Sustainability-oriented EU Taxes: A European Carbon-based Flight Ticket Tax[1]

Tuesday, 15 November, 2016

Alexander Krenek, Margit Schratzenstaller 


The aviation sector is a small but rapidly growing emitter of carbon emissions worldwide. Within the EU it contributes to about 3% of total greenhouse gas emissions. Recent forecasts predict a considerable expansion of EU related air traffic: CO2 emissions as well as the number of flights are expected to grow by 45% each between 2014 and 2035 (European Commission 2016). For years the UN body in charge of overseeing the aviation sector failed to produce a market-based mechanism which would internalise the cost of emitting CO2. Frustrated with this lack of progress, the EU eventually decided to include the aviation sector into the EU Emissions Trading System (ETS) (Keen, Parry and Strand 2013). The ETS, however, which currently is clearly underperforming, will not be able to price CO2 emissions from aviation adequately in the near and medium-term future. Given this background and the imperative to reduce CO2 emissions drastically, it is remarkable that the existing under-taxation of the aviation sector has long been neglected in the public finance literature.

Rationale and options for taxing the aviation sector

Aviation taxes are potentially powerful instruments to internalise the external costs of aviation and are thus capable of reducing demand effectively (Keen and Strand 2006). However, attempts to introduce aviation taxes can be expected to encounter a collective action problem leading to under-taxation (Jones, Keen and Strand 2012). First, unilateral determination of tax rates will result in inefficiently low tax rates due to the existence of cross-border externalities (as the bulk of emissions from aviation are caused by international activities, i.e. international flights). Moreover, unilateral action would reduce pressure on other countries to implement own policy measures as they can act as free-riders (Auerswald, Konrad and Thum 2011). Thus countries are stuck in a prisoner’s dilemma. Every country would be better off with aviation taxes leading to a socially optimal level of air traffic. However, an individual country has incentives to defect and to lower or to not introduce aviation taxes in the first place to thus increase its market share in overall air services. Secondly, the mobility of tax subjects (passengers) and tax bases (fuel), respectively, bears the danger of harmful downward tax competition with the consequence of lowering the tax rate (further) below the optimal level.

These considerations speak in favour of introducing aviation taxes within an internationally coordinated move. The assignment of aviation taxes to the supranational level (e.g. to the EU) which then keeps the revenues collected to finance its own expenditures (e.g. the EU budget) seems the most appropriate option - given the cross-border nature of the negative externalities caused by air traffic, the revenues from their taxation are hardly attributable to a specific country.

There are various options to tax the aviation sector. Carbon-based taxes (i.e. taxes which are based on the social cost of CO2 emitted per flight per passenger) as opposed to conventional tax designs have to be regarded as superior in terms of environmental effectiveness. Poorly designed conventional aviation taxes could, as demonstrated in Tol (2007), even have the perverse effect of increasing CO2 emissions.

In principle a carbon-based fuel tax is the environmentally most effective among the various potential designs of taxes on air traffic: it may reduce the amount of fuel used and shift the fuel mix towards the use of less carbon-intensive fuels, and it induces airlines to choose more efficient engines (Keen and Strand 2006). It will also dampen demand for and supply of flights and maximise aircraft load.

A carbon-based flight ticket tax will not induce carriers to maximise aircraft load, to use less carbon-intensive fuel or to reduce fuel use. In contrast to a fuel tax, however, it does not offer carriers the possibility to disproportionally shift the tax burden to price-inelastic passenger segments. Moreover, given the current legal situation, a flight ticket tax has a much better chance of implementation compared to a tax on aviation fuel used in international air traffic which is outlawed by the Chicago Convention of 1944. A flight ticket tax if introduced at EU level would also face very limited tax avoidance issues in the form of passengers migrating to non-EU airports, whereas a fuel tax, even introduced at EU level, would still face the issues of fuel bunkering by carriers and planes tanking in non-EU countries. Altogether, this makes a flight ticket tax an attractive alternative to a fuel tax.

Under-taxation of the European aviation sector

In the EU the aviation sector is structurally under-taxed, as is global aviation in general (Keen, Parry and Strand 2013). In addition to the failure of internalising the social cost of emitting CO2 and other greenhouse gases, the aviation sector is indirectly subsidised via far-reaching VAT exemptions. According to the 6th EU VAT Directive, a zero value added tax (VAT) rate has to be applied to international flights; this applies to airlines’ inputs (acquisition of aircrafts, fuel) as well as to their outputs (air tickets sold). In contrast to just exempting international flights from VAT, zero rating implies that airlines can deduct VAT paid for inputs, which could not be reclaimed under a tax exemption regime. Moreover, according to the Chicago Convention, the fuel used for international flights is exempted from the mineral oil tax worldwide. In the EU, the EU Energy Tax Directive of 2003 obliges Member States to exempt kerosene used for international flights from energy taxation. While there exists the option to levy a kerosene tax on international flights based on bilateral treaties, it is not made use of by any EU country.

Several European countries, however, have or had adopted some kind of conventionally designed (i.e non-carbon-based) ticket tax on international flights during the last few decades. Norway was a frontrunner when it introduced its tax on charter traffic as early as 1978 as one element of its pioneering efforts to “green” its tax system. Also the United Kingdom is an early adopter, levying its Air Passenger Duty since 1994. Several EU countries – France, Malta, Denmark, The Netherlands, and Ireland – followed between 1999 and 2009. Germany and Austria introduced their flight ticket taxes as late as 2011.

The group of European countries which eventually gave up their flight ticket taxes is almost as large as the group of countries still having them. While the Norwegian tax, which was abolished in 2002, had survived for almost a quarter of a century, the Maltese one was eliminated after only 7 years. Denmark and The Netherlands terminated their air ticket taxes almost immediately after introduction. Most recently Ireland gave up the Air Travel Tax which had been implemented in 2009, after having reduced it already in 2011. In Sweden (2006) and Belgium (2008) governments started initiatives to introduce air ticket taxes, but gave up their plans following fierce resistance by the airline and the tourism industry as well as other stakeholders, e.g. trade unions. In Iceland government plans announced in 2011 for a rather moderate tax on air passengers were rejected; as well as in Portugal in 2014.

Altogether, the (rather limited) experiences of European countries with the flight ticket tax appear to corroborate the theoretical prediction that due to tax competition aviation taxes cannot be implemented effectively on the national level. However, it should be pointed out that, while there is abundant theoretical and empirical work on the mechanisms and the potential outcome of international competition in the realm of direct taxation, and in particular with regard to the taxation of corporations, empirical analyses of international environmental tax competition, in general, and of competition based on aviation taxes, in particular, are practically non-existent. This might have to do with the fact that due to intense international competition and the obvious trade-off between economic and environmental aspects involved, aviation taxes could never gain ground in the first place so that there is little scope for downward competition. So rather than the race-to-the-bottom type of tax competition observed in the EU with regard to the taxation of corporations – which requires a significant initial level of taxation in the first place – the current status quo regarding flight ticket taxes may be better characterised as “stuck at the bottom” (Weibust 2009: 30).

A carbon-based flight ticket as sustainability-oriented EU tax

In the EU aviation taxes have been suggested repeatedly by the European Commission in the discussion about taxes levied at the EU level as an option to reform the EU system of own resources financing the EU budget. This debate provides the background for our proposal for a carbon-based European flight ticket tax. There are many very well-known shortcomings of the current EU system of own resources, but one central flaw remains underexposed in the relevant literature: current revenue sources of the EU do not support central EU policies in general, and in particular they are in no way connected either to the Europe 2020 strategy aiming at making the EU a “smart, sustainable and inclusive economy” nor to the EU Sustainability Strategy (Schratzenstaller et al. 2016). EU taxes substituting at least part of current own resources may, if designed accordingly, enforce sustainability-orientation[2] of the current EU system of own resources and act as an effective instrument to close the existing sustainability gaps in tax regimes[3] within the EU. These sustainability gaps, which are elaborated in detail in Schratzenstaller et al. (2016), include the high and increasing weight of taxes on labour, the decreasing progressivity of tax systems and the diminishing importance of Pigovian taxes aiming at the internalisation of external costs, the intensifying company tax competition and problems of tax compliance and tax fraud especially with regard to mobile tax bases.

Replacing a part of the EU’s current own resources by the revenues from a flight ticket tax may improve not only environmental sustainability but also the economic dimension of sustainability: it would allow Member States to decrease their contributions to the EU budget paid out of national budgets, so that they can cut other taxes harming employment and growth, in particular taxes on labour. Assigning a flight ticket tax to the EU as an own revenue source appears justified also due to the cross-border nature of CO2 emissions from international flights.

Revenue potential and effects of a carbon-based flight ticket tax on the aviation sector

The first problem to be solved when introducing a Pigovian tax is to identify the marginal social cost associated with the taxed activity, as a prerequisite to be able to fix a tax rate which can bring about the social optimum (Pigou 1954). Since the beginning of the 1990s, a large body of empirical estimations of the social cost of carbon has emerged. Considering recent studies on the social cost of carbon we can conclude that a price accepted by a majority of researchers concerned with the topic may be within the range of 25 € to 35 €. We apply three alternative carbon prices for our estimations: 25 € (low-tax scenario), 30 € (medium-tax scenario) and 35 € (high-tax scenario) per tonne of CO2 emissions. However, it may plausibly be assumed that the carbon prices we use for our estimations are under-estimated, as they are based on rather high discount rates and do not adequately reflect risk aversion to extreme climate change (Nordhaus 2011, van den Bergh and Botzen 2014). Moreover, the social costs incurred by other greenhouse gas emissions caused by air transport, which also reach considerable levels, are neglected in our proposal. Therefore, the tax rates we suggest are probably too low to bring about a social optimum.

If taxing the aviation sector is to increase environmental sustainability it is vital that the tax instruments applied are carbon-based. This is why we propose a ticket tax individually calculated for every flight ticket according to the carbon footprint per person for a given flight and a tax rate reflecting the associated social cost. In order to capture the whole EU-related air passenger traffic every departure from an airport situated within the borders of the EU, but only arrivals from non-EU countries should be subjected to the tax.

The calculation method we apply to obtain potential revenues from a carbon-based flight ticket tax in the EU is straightforward. In a first step we created a new data set, which is based on Eurostat air passenger and route data for 2014, assigning to every EU related route its distinct carbon footprint by using the ICAO methodology, which takes into account distance, type of aircraft and load factors.

In a second step the impact of the suggested tax rates on 2014 flight prices is identified. In a third step we apply the pan-national demand elasticities for three different categories of flight routes provided by IATA (2007) to simulate the decrease in demand resulting from a tax-induced price increase. Based on these data, total tax revenues per route are estimated and added up in order to obtain the total EU revenue potential. Depending on the tax rate (25, 30 or 35 € per tonne CO2), potential total EU revenues would amount to € 3.9 billion, € 4.6 billion, and € 5.4 billion.

Our results also indicate that if a tax rate of 35 €/tonne CO2 had been implemented for the year 2014 on top of all existing fees and taxes, passenger numbers compared to the year 2013 would not have risen by 4% but would have remained constant.

Most certainly this snapshot only allows limited conclusions about the long-term impact of a flight ticket tax in the suggested design. However, with all due caution two tentative conclusions come to light: First, the suggested tax design will be able to significantly dampen the massive annual EU related air passenger growth, but in order to decrease CO2 emissions in the long run and to create a level playing field for all means of transport within the EU it will be essential to also subject air travel to VAT. Secondly, our results imply that the tax rates applied in our estimations of potential revenues from a carbon-based flight ticket tax would ceteris paribus guarantee stable revenues for the EU budget.

Conclusions and outlook

Due to the cross-border nature of externalities caused by international aviation, it appears most appropriate to use revenues from taxing these externalities to finance parts of the EU budget. This is especially convincing as only through a common and internationally coordinated approach will a social optimum of air traffic be possible in the future. A carbon-based flight ticket tax, which takes into account the individual carbon footprint per passenger per route, is the most efficient and (with regard to its chances of implementation) realistic market-based mechanism to internalise the social cost of emitting CO2 into the atmosphere: particularly considering that the EU ETS has not and will not deliver in the near or medium-term future.

The issue of taxing the European aviation sector effectively can also be discussed in the context of improving the system of own resources of the EU. Most of the problems related to the system of own resources are well known, but one major deficit is hardly discussed: through its form and structure the system of own resources does not contribute to key EU aims and strategies such as “moving towards a smart, inclusive and sustainable economy”.

Implementing the proposed tax design and using the estimated € 5 billion to reduce GNI contributions of Member States so that they are able to reduce taxes on labour would contribute to closing two sustainability gaps in EU taxation: namely a declining weight of Pigovian taxes and a heavy tax burden on labour. Overall, regardless of its limited revenue potential, an EU carbon-based flight ticket tax may be considered a prime example of a sustainability-oriented innovation in European tax regimes.


Auerswald, H., Konrad, K. and Thum, M. (2011): “Adaptation, Mitigation and Risk-Taking in Climate Policy”, CESifo Working Paper No. 3320.

Dimitrova, A., Hollan, K., Laster, D., Schratzenstaller, M., Walterskirchen, E. and Weiss, T. (2013): “Literature Review on Fundamental Concepts and Definitions, Objectives and Policy Goals as well as Instruments Relevant for Socio-Ecological Transition”, WWWforEurope Working Paper No. 2013/40.

European Commission (2005): “New Sources of Financing for Development: A Review of Options”, Commission Staff Working Paper No. SEC(2005)467.

European Commission (2011): “A Budget for the European Union 2020”, Commission Staff Working Paper No. SEC(2011) 868 final.

European Commission (2016): European Aviation Environmental Report 2016, Brussels: European Commission.

Expedia (2016): Preparing for Take Off. Air Travel Outlook for 2016,

IATA (2007): Estimating Air Travel Demand Elasticities,

ICAO (2011): ICAO Carbon Emissions Calculator, Montreal: International Civil Aviation Organization.

Jones, B., Keen, M., and Strand, J. (2012): “Fiscal Implications of Climate Change”, World Bank Policy Research Working Paper No. WPS5956.

Keen, M., Parry, I., and Strand, J. (2013): “Planes, Ships and Taxes: Charging for International Aviation and Maritime Emissions”, Economic Policy 28(76): 701-749.

Keen, M., and Strand, J. (2006): “Indirect Taxes on International Aviation”, IMF Working Paper No. WP/06/124.

Krenek, A., and Schratzenstaller, M. (2016): “Sustainability-oriented EU Taxes: The Example of a European Carbon-based Flight Ticket Tax”, FairTax Working Paper No. 1.

Nerudová, D., Rozmahel, P., Dobranschi, M., Litzman, M., Hampel, D., Janova, J. and Brogger, B. (2016): “Sustainability of the Taxation System”, mimeo.

Nordhaus, W.D. (2011): “Estimates of the Social Cost of Carbon: Background and Results from the RICE-2011 Model”, NBER Working Paper No. 17540.

Pigou, A.C. (1954): “Some Aspects of the Welfare State”, Diogenes 7(6): 1-11.

Schratzenstaller, M. (2016): “Sustainable Tax Policy Beyond the Tax Ratio for the EU as Core Element of a “Fiscal Union”, in: Oesterreichische Nationalbank (ed.), Toward a Genuine Economic and Monetary Union, Vienna: Oesterreichische Nationalbank, 141-157.

Schratzenstaller, M., Krenek, A., Nerudová, D., and Dobranschi, M. (2016): “EU Taxes as Genuine Own Resource to Finance the EU Budget – Pros, Cons and Sustainability-oriented Criteria to Evaluate Potential Tax Candidates”, FairTax Working Paper No. 3.

Thalmann, Ph. (2012): “Global Environmental Taxes”, in Milne, J.E., and Andersen, M.S. (eds.), Handbook of Research on Environmental Taxation, Cheltenham/Northampton: Edward Elgar, 456-476.

Tol, R.S.J. (2007): “The Impact of a Carbon Tax on International Tourism”, Transportation Research Part D 12(2): 129-142.

Tol, R.S.J. (2013): “Targets for Global Climate Policy: An Overview”, Journal of Economic Dynamics and Control 37(5): 911-928.

Van Den Bergh, J.C.J.M., and Botzen, W.J.W. (2014): “A Lower Bound to the Social Cost of CO2 Emissions”, Nature Climate Change 4(4): 253-258.

Weibust, I. (2009): Green Leviathan: The Case for a Federal Role in Environmental Policy, Surrey/Burlington: Ashgate.

[1] The article is a shortened version of Krenek and Schratzenstaller (2016).

[2] For the concept of sustainability and its dimensions see the literature reviews by Nerudová et al. (2016) and Dimitrova et al. (2013).

[3] For fundamental deliberations on and key features of sustainability-oriented taxation see Schratzenstaller (2016).