Environment

Could increasing taxes on airlines pay for the UK’s green transition? 

Charging airlines as much fuel duty as ordinary car drivers would raise billions of pounds, new analysis has shown, potentially paying for windfarms, hospitals and electric vehicles

The aviation industry is granted billions of pounds int ax exemptions every year, a new report claims. Credit: canva

European Union member states are negotiating plans to apply fuel tax to airlines for the first time. This week, Belgium plans to propose a Europe-wide tax on commercial aviation “in view of its environmental impact”

Here in the UK, there are no plans to end the massive tax exemptions enjoyed by the aviation industry.

Yet charging airlines as much fuel duty as ordinary car drivers would raise billions of pounds, new analysis shows.

The “airline tax gap” robbed the UK Treasury of £4.7 billion in 2022, according to analysis by the Transport and Environment (T&E) group – a figure that will likely increase to around £7.4bn by 2025.

Such tax exemptions “bleed money”, said Matt Finch, T&E UK policy manager.

“It’s indefensible. You’ve got nurses asking for pay rises, and the government saying we haven’t got any money. Well, there’s a couple of billion quid for the taking if you want it.”

What tax do airlines pay?

The government charges airlines a tax levied per passenger flying from UK airports, called air passenger duty (APD). This ranges between £6 and £607, depending on your destination and the class of your ticket.

But the exemptions far outweigh the APD revenue.

If you’ve ever filled up a car with petrol in the UK, you’ve paid more fuel tax than British Airways, Ryanair and EasyJet ever have.

“It is quite hidden from the general public, but it’s very unfair,” Finch said.

“Ordinary people have to pay fuel duty, why not British Airways? British Airways made £1.1 billion in profit last year. I certainly didn’t pay £1.1 billion in wages.” 

Airlines are also exempt from paying VAT on air fares. Such exemptions usually only apply to essential products like fruit and vegetables.

A third tax break comes in the form of the UK’s emissions trading scheme, which requires companies to surrender an allowance per tonne of carbon emitted. Long haul flights are currently excluded from the scheme.

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These broad-ranging tax subsidies stem back to the 1946 Chicago Convention. In a bid to encourage postwar travel, countries agreed to tax the aviation industry at a low rate.

“Fast forward to 2023, and these taxation privileges still stand,” said Finch. This includes highly polluting private jet travel.

The T&E study recommends applying a fuel tax on kerosene, a 20% VAT rate on tickets and extending the carbon market for aviation to all industry activity. It also proposes increasing the rates of air passenger duty and applying fuel taxes at the Autumn Budget.

This could increase ticket prices for consumers, the authors conceded, but would greatly diminish emissions and make low-carbon alternatives like trains more competitive.

Airlines UK has been approached for comment.

What could we do with the money that we raised from taxing airlines?

The money that the increased tax generates could be used to fund the green transition. This refers to the process of weaning our economy off polluting fossil fuels.

The Climate Change Committee estimates that the transition will cost the government around £60 billion per year by the mid-2030s.

While taxing airlines won’t fully plug that gap, it would be a significant start. Steve Coulter, head of economy at Green Alliance, an environmental think tank, said: “This money could help pay for some of these things like decarbonising aviation, or insulating homes.” 

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With £4.7 billion, you could build up to 9,000 community solar farms – which cost around £500,000 each, analysis from the Eco Experts suggests.

In 2020, then-Prime Minister Boris Johnson pledged £3.7 billion to build 40 hospitals. You could pay for these, and have a billion left over to build over 300 3.5 megawatt wind turbines. 

Earlier this year, the government pledged £56 million to build 2,400 electric vehicle charge points. With £4.7 billion, you could build 200,000 more. 

There is a “strong economic case” for changing how we tax the aviation industry, Coulter said.  

“If we use some of this money that we’re currently spending on subsidising Ryanair and the like, we can put it into developing new green technologies. 

“These are the industries of the future. The Americans and the Europeans are developing these industries – If we don’t then we’re going to be left behind.”

What about the environmental impact of planes?

The tax breaks granted to the aviation industry are also terrible for the planet.

Artificially low prices turbocharge demand for highly polluting flights.

“Aviation is brilliant, it means we can fly around the world. Everyone who’s travelled loves travelling,” said Finch.

“But there are some big, big, big cons to it, like the environmental impact.”

Across Europe, ending taxation exemptions granted in 2022 would have saved 34.8 million tonnes of CO2, T&E estimate. This is equivalent to the combined emissions of the three biggest airline emitters in Europe (Ryanair, Air France and Lufthansa).

When taking into account non-CO2 effects of aviation – such as nitrous oxide and soot – ending tax exemptions could have saved up to 104.4Mt of CO2 equivalent. This would have had the same climate impact as taking all German cars off the road for a year.

Appropriate taxation could stop airlines “polluting with impunity”, Finch urged.

“There’s never been an incentive to try and move to hydrogen planes or electric planes, partly because the fuel isn’t taxed.”

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