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

Aviation CO 2 emissions Source: DEFRA e-Digest of Environmental Statistics

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

“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

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

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

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

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

Per-passenger payments

Seat tax: example flights Destination (aircraft type) Distance (approx.) Load (%)APDSeat tax Two-part tax Sudan (A300 – 600) Canada (B767 – 300)

Seat tax: example flights Destination (aircraft type) Distance (approx.) Load (%)APDSeat tax Two-part tax Sudan (A300 – 600) 5,000 km30.0 Canada (B767 – 300) 5,200 km96.3

Seat tax: example flights Destination (aircraft type) Distance (approx.) Load (%)APDSeat tax Two-part tax Sudan (A300 – 600) 5,000 km30.0£40.00£100.46£83.06 Canada (B767 – 300) 5,200 km96.3£40.00£31.29£26.98

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

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? CO 2 externality effectively internalised by ETS Other greenhouse gases, noise and congestion costs provide rationale for ongoing aviation taxes Ideally auction CO 2 permits and target domestic taxes on other externalities

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