Aviation passenger taxes – why they won’t work in the long run

By Hans Nasman.

Government regulation of the aviation sector has become a key topic of discussion with the rising prevalence of climate change concerns. Aviation is an incredibly carbon-intensive form of transportation. In 2016, emissions from aviation represented 3.6% of total EU28 greenhouse gas emissions. Critically, emissions have more than doubled since 1990, making aviation one of the fastest-growing sources of emissions. This has made some form of regulation on emissions increasingly topical.

In an ideal world, the source of the emissions – aviation fuel – would be taxed directly in proportion to the cost of the damage caused. However, International Civil Aviation Organization (ICAO) resolutions make this legally impossible, and any amendment is unlikely to occur. This effectively only leaves national polices as feasible options. The simplest and most implemented policy is some form of an air passenger tax. These have been implemented in an increasing number of countries, the longest-running being in the United Kingdom since 1994.

The Norwegian passenger tax (flypassasjeravgift) was adopted by parliament in December 2015, and came into force in June 2016. It is distinctive from most passenger taxes as it only has one band of approximately NOK 80 (£6.74) per passenger, instead of having higher tax levels for longer flights. The tax was changed on 1 April 2019, adding a new band for flights leaving the EU. However, even with the tax, passenger numbers have risen 6.8% from the imposition of the tax to September 2019.

A tax on fuel would be ideal as it directly increases the cost of emissions. Beyond the direct incentive for airlines to cut fuel use and thus emissions, a tax on fuel will provide additional incentives to develop technologies and practices to minimise the use of fuel, providing a dynamic incentive to minimise emissions in the long run. However, a fuel tax is not possible, meaning a tax on passengers becomes an alternative. The issue is that taxing passengers does not directly incentivise reduce emissions, meaning the tax may not have the desired outcome. With a passenger tax, airlines are concerned only with the number of passengers.

To illustrate this, consider a flight from Oslo to Helsinki. With a fuel tax, the airline will pay the full tax regardless of how many passengers are actually on board, meaning it will want to have a full flight in all cases and has a larger incentive to cut fuel use if possible. With a passenger tax, an empty seat on board will mean lost revenue, but also a decrease in the tax. Another aspect to consider is the relative price of alternative fuels. A fuel tax increases the incentive to switch to a biofuel to cut emissions, as the relative increase in fuel price is now smaller due to the tax. A passenger tax gives the airline no comparable incentive. As a final point, a fuel tax would further incentivise research and development into both new ways to improve fuel efficiency and other alternative fuels in order to minimise emissions in the long run.

Photo source.

The Norwegian tax could be revised to have a greater effect on passengers. Multiple bands of tax based on distance would make the tax correspond to the amount of emissions caused, and would increase the effect for longer distance flights. The change of the passenger tax in 2019 to include a second tax band is a step in this direction. Another possibility is to target different types of passengers with different sized taxes. For example, both the UK’s APD and the French “Chirac Tax” have different rates based on the class of seat purchased. Finally, the rates of the tax could simply be increased.

Even an overhaul of the policy will not solve the fundamental issue with a passenger tax. The tax is disconnected from the externality which necessitates it, as it puts a price on passengers, rather than emissions. A simple passenger tax can at best increase consumer prices, either decreasing passenger numbers in absolute terms, or more likely simply slowing down growth in passenger numbers. As incomes continue to grow, demand for air travel will continue to grow along with it. For emissions to decrease in the long run, new technologies and practices need to be implemented. In other words, regardless of the direct effect, for long term emissions reductions the incentives of the tax become paramount. The passenger tax does not give airlines an incentive to adopt new practices or technologies. A newer and more fuel-efficient plane type gives the airlines no additional benefit with a passenger tax, but a fuel tax would increase the airline’s saving. For the best possible emissions impact in the long run, the passenger tax is not the best option. A fuel tax would be the ideal choice, and international action should be taken to make this a possibility.

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