A proposed new tax on traditional aviation fuel put forward by the European Commission could add around Eur35 to the cost of a return Paris to Rome flight, doubling the cost of low-cost ticket prices, S&P Global Platts calculations show.
The European Commission July 14 unveiled a bold plan for cutting carbon emissions as part of the EU Green Deal and "Fit for 55" legislative package, which are targeting reduction in CO2 of at least 55% by 2050.
Decarbonizing the aviation sector is one of the more ambitious targets set out in the plan. This is not to say the commission expects carbon reduction will be brought about by technological advancement alone—a reduction in flying is also expected.
"The airline is expected to pass through the cost to consumers by raising ticket prices, leading to a reduction in passenger demand and hence fuel consumption," according to the document laying out the proposed fuel tax changes.
Fuel duty shake-up
As part of this strategy, proposals for revising current taxes on energy products were released. The European Tax Directive (ETD) currently does not distinguish between fossil fuels and any renewable fuel that has emerged since the last update in 2003.
Meanwhile, individual countries were left to decide on exemptions and reductions, resulting in many exemptions for fossil fuels. In the European Commission's words: "the ETD de facto favors fossil fuel use".
An overhaul to the ETD will see a minimum tax rate of Eur10.75/gigajoule across Europe introduced on traditional aviation fuel, ramping up from 2023 to 2033, while greener alternatives such as sustainable aviation fuel (SAF) will benefit from a zero minimum tax rate. Fuels will be taxed based on their energy content, with diesel charged at the same minimum rate as jet fuel.
Potential cost to passengers
Jet fuel currently has no duty attached, so what does this plan mean for consumers and ticket prices?
The new jet fuel duty would be the equivalent of 38.64 euro cents/litre using the minimum energy density of jet A-1, the standard specification for traditional jet fuel.
Alongside the costs for jet fuel, S&P Global Platts looked at diesel duty changes, for comparison to a transport fuel on which consumers are used to paying a large percentage of duty. Diesel fuel duty in France as of July 2021 is 60.90 euro cents/litre according to the petroleum industry union, UFIP, while the new proposed minimum would be equivalent to 41.42 euro cents/litre. The current minimum duty for diesel is much lower than what is charged by each nation, since it has not been updated since 2003 and no longer functions as a floor to taxation.
Now, the consumption of fuel per passenger in an aircraft is different to that of a car or train. The volume of jet fuel consumed is around 4.06 litres/100 km, according to the International Council on Clean Transportation. Diesel consumption will be more familiar as the miles per gallon figure quoted in the UK. This has a current average in new cars of 55.4 mpg or 5.1 litres/100 km, according to RAC, a motoring association.
Current French diesel duty works out as Eur5.98/100 km travelled whereas the new minimum would be Eur2.11/100 km. The minimum duty on jet fuel will be Eur1.57/100 km, once ramped up over the next ten years. These aren't the only tax considerations as VAT is charged on diesel while other schemes such as the Air Passenger Duty in the UK mean tax is paid per passenger for flights departing from the UK (currently GBP13 Eur15.22) for an economy seat) although only a few European Union countries have similar passenger duties.
The minimum tax rates listed will be indexed to inflation, according to the document, so the calculation at today's prices will be proportional to future ticket prices.
Taking the price increase from ETD alone, the duty on fuel used for a flight from Paris to Rome at 1,113 km would be Eur17.47, or Eur34.94 for a return. Return flights from Paris to Rome in September 2021 are listed as low as Eur22.16.
All of this fuel duty will be in addition to an updated EU Emissions Trading System (ETS) and the CORSIA scheme for extra-European flights. The updated ETS will see a gradual reduction in free carbon allowances, which would culminate in no free allocation by 2027 for airlines.
Aviation impact on emissions
It's worth noting at this point that jet fuel's higher fuel efficiency in litres/100 km does not mean it is less harmful to the planet than other fuels. The direct CO2 emissions are lower but secondary effects due to high altitude emissions effectively double the carbon dioxide equivalent per kilomtre (kg CO2e/km) by some estimates.
The emissions from an international flight to or from the UK are 0.18181 kg CO2e/km considering high altitude emissions or 0.09612 kg CO2e/km without. An average diesel car emits 0.16844 kg CO2e/km, a national train journey 0.03694 kg CO2e/km and international rail travel only 0.00497 kg CO2e/km based on conversion factors from the UK's department of Business, Energy and Industrial Strategy. Diesel used for rail travel, agriculture and construction will have a lower minimum duty of Eur0.90/gigajoule, along with jet fuel used for cargo-only flights.
Sustainable aviation fuel
SAF is a renewable alternative to traditional jet fuel, made by converting sustainable feedstocks into fuel manufactured mainly from biowaste, namely agricultural waste fats and/or oils, or residue raw materials.
On top of changes to fuel duty the EC simultaneously unveiled a series of proposals to boost the usage of SAF. It wants SAF to account for 5% of aviation fuels in the EU by 2030, and 63% by 2050 as part of its ReFuelEU Aviation initiative. The ReFuelEU Aviation initiative includes financial incentives and tax credits for blending and producing cleaner fuels, and is expected to help in reducing SAF production costs and bring down prices. In a news conference, EC President Ursula von der Leyen conceded these were very ambitious targets, given that currently SAF only accounts for 0.01% of total aviation fuel demand in Europe.
SAF is currently around three or four times more expensive than conventional jet fuel compared to five times two years ago, even as SAF has rallied over the past year as more airlines are starting to adopt the cleaner fuel. The Northwest European SAF price was assessed at $2,228.875/mt on July 15, S&P Global Platts data showed. Platts assessed Northwest European jet fuel cargoes at $626.500/mt on July 15.
Airlines call for carrot instead of stick
Airlines are not happy with increasing tax as a solution to the climate problem, not least because the scheme is inherently designed to reduce demand for their business. This could be particularly painful for an industry looking to recover after being battered by international travel restrictions in the midst of a global pandemic.
"Aviation is committed to decarbonization as a global industry. We don't need persuading, or punitive measures like taxes to motivate change," said Willie Walsh, IATA's Director General in a press release sent just after the new proposals were unveiled.
"In fact, taxes siphon money from the industry that could support emissions' reducing investments in fleet renewal and clean technologies. To reduce emissions, we need governments to implement a constructive policy framework that, most immediately, focuses on production incentives for SAF and delivering the Single European Sky," Walsh said.
The EU has decided that to meet global climate goals we need to fly less, aligning with many climate scientists on the view that technological advancement on its own cannot decarbonize the industry fast enough.
The aviation industry is proving to be one of the hardest to decarbonize because of weight limitations and safety considerations that put constraints on the kinds of technologies that can be used reduce emissions from aircraft. Batteries, for example, are currently considered too heavy to revolutionize commercial aviation.
This is an uncomfortable conversation for airlines and one that has been brought sharply into focus by the coronavirus pandemic as people conducted international meetings remotely and chose to holiday by car or locally, as flying became difficult (if not impossible), expensive and anxiety-provoking for passengers.
A well-crafted tax scheme could incentivize airlines to decarbonize as quickly as possible, but may harm beyond repair an industry already fighting for survival. The aviation industry directly recruited 400,000 people within the EU in 2018 and made up an estimated 2.1% of EU GDP in 2017, according to the EC.
On top of all this, the fairness of charging to pollute is an ethical dilemma, with more affluent consumers able to effectively bypass environmental regulation while others are priced out.
The new regulations are currently at a proposal stage, but the EC's document lays out several options for ETD overhaul, with this "option 2" listed as the preferred mechanism. There is one less stringent option which follows current ETD structure but still removes exemptions for aviation fuel. Other options include charging duty directly linked to carbon content of the fuel.
There has been considerable backlash across industries for the EU's roadmap, but to meet climate goals the legislation will have to be demanding, and if tougher regulation is not introduced now, even more aggressive measures would need to be taken in the future.
"The addition of carbon costs to home heating and road transportation fuels via this new emissions trading scheme will have a direct and visible impact on consumers' energy bills, prompting concerns of a backlash similar to the 'yellow vest protests' of 2018 in France when new taxes applied to gasoline increased prices at the pump," S&P Global Platts Analytics said.
"However, Platts Analytics believes that even if the EU were to miss the 55% reduction in emissions by 2030, this suite of policies sets the stage for even greater emissions reductions over the 2030s and beyond and is a strong step in the necessary direction," it said.