Economic benefits and costs of aviation

UECNA recommendation 1
Under the current business mode aviation does not pay its full external costs. It needs to do so.

Aviation brings economic benefits. It improves connectivity between countries and continents. That helps businesses to grow and facilitates trade which, in turn, increases prosperity and very often opens up closed societies.  In particular, improved links to the emerging economies of the world has an important role in reducing poverty in these countries. Aviation also brings important social and cultural benefits.

But aviation also causes problems for people and the planet. Noise is a major concern for communities impacted by airports. Aircraft are one of the fastest-rising contributors to climate change. And pollution from planes is a growing concern.

These downsides of aviation impose an economic cost on society. A 2016 report estimated the costs of aviation noise in the UK alone to be at least £540 million a year. Across Europe the overall environmental costs of aviation, including their impacts on health, amount to billions of euros each year.

Of course, the aviation industry, like any business, also helps to reduce the health burden on society by providing employment because people’s physical and mental health improves if they have a job. This will reduce but not eliminate the huge health and environmental costs aviation imposes on the economies of all countries in Europe.


UECNA recommendation 2
Aviation already pays a significant amount of tax but it remains under-taxed and should pay its full and fair share of tax.

Taxes

The aviation does pay tax. For example in most countries it can pay a lot of business and employment taxes but, nevertheless, it is under-taxed. There is no tax on aviation fuel and in most countries there is no tax on airline tickets. As a result, European governments are losing billions of euros in income each year. Some countries have imposed substitute taxes, such as Air Passenger Duty in the UK, but they do not raise the amount of money a tax on aviation fuel and airline tickets would bring in.

The fact the aviation industry is under-taxed also distorts the market. It means that demand for flights is unrealistically high due to low prices. These low prices of course in part are due to the efficiency of many of the budget airlines but they are also the result of under-taxation.

And demand for aviation continues to rise. The 2019 EASA Report estimated that flights using European airports would rise from 9.6 million in 2017 to 13.6 million in 2040. Improved technology will to some extent mitigate the impact of that growth on people and the planet but residents and environmentalists fear that these technological improvements might be mainly used to allow more planes to fly rather than to significantly reduce the noise, air pollution and climate impacts of aviation.

There are therefore these two good reasons to impose more tax on aviation:

  1. to increase the tax revenue which governments get from the industry;
  2. and to manage the growth in demand.

There are a number of taxes which could be imposed:

  • A tax on aviation fuel – international agreement to do this would be difficult so the most likely way it could be introduced would be through bilateral agreements between countries
  • A ticket tax – this would be most effective if it were imposed at a European level as individual countries are reluctant to impose the tax in case they lose out to their competitors
  • A tax on noise or emissions – a tax on noise or emissions could act as an incentive towards the production of less noisy or less polluting aircraft
  • A frequent flyers levy – this is where everyone gets one tax free return but then the tax increases with each extra flight in that year. This is the most equitable tax as the more flights you take, the more you pay: http://afreeride.org/

We are not suggesting all these taxes should be imposed! We have listed them in order to show that, if the political will is there, there is wide range of taxes and levies which could be used.

There are also market-based measures, such as the EU’s Emissions Trading Scheme, which can be used. ICAO, the international aviation body, favours an off-setting scheme called CORSIA but off-setting is problematic: it does not reduce aviation emissions and there will be no incentive to reduce them if the price of carbon is too low and it may be too low. A recent report from the European Parliament said that ‘the International Civil Aviation Organisation [proposals], even if fully implemented, fall short of the necessary emissions reductions.’


UECNA recommendation 3
To recognise that higher taxes and charges will not damage the wider economy: business travel is rarely price-sensitive and that fewer leisure trips by air would simply people would spend their money in other ways which would boost businesses and create jobs.

The Impact on the Economy

If too many taxes and charges were imposed on aviation, the industry might struggle to function properly. That would not be good for the wider economy. But that need not happen.

An increase in the cost of air travel, unless it was excessive, is unlikely to deter business people from flying because business travel is much less price sensitive than leisure travel.

If higher taxes and charges meant people made fewer leisure trips, it is unlikely to damage the wider economy as people will spend their money on something else. For example, they may go to the theatre or cinema more often. Or they may decide to holiday locally. Or travel by train. The same amount of money would still be circulating in the economy, supporting businesses, creating jobs etc.

Any increase in air travel will impact different countries in different ways.


UECNA recommendation 4
More government investment is put into rail in order to persuade a significant number of air passengers to switch to rail.

The Role of Rail

Rail could be a viable alternative to many short-distance air journeys. It is estimated that rail in Europe can compete with air for travel times up to about at least four hours (i.e. distances up to about 750 km). This means there is scope to switch many current air trips to rail.

For business passengers, time is usually more important than cost so many may continue to favour air.  But not always. Rail has the advantage for many business people of being city centre to city centre. And the time on a train can be used to get work done. The Eurostar is an example of a service which has attracted business people. It can work for them:  city centre to city centre times as good as air; facilities where they can work productively.

For many leisure passengers cost can be more important than time. All too often at the moment rail can’t compete with air on cost. If aviation paid its full external costs and it fair share of taxation, rail would become more competitive on price.

It is important to recognise that rail, particularly high-speed rail, causes noise and emissions problems but typically the external costs of rail are less than half of air.

European governments already put a lot of money into rail but, given the figures above, it would make economic sense if more money could be put in, particularly to lower rail fares, so as to persuade more people to switch from air to rail.

Not all air passengers will switch to rail. But the aim should be to persuade sufficient passengers travelling within Europe to switch so that the number of intra-European flights is reduced by enough at the continent’s busiest airports to allow these airports to accommodate more intercontinental flights in the future without the need for new runways or terminals.

A big improvement to the European night train network would also be important. The number of night routes has fallen recent years. An affordable night service can be attractive to both business and leisure passengers.