Ending aviation’s tax holiday

February 07, 2018

One billion. That’s how much in euro that Germany’s tax on airline tickets generates every year. A billion is about a quarter of what trucks pay in Maut every year, or about 35 times less than the motor fuel tax.

So it is not very high. Particularly when you remember that aviation benefits from a preferential tax regime. As the EU’s own environment agency recently highlighted, airlines pay no fuel taxes, and VAT is only charged on domestic flights. The German ticket tax adds around €7 to a short-haul flight ticket. That’s the cost of a beer and a Bretzel in the Berlin airport. It is a cost that airlines’ customers can easily afford. And in light of aviation’s extremely negative climate and environmental impacts, the German ticket tax is a bargain.

But despite all of this the future of the Luftverkehrssteuer was hanging in the balance in recent days. Following pressure from Germany’s aviation industry – which claims the ticket tax harms its ‘competitiveness’ – the CDU and SPD negotiating teams were discussing abolishing the ticket tax. As this article goes to press it looks like it may have survived, which would be good.

But a €7 ticket tax is only a small piece of the aviation puzzle. Two weeks ago we brought together the world’s top aviation environmental experts. The picture they painted was sobering: aviation is on its way to eating up all of what remains of our chances to limit global warming to below 2°C as agreed in Paris. Aviation emissions are growing incredibly fast (up 8% in the EU in 2016), billions of people are waiting to catch their first flight (just 3% of India’s population have ever boarded a plane) and efficiency improvements in the sector are slow and shrinking. What’s more, by ignoring non-CO2 effects we’re underestimating aviation’s contribution to global warming by a factor of at least two. What’s to be done?

Perhaps it is useful to compare aviation to passenger cars. On the one hand the comparison reflects badly on aviation. We’re making real progress on light vehicles, with EVs charged with wind and solar electricity acting as the poster child of a zero emissions future. On the other hand, the fight against car pollution started decades ago. Carmakers are not inherently more innovative (although there is more competition than between the Airbus-Boeing duopoly). But over the past 30-40 years we have progressively tightened the screws on car pollution. That pressure, be it fiscal or technological, has led to innovation, often beyond our imagination. And because we have all these instruments (taxes, standards) we also have the means to make the transition go faster. Just imagine Tesla trying to enter the heavy-duty market in a world without diesel excise duties!

Taxation clearly plays a major role and here Europe has a big opportunity. The EU’s €1 trillion budget (over seven years) is up for review and the Commission is due to make a proposal for a post-2020 budget in May. Because of Brexit there’s a €12 billion hole in the budget and that at a time when there are a number of new priorities (migration and security top Juncker’s list). The two options to balance the budget – cutting spending or increasing member state contributions – are unpopular for understandable reasons. One way forward which was proposed by former Italian prime minister Mario Monti is to increase the EU’s so-called own resources. These aren’t EU taxes but rather national taxes or levies where the EU gets a cut, the prime examples being VAT and import duties.

We have run the numbers and if all EU countries would agree a fixed VAT rate of, say, 15% on air tickets, this would generate €11 billion in new revenues from intra-EU flights and €17 billion from both intra and extra-EU flights. A small kerosene tax on intra-EU flights of 10 cents a litre would generate €3 billion whereas a level equivalent to the EU’s minimum diesel taxes (33 cent/litre) would generate €9.5 billion. We also looked at motor fuel taxation where a new carbon tax equivalent to €30/tonne (roughly 7.5 cent/litre) could generate up to €26 billion in additional revenue. (These are EU-28 numbers.) Some of these revenues could be directed into helping to fill the EU’s “Brexit funding gap”.

Of course, taxation is challenging because it normally requires unanimous approval. But that’s also true for the EU budget where a deal will need to be found. So if ever there was an opportunity for a grand bargain which helps spare the member states’ and the EU’s budget while tackling our toughest climate problem, now would be the time. Of course, it wouldn’t be “easy”. But then again, nothing worthwhile ever is.