Wednesday 26 June 2019

Colm McCarthy: 'Why it's time to stop giving aviation and shipping sectors an easy ride on pollution'

EU is finally realising the burden of carbon taxes shouldn't just be levied on motoring, writes Colm McCarthy

PRICE: Aviation fuel costs airlines only 60 or 70 cent a litre. Stock picture
PRICE: Aviation fuel costs airlines only 60 or 70 cent a litre. Stock picture
Colm McCarthy

Colm McCarthy

Since Ireland's contribution to the world's carbon emissions is tiny, whatever efforts can be made in this country will have a negligible direct effect. Ireland has a climate but does not have its own atmosphere, and virtue is not, in this instance, its own reward. This is no excuse for long-fingering whatever cost-effective measures are available, but policy must also focus on what stance the Irish Government should take in international bodies, especially the European Union.

A report for the European Commission dealing with climate change and the aviation industry, in preparation since 2018, has been leaked to the press. When you buy an airline ticket in Ireland you pay no VAT, and the airline pays no excise duty on jet kerosene, a fuel close to diesel in emission terms. Some European countries have ad hoc ticket taxes instead of VAT and some have VAT on internal flights only. But the industry is largely free of the burden of indirect taxes levied on motoring.

Airliners produce about 3pc of worldwide carbon emissions, one-quarter the portion attributable to cars and trucks. Marine transport, also free of fuel taxes, contributes another 3pc or so. The European Commission is coming around to the view that neither aviation nor marine transport should permanently be treated so favourably - every tonne of carbon makes the same contribution to the build-up in the atmosphere whatever, or wherever, its source.

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A litre of petrol or diesel costs around €1.40 in most European countries, inclusive of both VAT and excise. This is more than double the pre-tax price - more than half what you pay is either VAT or excise. European motorists face penalties at the pump for emissions and manufacturers have responded to the incentives this creates by offering more fuel-efficient vehicles.

Aviation fuel is only 60 or 70 cent per litre to the airlines. There is (virtually) no tax. Since airlines pay directly for their infrastructure costs (airport fees and air navigation services), it would be unfair to tax aviation fuel as heavily as automotive fuel - part of the charge on petrol and diesel is for the upkeep of the road system, largely free at the point of use. But the leaked report for the EU argues that there should be an excise tax of around 33 cent per litre on jet kerosene, bringing the price up to about €1 per litre. This would add 10 or 12pc to the price of airline tickets.

Cue shock and horror from the airlines, who have been working on various voluntary schemes to curtail emissions. To be fair, the modern airliner is more fuel-efficient, and hence less of a carbon emitter than was the case a few decades back. But the same is true for cars, buses and trucks. It is difficult to fault the logic in the Commission's report. It concludes that there is a case for phasing in an excise duty on jet kerosene - even the USA, a laggard in these matters, has a tax, although at the derisory rate of one cent per litre. Whenever the EU acts, passenger volumes will be reduced, it is estimated, by about 11pc, since the price elasticity seems to be about one. That means that if you increase prices by 11pc, demand will fall by 11pc. If Europe goes this route, gradually over a period of years, demand growth which might otherwise have happened will be inhibited.

What about VAT? There are no current proposals but the exemption of air travel from VAT is another anomaly. If VAT is also imposed, there would be an even bigger price rise and an even bigger impact on demand, inhibiting aviation growth even further. Governments would of course enjoy extra revenue and could cut taxes elsewhere with the proceeds. The reason why aviation has been taxed so lightly has to do with ancient international treaties, some dating back to the end of World War II, which sought to offer favourable treatment to the revival of (non-existent) international commerce. Another beneficiary was the shipping industry. There are no taxes on marine fuel, even though it also produces emissions, comparable in worldwide impact to the aviation sector.

New regulations are on the way to phase out the use of high-sulphur marine bunkers, but there has been no international initiative for a straight excise duty to address carbon emissions. There is currently an over-supply of vessels and a proposal from the industry to impose a speed limit, which has attracted support from some credulous environmentalists.

Slower ships will mean lower fuel consumption per trip it is true, but it would mean more labour costs. It also means a greater requirement for older and less fuel-efficient ships, otherwise surplus and ready to be scrapped, which is the reason why it is being proposed. If there were too many bakeries, the owners of the older ones would support a rule which restricted output from each, including those built most recently. The logical course of action with fuel for ships is the same as with airlines - there should be international agreement to impose some level of minimum tax on marine bunkers.

These measures would incentivise the development of alternative technologies, nuclear ships for example: nuclear-powered icebreakers and submarines are already in operation. It may be possible to develop new hydrogen fuels for aircraft which have far lower life-cycle emissions. The engineers are not optimistic about electric airplanes: apparently the batteries may never be light enough to allow for a commercial payload of passengers or freight.

But securing agreement on taxation measures for the marine and aviation sectors at European level, and eventually around the world, would be important steps towards the attainment of a universal carbon tax, the silver bullet of climate policy.

The Government's new climate change strategy is due to be published shortly and follows the electoral success of the Green Party in Ireland and in most other European countries. The general public is finally persuaded, it would appear, that policy internationally has responded too slowly to the climate threat and the Government may announce concrete measures to curtail emissions here in Ireland. When the document appears, it will be important to consider its cost-effectiveness - have the measures proposed survived an analysis which establishes that each one delivers worthwhile emission reductions at the least achievable cost? Wasteful initiatives which cost too much for too little in carbon savings will quickly convert born-again Greens back into climate sceptics.

But it is even more important that whatever leverage the Irish Government may have internationally be deployed, since it would be prudent to assume that virtuous unilateral policies in Ireland will have zero demonstration effect. European Union policy on climate change has been more effective than anything undertaken to date in many other parts of the world, including the USA, but has also attracted its share of criticism.

Two examples: the ETS (Emissions Trading Scheme) has produced an erratic, and often too low, price for carbon emissions in power generation and heavy industry; and several countries are continuing to promote coal. If the European Commission is leading the way towards carbon taxes on sectors hitherto spared by historical accident, it should enjoy unequivocal public support from this country.

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