Economic instruments for aviation: an exploratory study

At the request of the Directorate-General for Strategy and Governance of the Dutch Environment ministry, CE has run calculations on several potential policy instruments for reducing aviation emissions. All the policies considered respect the ‘Polluter Pays Principle’ and some may help achieve a further greening of the tax system. The following policy instruments were reviewed:

1. A ticket tax to be paid by departing passengers.
2. A ticket tax for departing passengers indexed to NOx emissions during landing and take-off (LTO).
3. An LTO charge per aircraft.
4. An LTO charge per aircraft, indexed to NOx emissions.
5. Excise duty on kerosene.
6. Emissions trading in the aviation sector.

The AERO model was used to calculate the impact of the various measures, examining impact on aviation demand, impact on emissions, cost and cost-effectiveness. The legal and politico-economic aspects of the various measures were also examined. Based on the computational results and the legal and political review, conclusions are drawn. Included as an appendix are a Factsheet on each of the measures. In brief, the main conclusions are as follows:

• Ticket taxes and LTO charges are effective means of reducing aviation air pollutant emissions. Taxes and charges increase the cost of air travel, thereby reducing demand.
• Taxes and charges that distinguish between relatively clean and relatively dirty aircraft engines are more effective than those that make no such distinction. Besides reducing demand, differentiated taxes and charges give aircraft operators an incentive to cut emissions through both technical and operational measures.
• A brief study of the existing literature on taxes and charges indicates that there are unlikely to be any legal barriers to a ticket tax or LTO charge. A kerosene tax, on the other hand, would be somewhat harder to introduce, as the current tax dispensation for aviation fuel is anchored in numerous bilateral air service agreements.