan for review in 2007. Environmental activists then brought it before the courts. Lower federal courts originally approved the expansion before being brought to the Federal Administrative Court, where it was overturned. The Administrative Court found that the development would do more public harm than good, citing Austria’s national and international climate change commitments. However, this argument was rejected by the Constitutional Court, which allowed the expansion to go ahead. Initially planned to be opened in 2021, the third runway is now anticipated to be opened in 2028 despite continued objections by citizens climate activists.