Solidarity Levies on Air Travel

Oxford Energy and Environment Brief

April 2011

The case for a ready-made innovative stream of finance in support of

the current international climate negotiations

by Peter Lockley

and Muyeye Chambwera

Contents

1. Executive summary ...................................................................................................... 1

2. Background – The need for funding pledges by COP 17 in Durban ............................ 3

3. Air ticket taxes are a straightforward way to raise finance ........................................... 4

4. Existing Air Passenger Taxes & their use ..................................................................... 5

5. Economic issues............................................................................................................ 6

5.1 Fair taxation. ......................................................................................................... 6

5.2 Effects on demand: ................................................................................................ 6

5.3 Distortion of competition ...................................................................................... 7

6. Country-by-country revenue potential .......................................................................... 8

7. Conclusion .................................................................................................................... 9

1. Executive summary

The agreement by the UNFCCC Conference of Parties (COP16) in Cancun to establish a Green

Climate Fund is encouraging, but developing countries, including the hosts of COP 17, South Africa,

are already warning that they have no appetite to establish another 'placebo fund' with no money in it.

For the Fund to be operationalised at COP 17 in Durban, there have to be credible pledges, at least for

start-up funding, on the table going into COP 17.

Ubina Environmental Consulting, petelockle[email protected]

Researcher and Team Leader: Economics of Climate Change International Institute for Environment and

Development IIED, London, muyeye.chambwera@iied.org

It is also clear, on the one hand, that due to the current fiscal constraints, direct budget contributions

will be politically very difficult, and on the other, that it will not be possible to set up the sort of

innovative international financing mechanisms that have been suggested in this context – such as

permit auctions for the international aviation and maritime sectors, or a financial transaction levy – in

time for Durban. In particular, the current ICAO (International Civil Aviation Organization) timetable

would suggest that 2015 is the earliest possible date for a comprehensive aviation measure to begin,

even if political obstacles can be overcome. Accordingly, although mitigation of aviation emissions is

a desirable goal, this brief does not discuss the ICAO negotiations further. At the same time it has

been clear, at least since the setting up of the Global Fund for Malaria and HIV/Aids, that up-front

pledges help expedite the process of setting up a fund considerably.

The sole focus of this brief is the generation of near-term start-up finance for the new Green Climate

Fund and its aim is to highlight a practical option of innovative finance for this purpose that is

available to countries which are willing to provide funding but unable to do so through their

consolidated budgets.

An aviation ticket or passenger levy would generate a new (off-budget) income stream for many

developed countries that could be earmarked for climate change. Such country levies are quick to set

up (without the need for international agreements), and have proven to be extremely cheap to

administer.

A number of countries already implement a solidarity ticket levy to fund the fight against HIV/Aids.

These include Least Developed Countries (LDCs) such as Niger; France is the only developed

country to do so. This indicates that the levy is practical, and has no serious effects on the economy of

even a very poor country.

Several countries have ticket taxes, but for general revenue and not directed towards climate change

(e.g. UK, Ireland, US). These countries could either ring-fence a proportion of existing taxes, or

increase them and ring-fence the additional revenue.

Passenger levies or taxes can be small enough to have no discernible effect on demand, but still raise

useful revenue (as in France). Or, they can be set at a level that will also have a modest effect on

demand (particularly for budget short-haul flights), as part of an emissions control strategy (as in the

UK).

The levy can be set suitably low so as to avoid any genuine risk of competitive distortions. Moreover,

coordination of levies could eliminate any residual risk of distortion, for example, between EU

Member States; in practice covering the main EU hubs would reduce this risk to negligible.

The national levies can be phased out in the longer term if a carbon-pricing mechanism is agreed in

ICAO that generates similar revenue for climate initiatives.

The penultimate section of the brief presents some illustrative calculations for the main developed

countries that are not Economies in Transition, using rates similar to the French Solidarity Levy. The

total raised would be around $10 billion, with (for example) around $1bn contributed by Spain,

$700m by Italy, $260m by Canada, $200m by Australia, and $150m by Switzerland.

2. Background – The need for funding pledges by COP 17 in Durban

The recent UN Climate Conference in Cancun, Mexico adopted a decision to create a Green Climate

Fund (GCF), to be designed by a Transitional Committee under the aegis of the UN Framework

Convention on Climate Change (UNFCCC). A lot of effort has already been put into ideas on what

this new fund is going to be. But very little has been said on how it is going to be funded:

There is no clarity on how to finance the Fund. Developing countries are keenly awaiting

announcements by their developed country partners on regular and mandatory contributions to the

new Green Fund. The Transitional Committee work cannot finish without some collective assumption

on the scale of funding to be routed through the fund – an important design parameter for the Fund.

The developed world’s reticence to discuss the magnitude of the GCF is simply scandalous. It neither

bodes well for a proper institutional edifice of the GCF nor for the rapid progress needed to achieve

results by Durban. This conversation cannot be avoided. It must take place now and side by side with

the design process to be initiated by the Transitional Committee.

The Cancun Agreements reaffirm that funding may come from a wide variety of sources, public and

private, bilateral and multilateral, including alternative sources, and takes note of the report of the

High-level Advisory Group on Climate Change Financing (AGF). It is no coincidence that the

Agreement has nothing more to say on how the new fund is to be sourced. Identifying sources of

funding for the GCF will be the toughest problem in the forthcoming finance negotiations, and it has

to be resolved quickly, at least with regards to mobilising start-up funding, for there is a real danger

that without some start-up funding package, the GCF will arrive stillborn at Durban.

So how can

adequate start-up funding be secured by Durban, in the current context of record budget cuts in the

developed world?

Over two years ago, the LDC Group put forward a proposal for a levy on international air travel to

provide a significant core funding stream for adaptation.

Although the LDC proposal envisaged a

global, mandatory measure, an alternative option for securing quick start-up funds for the GCF ahead

of COP 17 is for country-by-country, opt-in pledges to implement an air ticket levy and channel the

proceeds to the GCF.

As discussed below, a number of countries already have such taxes (albeit not to fund adaptation) –

they are easy to design, cheap to collect and have minimal impact on a country's economy: Air ticket

taxes should be broadened, deepened, and directed towards climate change action.

This section is contributed by Benito Müller and partially based on his Time to Roll Up the Sleeves - Even

Higher! Longer-term climate finance after Cancun, Oxford Energy and Environment Brief, January 2011.

Farrukh Iqbal Khan, The Green Climate Fund: What needs to be done for Durban (COP 17), Oxford

Energy and Environment Brief, February 2011.

One reviewer commented that this view was overly dramatic, that if no funding is available at Durban, then

one could simply wait with the adoption of the documents developed by the Transitional Committee. But

given the urgency in establishing the new fund that was professed by most Parties (including the developed

ones), such a postponement due to the lack merely of start-up funding would be a serious blow to the

credibility of contributors which can and must be avoided, for the good of the overall multilateral climate

change regime.

For more on the LDC International Air Passenger Adaptation Levy (IAPAL), see, for example, Benito

Müller, IAPAL - Thirteen Questions and Answers, ecbi Policy Brief April 2009.

3. Air ticket levies/taxes are a straightforward way to raise finance

Any national government has the undisputed right to put a levy or tax on passengers using its airports,

without the need for international agreement.

In practice the liability usually falls on the airline, and

is calculated per passenger departing from airports in the territory of the country (transfer and transit

passengers, who change planes and wait on the runway respectively, are usually exempted). It can be

a flat rate, be varied by distance or class of travel, or be a percentage of the ticket price. Most

countries that levy tickets do so on both domestic and international flights – and a country-by-country

opt-in tax/levy could do the same (in contrast to an internationally-agreed mechanism such as IAPAL,

which would only cover international flights).

According to data published by the UK revenue and customs authorities, Air Passenger Duty is the

cheapest of all UK taxes to collect. At 0.04 pence per pound collected, it is more than twice as cheap

as the next most efficient tax, and over 27 times cheaper than the average pound of UK tax revenue.

The use of revenues raised in this way is entirely in the gift of the Government in question. A handful

of countries already have such taxes, and fewer still use the revenue for international public good

initiatives. However, in the majority of developed countries, aviation remains untaxed (apart from

fees levied purely within the industry such as airport charges – sometimes misleadingly represented as

'taxes').

Legal issues would only arise if a government attempted to discriminate according to the nationality of the

passenger or the airline.

Meeting Our Challenges – Departmental Annual Performance Report 2009. HM Revenue and Customs

2009 (http://www.hmrc.gov.uk/about/autumn-report-2009.pdf) see table 1 on page 32.

Table 1: Aviation taxes and their use in selected developed countries – indicative figures.

Domestic

Economy

Class, US$

Domestic

Premium Class,

US$

International

Economy

Class, US$

International

Premium

Class, US$

Total

raised,

US$ m

Use

France

1.4

5.6

160

UNITAID

98-123

196-280

3’000

Govt revenue

Germany

35-63

1’400

Govt revenue

USA

7.5% of fare

14.50

16’000

(all

taxes)

Aviation

infrastructure,

security etc

Notes:

1. Figures for UNITAID countries are for 2009 and taken from Unitaid (2009), converted at 1€ = $1.40

2. Figures for UK and Germany are projections for 2011, sourced from the respective governments.

3. Figures for the USA are for 2005 and the total is the aggregate of all federal aviation taxes, not just those listed. See

further Cairns et al (2006), Predict and Decide: Aviation, climate change and UK policy, Cairns and Newsom,

Environmental Change Institute (2006) http://tinyurl.com/69ftdrh, Annex C

4. Existing Air Passenger Taxes & their use

The table and discussion below gives selected examples of air ticket taxes that are already in place.

UNITAID. As well as France, a number of developing countries already implement an air ticket levy

in order to raise funds for UNITAID: Chile, Madagascar, Mauritius, Niger and the Republic of Korea.

Norway contributes a proportion of revenue from an aviation fuel tax to UNITAID.

Benin, Burkina Faso, Côte d’Ivoire, Democratic Republic of Congo, Jordan and Mali have also

committed to implement a levy.

Promotion of the levy is one of the missions of the Leading Group

on Innovative Financing, which has 63 member countries

Aviation Infrastructure. In the United States, a number of federal and state taxes are levied on

aviation (both tickets and fuel). According to the Air Transport Association of America, federal taxes

alone amounted to $16 billion in 2005. The proceeds are used for improvements in aviation

infrastructure, and to pay for measures related to security, immigration, quarantine etc.

Given the size of the US aviation sector (around a fifth of all global aviation activity is US domestic

flights) only a small increase in the rates of taxation would be needed to yield useful revenue for

adaptation. To illustrate, a 5% increase in all taxes would generate $800 million, but would only add

70 cents to the price of an international air fare.

Government Revenue. The UK and Ireland have levied ticket taxes for several years. Germany and

Austria recently introduced air ticket taxes that came into effect in 2011. The Netherlands imposed

such a tax in 2008, but revoked it in 2009, citing loss of passengers, mainly from Amsterdam Schipol

to Frankfurt airport. However, this trend coincided with a sharp Europe-wide reduction in passenger

numbers due to the economic crisis.

EU ETS. Although the EU Emmission Trading Scheme (ETS) is not a tax, European Member States

will benefit from the auctioning of a proportion of aviation emissions permits when the sector enters

the EU ETS in 2012. The European Commission has just published the details of aviation's cap, of

which 15% will be auctioned. At current permit prices of €16, this auction would raise a little over

€500 million (US $700 million) for Member State governments.

The Directive incorporating aviation into the EU ETS acknowledges that Member States have the

right to determine what use to make of auctioning revenues. Nevertheless, it lists purposes for which

the revenues should be used, including 'to adapt to the impacts of climate change in the EU and third

countries', 'to fund research and development for mitigation and adaptation' and 'to avoid deforestation

and facilitate adaptation in developing countries'.

UNITAID purchases medicines to combat HIV/Aids, malaria and tuberculosis in the developing world.

Unitaid (2009)

See list at http://www.leadinggroup.org/article48.html

EUA spot price at 10.03.11. For details of the EU ETS cap,

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/259&type=HTML

Directive 2008/101/EC of the European Parliament and of the Council, Recital (21).

5. Economic issues

This section presents some brief consideration of fiscal and economic issues surrounding ticket

taxes/levies. A full economic analysis is beyond the scope of this paper, and in any case is not merited

given the minor effects of levying such a modest tax.

5.1 Fair taxation.

Kerosene used for international flights is exempt from taxation, by virtue of a large number of bi-

lateral Air Service Agreements that implement the 1944 Chicago Convention on Civil Aviation. In the

EU, additionally, aviation enjoys favourable zero-rating for VAT. Ending the fuel tax and VAT tax

breaks is certainly desirable, but would require consensus among the 27 Member States, whereas any

country can take a unilateral decision to impose a ticket tax/levy.

In fact, ticket taxes/levies would need to be increased substantially before they fully compensated for

the fuel tax and VAT tax breaks. The UK Treasury has valued these exemptions for flights from the

UK at £10 billion (€11.6 billion). In other words there is considerable headroom, even in the country

with the highest aviation taxes in Europe, to increase the rate of taxation before the sector reaches

fiscal equity with motoring.

As well as being under-taxed relative to other sectors, aviation is a fast-growing source of greenhouse

gas emissions that does not meet its climate costs. In the period before mitigation measures can be

developed that will internalise this externality, it is a reasonable proxy to ask the industry, or rather its

consumers, to make a restitutive payment towards the damage they are causing, to help, in particular,

vulnerable countries adapt to the climate change to which the industry contributes.

5.2 Effects on demand.

As discussed, it is likely that ticket taxes at the level suggested would have no material impact on

overall demand. Price elasticities for air travel are thought to be low, with estimates clustered around

−1 (slightly lower for long-haul business, slightly higher for short-haul leisure)

. This means that a

1% increase in the price of air travel leads to a 1% demand reduction (in what) – and note that any

reduction would be on a one-off basis, against a background of steady annual increases in air travel.

Systematic data on average airfares is, however, not publicly available, making calculations of

demand effects difficult.

Generally, however, demand is thought to be more income than price elastic, i.e. depending more on

passengers’ available income than to changes in the airfare itself. This is borne out by the close

correlation between per capita GDP and frequency of air travel across countries

, and by the way

demand for air travel has tracked GDP growth in recent decades

. It is also borne out anecdotally in

countries that have implemented levies, in the first month of the German ticket tax, for which data are

available, Lufthansa passenger numbers increased against the same month the previous year by

11.7%

Even in the UK, which uses taxes as part of a wider strategy to help limit emissions with levies of

over $100 on long-haul economy tickets, demand for air travel has remained stubbornly strong, even

when corrected for the economic downturn.

The range of estimates from the academic literature are presented at

http://www.fin.gc.ca/consultresp/airtravel/airtravstdy_1-eng.asp

http://graphs.posterous.com/propensity-for-airline-travel-vs-gdp-per-capi

http://www.boeing.com/commercial/cmo/images/cmo_methodology_chart3_lrg.gif

http://de.news.yahoo.com/17/20110209/tbs-gute-zahlen-waermen-deutsche-tourist-cc081a3_1.html

5.3 Distortion of competition.

It has been argued that differential taxes will cause passengers to fly from countries with the lowest

taxes, distorting competition between airlines (who have established bases at particular airports) and

reducing the revenue base. While this is theoretically correct, for direct flights the effect is only likely

to occur in practice where major airports are geographically close but in different countries, so that

passengers can feasibly access a non-taxed flight. For developed countries, this situation only pertains

in north-west Europe, and at the US-Canada border.

At the rates suggested in this paper, however, the maximum differential would be $5 for an economy

class traveller and $50 for a business class passenger. A $5 advantage would quickly be eliminated if

the passenger had to travel further by car or public transport to access a more distant airport, and even

a $50 advantage is unlikely to cause a significant shift in patterns of business travel, since such

passengers are far more time than price sensitive.

The simplest way to eliminate any such effect, of course, would be an agreement to levy similar rates

amongst the governments concerned. Belgium, Luxembourg and the Netherlands could levy a similar

rate to Germany, Denmark and Sweden, and Canada and the US might also benefit from coordinated

measures.

Transfer passengers could be exempted (as with UK APD) to avoid any effect on choice of

connecting airport.

6. Country-by-country revenue potential

In the illustration below a total of around $10 billion would be raised if the 23 developed countries

listed

implemented ticket levies at the following rate: $1 domestic economy, $10 domestic premium,

$5 international economy, $50 international premium

Revenue figures have been rounded to the nearest million and totals may therefore show minor

rounding errors. It is assumed that 10% of all passengers pay the premium rate.

No account is taken

of the interplay with existing aviation taxes; the solidarity levy is assumed to be new and additional.

Country

Domestic

Pax (m)

Domestic

Revenue (US$m)

International

Pax (m)

International

Revenue

(US$m)

Total

Revenue

(US$m)

Australia

(1)

49.6

11.4

108

203

Austria

(2)

0.7

17.8

169

170

Belgium

17.9

170

Canada

(3)

20.4

194

258

Denmark

16.1

153

155

Finland

1.2

9.9

France

70.1

666

691

Germany

107

1017

1039

Greece

3.4

23.8

226

233

Ireland

0.6

24.5

233

234

Italy

14.2

656

682

Japan

(4)

173

200

372

Netherlands

36.7

349

New Zealand

(5)

7.3

4.3

Norway

(6)

11.3

7.6

Portugal

1.5

181

183

Spain

17.8

101.2

961

995

Sweden

162

167

Switzerland

(7)

0.6

15.8

150

151

United Kingdom

11.5

143.8

1366

1388

United States

(8)

618.1

1174

151.5

1439

2614

Total

892

1694

906

8605

10300

Sources: see end notes

Annex I countries, excluding Economies in Transition and Turkey (due to their circumstances), and Iceland,

Luxembourg and Malta due to low aviation activity or lack of data.

These rates are based on the French levy, but rounded down. The main difference is that it is proposed here

that flights within Europe should attract the international, not the domestic rate – which accounts for higher

revenue from France than the current UNITAID total.

Based on data from IATA's premium traffic monitor:

http://www.iata.org/whatwedo/Documents/economics/Premium-Monitor-Dec10.pdf

7. Conclusion

National air ticket levies could be one of the most reliable potential sources of finance for the Green

Climate Fund in the short term, and could be made operational without the need for drawn-out

negotiations. There are precedents for the application of air ticket taxes in both developed and

developing countries, and although several individual countries operate them for their own domestic

revenue purposes, there are clear examples, in both developed and developing countries of ticket

levies that have been hypothecated for international public good initiatives – in this case the purchase

of medicines for HIV/AIDS.

Where ticket taxes/levies have been applied, no major distortions or decline in business has been

experienced as a result of the tax. Negotiations are underway at the International Civil Aviation

Organisation to develop a market-based instrument for aviation, with potential to generate revenues

for climate initiatives, but it may take several years to put into this operation and generate revenues

for climate change adaptation. Thus a ticket tax/levy represents a fast-start, low-impact revenue

generating system which could, if desired, be replaced by mitigation oriented mechanisms as they

develop. What is critical is to get to Durban with a realistic, credible and predictable option which is

capable of delivering climate finance annually for the next 5-10 years.

(1)

Avline 2008-9, Australian Department of Infrastructure, Transport, Regional Development and Local

Government. http://www.bitre.gov.au/Info.aspx?ResourceId=761&NodeId=92. (NB international statistics

represent journeys to and from Australia and have been divided by 2)

(2) For all EU countries, data is for 2009 and is taken from

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Overview_of_EU27_air_passenge

r_transport_by_Member_States_in_2009_-

_passengers_carried_%28in_1000%29.PNG&filetimestamp=20110214143654. (NB Except for intra-EU

flights, numbers represent arrivals and departures and have been divided by 2.)

(3) Statistics Canada, data for 2009. http://www.statcan.gc.ca/pub/51-203-x/51-203-x2009000-eng.pdf

(4) Japanese Ministry of the Interior and Communications, Statistics Bureau.

http://www.stat.go.jp/english/data/handbook/c09cont.htm. Figure for international passengers in 2009 is

aggregated from tourism statistics provided and may include some arrivals by ship. However, data

correlates well with a 2004 survey specific to air transport:

http://www.stat.go.jp/english/index/official/209.htm#8

(5) Data aggregated for Auckland (2010), Christchurch (2010) and Wellington (2008) airports only, see

http://www.aucklandairport.co.nz/Corporate/NewsAndMedia/Publications/~/media/Files/Corporate/Monthl

y_Traffic_Reports/2011/MTU_Month%2006_Dec%202010.ashx,

http://www.christchurchairport.co.nz/content/388/i.%20Passenger%20Numbers.pdf, and

http://www.wellingtonairport.co.nz/html/business/statistics.php

(6) Avinor (Norwegian airport operator) Data is for scheduled and charter passengers in 2010 and taken from

http://www.avinor.no/tridionimages/2010%20Passasjerer_tcm181-126648.xls. Data given represents

arrivals and departures and has been divided by 2.

(7) Data aggregated for Geneva and Zurich airports in 2009, see

http://www.gva.ch/en/Portaldata/1/Resources/fichiers/Institutionnels/Statistiques/2009_stat-gva.pdf and

http://www.zurich-

airport.com/Portaldata/2/Resources/documents_unternehmen/investorrelations/Zahlen_und_Fakten_2009_e

n.pdf

(8) United States Bureau of Transportation Statistics. Data for 2009.

http://www.bts.gov/press_releases/2010/bts015_10/html/bts015_10.html#table_01