The “green” tax dilemma

News came out today that the U.S. embassy in London has responded harshly to plans by HM Treasury to change the Air Passenger Duty into a per-plane tax at great expense to airlines and, ultimately, travelers. Air Passenger Duty was last raised dramatically in 2006 as an anti-climate change measure. Then-chancellor (and current prime minister) Gordon Brown said that APD was only a temporary solution to restraining aviation’s climate impacts until the sectors scheduled 2010 inclusion in the European emissions trading scheme. Airlines were starkly opposed, claiming that it was merely a revenue grab, and environmental campaigners dismissed its “green” credentials.

The current plan, outlined in a consultation document [PDF] released earlier this year, is to change the per-passenger charge into a per-plane charge based on maximum takeoff weight as a factor of three distance ranges: the European Economic Area, less than 3,000 miles from London (non-EEA), and more than 3,000 miles from London. The argument is that a given plane produces the same emissions whether it is fully loaded with APD-paying travelers or just half-full. The current £40 APD for economy-class long-haul travelers could climb as high as £100, according to the Daily Telegraph — which might severely affect traffic at British airports, especially connecting flights through London’s Heathrow Airport. Indeed, the Treasury acknowledges this in its consultation: “London Heathrow airport has the highest number of international transfer passengers of any airport in the world; transfer traffic there represents 34 per cent of all passenger traffic. Some airlines argue that the knock-on impact of aviation duty would reduce UK transfer traffic by imposing an effective cost on the provision of transfer traffic; and that this would have negative consequences for the UK economy, including through a reduction in the frequency and variety of services that can be offered directly from London.” This exposes one of the major obstacles facing those who would implement regional “green” taxes: competition.

Many have argued for collaboration on setting tax rates. German and French officials, for example, have called for a minimum corporate income tax rate. Germany and France, with relatively high rates among European countries, have been clobbered by competition from low-tax Ireland, Poland, and Britain. But what do Poland or Ireland have to gain by harmonizing their tax rates? It’s their competitive advantage to undercut other countries. With green taxation, however, the benefits of taxation are spread across geographic areas, and in the case of climate change, the world. Countries that impose excessive anti-climate change aviation taxes on themselves are bound to lose out to other countries that don’t impose such taxes — especially in an environment as competitive as Europe.

Europe’s airline hubs serve substantial volumes of transfer passengers: within Europe; from East Asia, Africa, the Middle East, and North America to European destinations; from East Asia to Africa and North America; and from North America to Africa and the Middle East. If Heathrow becomes too expensive, passengers can easily choose to pass through Paris-Charles de Gaulle, Amsterdam Schiphol, or Frankfurt. While the effect of the 2006 increase in APD cannot be fully assessed given current figures (from the Civil Aviation Authority), it looks as though passenger totals are leveling off at London’s Stansted and Luton airports, both of which are used heavily by the low-cost carriers and charter airlines favored by the most price-sensitive travelers. To what extent this can blamed on APD instead of the economic slowdown is unknown.

As another lesson in how not to charge green taxes, the Netherlands is imposing a travel tax on Dutch flights beginning on July 1. It will see much higher charges imposed on travelers originating in or arriving in Holland (namely Schiphol, the only airport of significance there). But in order to preserve Schiphol’s international competitiveness, and KLM’s lucrative connecting flight operation, the Dutch government hollowed out the tax’s environmental bona fides. It is applied per passenger, not per plane, and it is assessed only on those whose itineraries end or begin in the Netherlands, exempting the massive number of connecting passengers. End result: a revenue grab that does little to help the environment while alienating Dutchmen and tourists. Dutch newspaper Trouw reports that it is cheaper to fly from Dusseldorf, Germany (not far from the Dutch border) to Paris with a connection at Schiphol than from Schiphol directly.

The new British charge is intended to be more closely associated with each flight’s environmental cost than its predecessor, and in this it is an improvement:

The Government is keen to emphasise that under aviation duty it will be for individual airlines to determine how they wish to pass the cost onto passengers. In addition, the Government believes that aviation duty should be a coherent and simple duty which serves its environmental objectives and with which compliance is straightforward. The Government is therefore minded that the duty should apply irrespective of the nature of the passengers or goods being carried and therefore include transit/transfer passengers and goods.

But the Treasury ignores the effect on international competition. Britain’s airports and airlines will lose business if the charges are set too high, as it appears they might be.

Because climate change is a global problem (unlike, say, low corporate tax rates), it needs to be addressed through multilateral mechanisms. Rather than doing what critics suspect and making a quick buck off the aviation sector — calling it a “green tax” seems to be the only way the unpopular Gordon Brown will get a tax hike through at the moment — governments should work to develop ways of fairly including aviation in regimes like the EU emissions trading scheme. Country-level plans in Europe will neither do much for the environment nor for the aviation sector.