RegulationCorporate GovernanceAirline tax: fuel for thought

Airline tax: fuel for thought

New government proposals may better tackle aviation industry's carbon emissions

Given the UK’s current green obsession, the carbon footprint of the aviation
industry has certainly received more than its fair share of criticism for its
contribution to the UK’s total carbon emissions.

To date, air passenger duty (APD) has been the method relied on in the UK to
tax the environmental impact of passenger flights. Indeed, APD seemed here to
stay when the government doubled the levy on all flights from 1 February 2007.

However, last month the government delivered proposals in its pre-Budget
report to replace APD with a tax payable per flight, rather than per passenger,
from 1 November 2009. A consultation will take place to determine the exact form
of the replacement tax.

The argument behind the proposed reform of APD is that the system of taxation
on aviation should incentivise airline operators to invest in fuel-efficient
technologies and operate fuller flights. In turn, this should encourage
customers to select those airlines that have lower emissions per passenger.

Plane speaking

The government’s proposals are likely to appeal to consumers, provided there
is sufficient transparency to make the relative carbon cost of a flight easier
to understand. This should happen since the tax would be based on the level of
carbon emissions per flight.

The present system of a ‘flat-rate’ APD imposes a standard charge on each
passenger seat booked. It is levied at between £10 and £80, depending only upon
whether the flight is categorised as short haul or long haul and the class of
travel. Such a flat-rate tax is unlikely to lead to behavioural change among
passengers, as it offers no scope to reduce the levels of taxation paid, for
example by flying on more efficient aircraft with higher load factors.

In addition, APD is not currently set at a level that is likely to discourage
people from flying and so arguably serves no clear environmental purpose –
instead it simply raises additional tax. It has also been heavily criticised by
many stakeholders for exempting approximately 40% of all UK aviation activity in
the form of air cargo and private flights.

In contrast, having a tax based on the carbon cost of a particular journey
should help encourage the use of newer, more efficient aircraft fleets. But
despite the possible environmental benefits of a system of taxation based upon
the levels of carbon emissions, there are many practical issues that would need
to be considered before implementing such a tax. For example, how would the
carbon impact of each aircraft type be measured and verified; how would figures
be obtained from overseas airlines; how would passenger load averages be
included and checked; how would passenger flights and cargo flights be dealt
with under one regime and how often are all these figures updated? Further,
would the costs then allocated to each passenger vary by class of travel?

The public would also want to know how the additional £520m that the
government intends to generate would be spent. Hypothecation is something that
governments traditionally fight shy of, but perhaps there is a reason for a
different approach in consumer-based environmental taxation.

In practice, it may be hard to set the tax at a level that would have a
genuine impact on travellers’ flight choices without making flying prohibitively
expensive for the less well off. With the tax levied on the airline and not the
individual, it will make it less transparent for individuals to see the impact
of their behaviour. While APD has dominated the debate about taxing the aviation
industry’s carbon emissions, other alternatives have been suggested. They
include a tax on jet fuel, since this would also serve to encourage the use of
more fuel-efficient planes with higher passenger densities and may be easier to
implement, although it would not be directly linked to carbon emissions.

Still grounded

At present, VAT is not levied on domestic flights and some suggest that this
should be introduced. It is not clear how effective these measures would be as
most businesses would be able to recover VAT on flights. Also, there is limited
scope for airlines to reduce the tax cost to private individuals by operating
more efficient flights. VAT is, of course, an EU tax and any changes would need
to be put forward in Europe generally.

The European Commission has adopted a proposal to include aviation in the EU
emissions trading scheme (ETS). This has been welcomed by many in the industry
as a way of encouraging airlines to use more fuel-efficient aircraft and
increasing passenger load. As all flights in and out of EU airports will be
affected, the proposals should not distort competition between EU and non-EU

However, some commentators doubt whether inclusion in the ETS will lead to a
reduction in emissions in the air transport sector given increasing demand for
air travel. It is possible, however, that the move will lead to compensatory
reductions in carbon dioxide emissions elsewhere in the economy.

Flying solo

While many of us would be reluctant to give up our overseas holidays, there
are a number of steps individuals can take to reduce their carbon emissions from
personal and business air travel.

Choosing to fly on fuel-efficient planes isn’t as hard as you might think.
Information on the age and fuel efficiency of fleets is often available on
operator’s websites. In June, Flybe became the first airline to introduce the
concept of aircraft eco-labelling. The scheme provides passengers with a
detailed breakdown of the fuel consumption, carbon emissions and noise patterns
of the aircraft to be used on their journeys at the time of booking.

Taking only direct flights wherever possible means fewer miles travelled and
lower emissions. Try also to fly with airlines with high average passenger
densities. Again, this information can sometimes be found on operator websites.
As a last resort, you could offset carbon emissions arising from your flight
through a reputable offsetting organisation. Although this does not directly
reduce the emissions from the flight, it can be a helpful way to counteract the
overall emissions.

Helen Devenney is a director in the indirect tax group
at Deloitte

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