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Fuel charges in international aviation and shipping: How high; how; and why?

Jon Strand's picture

International aviation and maritime transport account for about 5% of global carbon emissions. It may increase to more than 10% by 2030. Even so, these sectors were excluded from the Kyoto protocol. Aviation and shipping enjoy substantial tax privileges, by paying no excise taxes, turnover taxes, nor VAT. Shipping also enjoys extremely low corporate tax rates. This has lead to growing emissions and low tax revenue generation from the sectors, while the sectors enjoy more advantages than other comparable economic activity. This situation stems in large measure from these sectors’ international status: they do not naturally belong to any one particular country. Nor are they part of any; international agreements that limit taxation in aviation or extreme tax competition in shipping. 

Because governments are interested in more revenue to meet, among other things, global warming, and the international community is interesting curbing greenhouse gas emissions, the possibility of levying charges on the sectors’ fuels or activity is highly relevant. Adding carbon charges to fuel consumption using market-based mechanisms – either directly through internationally coordinated fuel taxes, or indirectly through an emissions cap-and-trade system, have been analyzed by me and two IMF collaborators, Michael Keen and Ian Parry, as part of the World Bank/IMF 2011 report to the G-20 on Mobilizing Sources of Climate Financing. That report discusses plans to meet a revenue target of $100 billion annually in climate finance for lower-income countries by 2020, set in Copenhagen in 2009. Our conclusion is that $10 billion might readily be raised for such purposes through global carbon charges on aviation and shipping. We also show that imposing a $25/ton CO2 carbon price will be manageable, raising the average air ticket price by 2-3%, and average import costs of goods and services through maritime and air freight by 0.5%. For some countries, including some small-island states, import costs will increase more, warranting explicit compensation to these countries.

More recently, we have shown that tax revenue from economically efficient taxes on aviation and shipping could easily be much larger than the figures above, and would generally involve two separate taxes: a fuel charge to both sectors; a ticket tax (or VAT) in aviation; and a capital (“tonnage’) tax in shipping. Together, these taxes could, when imposed at globally optimal rates, bring in more than $100 billion.

Such charge schemes may seem elusive in today’s environment, with hardly any taxes imposed on the sectors. Some would argue: “Isn’t the tax level already high in aviation? When I buy a plane ticket, “taxes and charges” are already hefty.” In practice, most of these charges are service-related, such as airport slot, take-off and landing charges (and in the U.S., a 7.5% Homeland Security Tax for airport security). Note also a lack of regulation on what can be called “taxes and charges,” including airlines’ increased fuel costs. It is true that a few countries, notably the U.K., impose heavy flight departure charges, but globally, they bring in only a small amount of revenue.

In shipping, the situation is worse. Boats are by nature highly mobile: they can refuel wherever they want and fly the flag of any nation, including many with zero corporate taxes. A fuel charge would need to be global to be effective.

A long-term and “reliable” fuel charge, initially moderate but rising over time, should provide good incentives for the sectors to reduce their fuel consumption and carbon emissions, while also raising substantial revenues that can be shared internationally to compensate a small group of serious losers under the tax, plus support developing countries in mitigating the threats of climate change.

As often happens, politics is in the way of quick solutions, especially in aviation. Here, the European Union has now embedded its airlines in its Emissions Trading Scheme, with plans to require non-EU airlines to buy carbon quotas for inter-EU flights. This plan has  been contested by the U.S. and China. We are also awaiting a proposed plan by the International Civil Aviation Organization on international charges on aviation fuel.

In shipping, the politics is simpler. Shipping’s governing body, the International Maritime Organization, realizes that the sector will soon need to face global carbon charges on its fuels, but there is, so far, little action. Plans for an international c-a-t regime on the sector are being developed, but with no decisions to date.

In addition, the choice of tax vs. a c-a-t regime for international transport fuels is important. A tax will create the more stable and manageable carbon price signal and raise substantial revenue, part of which can be used for international funding of matters such as climate finance. Under c-a-t the price signal will be less stable, and more potential revenue might be foregone due to freely distributed quota allocations.

But obviously, first the world will need to agree on any scheme at all. If the world is able to do so, it will bode well for further progress on international climate mitigation, involving a broad set of countries.
 

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