EU tax on airline CO2 emissions

The EU has been threatening since at least 2007 to impose an emissions tax on all airlines landing in Europe. They’ve postponed the tax at least once (to 2012) and may be forced by the strong opposition of the international airlines “club” (IATA) and foreign governments—not to mention by the doubts of the EU Commission about the WTO-consistency of the measure—to postpone the tax again.

I’ve reviewed the “border adjustment” tax problem here and here. These duties are more common than you might think and are not inconsistent with WTO rules on goods trade. But they are difficult to assess and administer fairly in any but the simplest forms (e.g. excise duties imposed on imports) and can readily be subverted for protectionist effect.

In the case of a tax on the import of a service such as a passenger fare, it would be very difficult to ensure that a border-tax adjustment was fair, transparent and not used as a trade-protective barrier. Governments are bound to be locked into disputes about such taxes; disarmament is less expensive and less dangerous to trade than reciprocity achieved by an “arms race”.

The Australian’s “exclusive” story speculates that the EU threat might be used to justify adopting our own carbon tax (in order to pre-empt EU action?). Although we’d retain the tax revenue by doing so, the idea is absurd; as if putting rocks in our own harbours were a way to offset the trade-barriers of our partners).

The tax will further squeezes airline margins by raising fixed costs without bringing improvements in service or productivity. Consumers will be worse-off—and the EU economy will shrink a little further when European aviation is included in their emissions trading scheme—but I can’t see it having a direct impact on Qantas’ sagging competitiveness since the tax will apply to all airlines flying into the EU (including, presumably, Virgin’s partner Etihad). Nor can I see it having much impact on the level of demand for international air travel.

But the added fuel tax will make it more difficult for cash-squeezed companies (like Qantas?) to weather downturns in demand due to other factors (business cycles etc); I suspect there are few corners left to cut in the variable costs without either noticeably reducing service levels or further impacting operational safety margins (crew training and conditions, maintenance schedules etc).

2 Comments

  • Hi Peter

    Does the PM’s announcement of a carbon tax mean the Brussels bunker will get off Qantas’s back now?

    Regards

    John

  • Excellent question, John, to which I don’t know the answer.

    It is not clear to me whether the EU will consider a tax on the production of fuels used by Qantas as equivalent to the tax that the EU imposes on airlines’ own production of emissions (by burning fuel). The two are not commensurate taxes so the “equivalence” calculation would, I guess, be a political botch.

    The only sure way that I know Qantas can avoid the EU tax (assuming it survives challenges from China, the USA etc) is to purchase EU Emission Permits. Now would be a really good time to do that, since the market in the EU has collapsed: http://www.petergallagher.com.au/index.php/site/article/dzikujemy-polska

    Best,

    Peter

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