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Aviation Taxes and the External Costs of Aviation: A Study on Reform Options and Implications

This study examines the current aviation taxes and the external costs associated with aviation, such as CO2 emissions, noise, and congestion. It explores the potential for reforming the tax system to better target environmental costs, including the implementation of a per-flight tax, per-seat tax, or a two-part seat tax. The study also discusses the implications of bringing aviation into the Emissions Trading Scheme (ETS).

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Aviation Taxes and the External Costs of Aviation: A Study on Reform Options and Implications

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  1. Aviation taxes Andrew Leicester and Cormac O’Dea Institute for Fiscal Studies

  2. Aviation CO2 emissions1970 - 2005 Source: DEFRA e-Digest of Environmental Statistics

  3. Aviation Taxes: APD • First charged from November 1994 • Most passengers departing from most UK airports • Varies according to destination (Europe/Other) and, since 2001, travel class • Currently four rates: £10 / £20 (Europe), £40 / £80 (Other) • Around ¾ of passengers pay lowest rate • £2 billion revenue forecast for 2007-08

  4. “Aviation duty” • PBR October 2007: Intention to replace per-passenger tax with per-flight tax from November 2009 • Similar policies already announced by both Lib Dems and Conservatives • Expected to raise additional £520m • No other firm details as yet

  5. External costs of aviation • External costs provide one rationale for aviation taxes • Greenhouse gas emissions • Noise / local disamenity costs around airports • Congestion • Fuel tax to capture environmental costs? • International constraints on fuel taxes • Reform could see tax rates linked to e.g. emissions, distance flown, airport of departure, aircraft size etc. • Cost of complex tax structure in terms of administration and compliance

  6. Issues in per-flight tax design • Some advantages over a passenger tax: • Should encourage more fully loaded aircraft • More easily applied to freight-only flights • No obvious reason to exclude freight from tax base • Few freight-only flights; around 3% of departures • Revenue / environmental effects likely to be small • Also some potential concerns • Loss of marginal services • Potential for avoidance activities

  7. Illustrative simulation: a per-seat tax • Per-seat tax akin to a flight tax: tax on empty seats has to be passed on or absorbed • Incentives to load aircraft fully • Environmental incentives would require sharper targeting • Data from CAA: departing flights, passengers and number of seats by departure airport and destination (2006) • 1.2 million flights, 120 million passengers • Simulate two per-seat taxes and compare to APD • Various assumptions: • Revenue-neutral relative to APD • Tax fully passed on to passengers: compare per-passenger payments • No behavioural change by airlines or passengers

  8. Simulated taxes • All options generate revenue of £1.96bn • Mean per-passenger payment of £16.58 • Passenger tax (APD) • £10 / £40 per passenger depending on destination • Seat tax • £7.53 / £30.14 per seat depending on destination • Payment depends on load factor explicitly • Two-part seat tax • Fixed component covering e.g. noise costs, variable component covering distance-based costs • £3.78 fixed charge + £4.22 / 1,000 km • Load factor and distance matter, depending on relative size of fixed and variable charges

  9. Per-passenger payments

  10. Seat tax: example flights

  11. Seat tax: example flights

  12. Seat tax: example flights

  13. Per-seat tax: winners and losers relative to APD • Winners: flying short distances on fully-loaded aircraft • Losers: flying long distances on empty planes • More complex structure would vary patterns of relative beneficiaries more: • Flying on clean, quiet planes departing airports away from residential areas

  14. Aviation and the ETS • Planned reform to APD in 2009 • Current plans from EU environment ministers to bring aviation into ETS from 2012 • Aim to cover all flights to / from EU countries • Plan to auction 10% of permits • Allocations to airlines depending on emissions between 2004 – 2006 • What role for aviation duty? • CO2 externality effectively internalised by ETS • Other greenhouse gases, noise and congestion costs provide rationale for ongoing aviation taxes • Ideally auction CO2 permits and target domestic taxes on other externalities

  15. Conclusions • Aviation contributing fast-growing share of UK carbon emissions • Current APD system not particularly well-targeted on environmental costs • Per-flight tax provides scope for sensible reforms • Would create more variation in payments to reflect e.g. load factor, distance, emissions, noise etc. • Complexity in administration to be considered against better targeting of the external costs • Interaction with proposed reform of Emissions Trading Scheme crucial

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