Aviation fuel tax

Carbon and fuel taxes are levied on the use of carbohydrate-based fuels or the emissions resulting from fuel burn. The main difference between these taxes is whether they are applied per tonne of CO2 emitted or per litre of fuel used. In practice, however, carbon taxes are often administered in the same way as excise fuel taxes: they are based on common commercial units (e.g. litres for liquid fuels such as jet fuel) rather than carbon content or CO2 emissions. One form of tax does not exclude the use of the other, as many countries combine fuel taxes with some form of carbon pricing (a carbon tax or an emissions trading system).

Jet fuel has historically been exempted from tax on international flights in most markets; taxes on jet fuel for domestic flights have, however, been put in place in some countries. As of 2019, these included Argentina, Armenia, Australia, Canada, India, Ireland, Japan, Myanmar, Norway, the Philippines, Saudi Arabia, Switzerland, Thailand, the United States and Viet Nam . Tax rates vary by country and also – namely for the United States – by state. In 2019, excise taxes ranged from EUR 0.01 (euro) to EUR 0.77 per litre of fuel. Average tax rates applying to domestic jet fuel are much lower than those for road transport fuels. In some countries, fuel excise and carbon taxes combined can reach EUR 300 per tonne of CO2, showing the scope for increased tax rates on jet fuel.  

Implementing a tax on fuel used for international flights would require the bilateral amendment of air service agreements between countries. Three concerns regarding their implementation are the risk of carbon leakage (the displacement of CO2 emissions occurring when production activities move from jurisdictions with more stringent climate policies to those with less stringent policies); reduced competitiveness for firms in jurisdictions implementing fuel taxes; and fuel tankering (see “Other considerations” below). Establishing an international fuel tax across several countries for flights within an established perimeter could help limit these risks.

The proposal by the European Commission for a revision of the energy taxation directive, included in the Fit for 55 policy package, goes in this direction, as it includes a provision to end the mandatory tax exemption concerning international aviation fuel. The proposal is to end jet fuel’s tax exemption for fuel used on private and commercial flights within Europe (60% of fuel sales used for international flights, cargo flights or other would, however, still be subject to the exemption). 

Jet fuel taxes can also be implemented through bilateral agreements for international flights between two countries. 

The proposed tax levies examined in the literature vary greatly, one study concluding they could range from EUR 20 to EUR 700 per 1 000 litres of fuel for fuel taxes; and USD 1 (US dollar) to USD 500 per tonne of CO2 for carbon taxes. Regardless of the method applied, policy makers need to consider that the implementation or increase of existing carbon or fuel taxes – if passed on to the passenger – make flying more expensive, potentially reducing the growth in demand for air transport.