Summary
Despite being some of the most carbon-intensive modes of transport, aviation and shipping continue to benefit from some of the most generous tax exemptions in Europe. One of the most significant of these is the exemption from the Value Added Tax (VAT).
Aviation:
Most traffic untaxed – Three-quarters of EU air passenger journeys pay no VAT at all. Intra-EU and most prominently, international flights, which cause the bulk of emissions, are entirely exempt.
Massive revenue loss – In 2024, EU governments collected just €1.4 billion in VAT from aviation, according to T&E’s estimates. If a standard 20% VAT rate had been applied to all tickets for journeys inside and departing from the EU, over €30 billion would have been collected. This equates to a VAT gap of €29 billion in one year.
Shipping:
Most traffic untaxed – International maritime passenger transport is exempt from VAT across all EU Member States, meaning passengers pay no VAT while operators can still deduct input VAT. Even at the domestic level, many ferry and cruise services benefit from exemptions or reduced rates, leaving most passenger shipping effectively untaxed.
Outdated VAT classification – Cruises are currently treated as passenger transport even though they function mainly as accommodation and leisure services. Reclassifying them for VAT purposes as tourism activities would align taxation with land-based hospitality and reflect true economic and environmental costs.
Rail:
5 countries are still applying VAT for international rail – About 16.3 million passengers are departing from countries that apply VAT to international rail tickets. This represents less than a quarter of EU international rail passengers.
Minimal revenue loss with a pan-European VAT exemption for international rail – removing VAT on international rail could cost between €106 million and €117 million/year according to our modelling.
Conclusion:
The current VAT regime is unfair and distortive – While essential goods and services are taxed, air travel and cruises avoid VAT. Other modes of passenger transport, such as rail and bus, do pay VAT, which puts them at a competitive disadvantage.
Why it matters – The VAT exemption keeps flying artificially cheap, driving up demand and emissions. At the same time, it deprives governments of billions in revenues that could support public services or investment in cleaner transport. Broadening the VAT base would create a fairer, more consistent market environment across transport modes.
Recommendations:
