FairTax Conference,
Vienna, September 19, 2016
Sustainability-oriented EU Taxes:
A European Carbon-based Flight Ticket Tax
Alexander Krenek and Margit Schratzenstaller
(Austrian Institute of Economic Research Vienna)
Motivation
• Aviation sector is a small but rapidly growing emitter of CO2
• It is expected to grow by 45% till 2035 in the EU
• Inclusion into the EU Emission Trading System (ETS) since 2012,
but:
• Due to low CO2 prices and far-reaching exemptions ETS will not
deliver in the near or medium-term future
=> Taxes on aviation sector present themselves as an effective
alternative option to internalise externalities by aviation
International taxation of the aviation sector
• Taxes are powerful marked-based instruments, however:
- due to cross-border externalities national tax rates will be set at
suboptimal levels
- unilateral actions will reduce pressure on other countries to
implement unilateral policy measures as they can act as free-riders
- downward tax competition due to mobility of passengers/fuel
• Tax revenues are NOT clearly attributable to single countries
assignment of aviation taxes to the supra-national level
to fund expenditures of international organisations
Structural under-taxation of aviation sector
In the EU the aviation sector is considerably under-taxed:
• No kerosene tax for international flights
• 6th EU VAT Directive: ZERO value added tax (VAT) on international
flights (fuel, flight tickets sold)
=> Not compensated adequately by other price-based mechanisms
(ETS)
Tax design issues
• Carbon-based design accounts for carbon
footprint/passenger/flight
• Carbon-based design is superior in terms of environmental
sustainability
=> Carbon-based flight ticket tax preferable to carbon-based fuel
tax (easier to implement)
Current flight ticket taxes
- The group of European countries which gave up their flight ticket
taxes is almost as large as the group of countries still having them
- Limited experience corroborates the theoretical expectation that
due to tax competition aviation taxes cannot be implemented
effectively on national level
”stuck to the bottom” rather than “race to the bottom”
Carbon-based flight ticket tax as sustainabilityoriented EU tax
• Aviation taxes as a sustainability-oriented source to finance part of
the EU budget
• Shortcomings of current EU system of own resources
Through their form and structure current revenue sources for the
EU budget do not contribute to central EU objectives such as making
the EU a “smart, sustainable and inclusive economy”
Replacing a part of the current revenues by a carbon-based flight
ticket tax could foster economic and environmental sustainability
Revenue potential and effects on the aviation
sector
• Eurostat’s “detailed air passenger/route” data
• Assignment of average CO2 emissions/passenger/route
ICAO methodology: aircraft type, distance and load-factor
• Identifying tax-induced increase on ticket prices
• Applying IATA demand elasticities in order to simulate a tax-induced
decrease of passenger numbers
• Multiplying amount of carbon emissions/passenger/route
EU revenues for three different scenarios
• Low-tax scenario (25€ / tonne CO2):
€ 3.9 Billion
• Medium-tax scenario (30€ / tonne CO2):
€ 4.6 Billion
• High-tax scenario (35€ / tonne CO2):
€5.4 Billion
Results and implications
• If introduced in 2014, passenger numbers would not have increased
by 4% but would have remained constant  limited conclusions
about long-term impact possible
• Carbon-based flight ticket tax would be able to at least significantly
dampen massive annual air passenger growth
• VAT is necessary to actually create a level playing field for all means
of transport and to effectively decrease CO2 emissions from aviation
• Carbon-based flight ticket tax would be a stable revenue source for
the EU budget
Conclusions
• International approach is necessary due to the cross-border nature of
externalities
• ETS has not delivered
• Limited revenue potential
• Prime example of a sustainability-oriented innovation in European tax
regimes
contribution to closing sustainability gaps in taxation in EU