Carbon and fuel taxes are levied on the use of carbohydrate-based fuel or the fuel-burn resulting emissions and could be applied to air transport. The main difference between these taxes is whether they are applied per tonne of CO2 or per litre of fuel emitted. 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 exempt from tax on international flights, but taxes on jet fuel for domestic flights are not exempt and are already in place in some countries such as the USA and Japan. Jet fuel taxes can also be implemented through bilateral agreement for international flights between two countries, that international flights are generally not currently subject to fuel or carbon taxes. Ticket taxes, by contrast, are quite common. National and international governments can also apply carbon pricing mechanisms (carbon taxes and ETS) to international aviation, as illustrated by the inclusion of intra-EEA aviation in the EU’s Emissions Trading Scheme (ETS).
The proposed taxes examined in the literature vary greatly, one study looking globally found they could range from EUR 20 to EUR 700 per 1000 litres of fuel for fuel taxes; and USD 1 to USD 500 per tonne of CO2 for carbon taxes. Regardless of the method applied, policymakers 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.
The CO2 reduction benefits of fuel or carbon taxes come mainly from demand reduction, provided the level of tax is high enough to induce a demand shift.
Fuel taxes also incentivise increased aircraft efficiency, which further reduces CO2 emissions per aircraft.
Carbon taxes on the other hand directly target CO2 emissions. Fuel or carbon taxes would likely push the sector towards less carbon-intensive or carbon-free fuel alternatives. This can potentially lead to a significant CO2 reduction in the long term.
A European study found that a tax of EUR 330 per 1000 litres of kerosene could result in an average reduction in CO2 emissions of 11%, based on the resulting increase in ticket price and reduction in demand. National reductions were estimated to range between 4% and 19%.
Another study found a globally applied fuel tax would reduce emissions by 3.3% for a tax of USD 63 per 1000 litres to 13.1% for a tax of USD 293 per 1000 litres.
An estimate suggests a globally applied carbon tax of USD 200 per tonne of CO2 could reduce aviation emissions by 8% comparing 2024 to 2004 levels.
The main cost of fuel or carbon taxes is borne by airlines and freight forwarders. As these taxes increase the cost of aircraft fuel, operating costs for airlines and freight forwarders will go up. These companies can decide to partially or fully pass the cost on to their passengers or customers, making air fares and freight forwarding services more expensive.
Fuel excise taxes (and fuel-based carbon taxes) have very low administrative costs, similar to road fuel taxes.
Both taxation measures will result in a revenue stream for the authorities that implement them. The collected revenue can be used to provide support measures to help the industry decarbonise and/or to address other adverse impacts of aviation, such as noise or air pollution.
Possible adverse effects of a fuel or carbon tax on aviation would be related to the reduced demand.
The possible resulting increases in air fares will affect leisure travellers more than business travellers as this market segment tends to have a higher price elasticity of demand.
Thinner routes may be disproportionately affected by a loss of connectivity, particularly at smaller/secondary airports. Freight forwarding could become more expensive, which could have repercussions on supply chains.
Download aviation-fuel-tax.pdf (617.94 KB)