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Aviation taxes

Aviation taxes. Andrew Leicester and Cormac O’Dea Institute for Fiscal Studies. Aviation CO 2 emissions 1970 - 2005. Source: DEFRA e-Digest of Environmental Statistics. Aviation Taxes: APD. First charged from November 1994 Most passengers departing from most UK airports

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Aviation taxes

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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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