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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