Air travelers to pay new emissions trading scheme tax

IN a call together with compatriots British Airways, Easyjet and Virgin Atlantic to the UK government to scrap the Air Passenger Duty (APD) – a tax introduced in 1994 for flights originating in the UK – Ryanair has surfaced yet another tax in the offing to be borne by air travelers.

Ryanair chief Michael O’Leary said that air travelers will be “taxed on the double” come January when they will have to pay the new Emissions Trading Scheme (ETS) tax.

So much about introducing a measure that will motivate airlines to be more conscious about saving the environment and become more fuel-efficient, indeed, when the cost – which is really a penalty imposed on the operator for failing to meet set standards – is conveniently passed on to the helpless traveler! That being the case, the legislation would have failed unless the authorities ensure that consumers are justly protected, even as history has shown that too often the ambiguity of such rules that are supposed to favour passengers and their ineffectual enforcement have fallen far short of the intended purpose.

The European Union has legislated fines against airlines that do not adequately compensate passengers for failing to meet their obligations, but as said by an official of the Association of European Airlines during the Icelandic ash cloud disruption in April, “the difficulty was being faced with the impossibility of strictly applying to the letter the European rules…” This has led to a huge backlog of disputable and unsettled claims by passengers for compensation for flight disruptions and cancellations.

It may be said that competition will be the leveler, that in the long term the more efficient airlines will be able to charge more economical fares than their counterparts who do not heed the call. Do not bet on that. Note the train of followers when one airline escalates the fuel surcharge, which is probably one of the airline industry’s most ingenuous cost accounting/marketing techniques to convince air travelers of its reasonableness since the airlines do not profit by it. In fact, airlines constantly remind their passengers following each increase in the surcharge that it only partially, if at all minimally, defrays the rising fuel cost, suggesting that the increased levy is an attempt to keep the fare low.

But all that is beside the point; the question is whether any ETS tax bumped on to the passenger is a fair levy.

In the case of the APD, Mr O’Leary made it clear that it was never used to increase the airlines’ profits. He told the BBC: “This has nothing to do with our profits. It is paid by families, paid by passengers going on holidays. If it is scrapped, the money goes straight back into families’ pockets.” According to him, the duty has led to 30 million fewer overseas visitors to the UK in the past five years.

However, the difference lies in the nature of the tax. The APD is an excise duty, which is considered an indirect tax that is recoverable from the consumer. And because it is only due when a passenger actually flies but collected in advance by the airlines at the time of ticket purchase, technically the customer can reclaim it if he does not travel as planned, for which service the airlines will normally charge an administrative fee. Many travelers would have already been familiar with the airport tax in one form or another that is imposed by some airport authorities around the world, such as the airport improvement fee, whether collected upfront by the airlines at the time of ticket purchase or disbursed directly by the passengers at the time of flying.

Unlike the APD, the so-called ETS tax is not an excise duty targeted at the passenger since it is a levy that aims at rewarding or penalizing the airline for exceeding or failing to meet carbon emission standards. It should not therefore be “passable” in its unique form from seller to buyer.

Yes, indeed, as pointed out by Mr O\Leary, why should the passenger be made to pay a second carbon tax – but not because he is already paying the APD but because this is directed at the airline. How the airline eventually recovers this cost as with other operating costs through the fares it charges is a different matter – which only under those circumstances would the competition truly work to benefit the consumer – but it would be corporate browbeating to suggest that because the money collected goes straight to the authorities and does nothing to increase the airline’s profits, hence the deception that it is a transaction between the authorities and the consumer, and the airline acting only as a middleman. The penalty is meant for the airline, not the passenger, unlike, say, the airport improvement fee for which there is a direct link to passenger usage.

The APD started as a means to fund efforts to reduce the carbon footprint of air travel. Unfortunately, like most fees, once introduced, it becomes fully entrenched in the system and is subject to annual increases. The charge was doubled in 2007, and justifying its increase, the UK Treasury envisaged that by 2010-2011, carbon dioxide emissions by airlines would be cut by about 0.3 million tonnes a year, and all greenhouse gas emissions by the equivalent of 0.75 million tonnes of carbon dioxide a year. The fee was again increased in 2009 and 2010. It is expected to rise by another 10 per cent next year.

So will the ETS tax be subject to adjustment, perhaps at even shorter intervals.

British airlines have reservations about how the APD is being used to save the environment since little is known about its green efforts. They, as well as air travelers, have the right to access information that will justify the levy. The implementation itself is far from being ideal, as it does not take into account aircraft efficiency and measures the contribution by distance travelled.

The airlines also contended that since there is already such a tax to tackle the impact of climate change, there is no reason to impose a second one. On that score, the extended levy could be viewed as a shared responsibility between all users.

The danger is that such a tax soon becomes too significant a source of revenue that it becomes difficult to abrogate it. Such is already the case of the APD. While the UK government is considering making changes to the duty, according to a Treasury spokesman, “it regards the tax as an important way of raising revenue, and expects it to generate more than GPB2 billion this year.”

The ETS tax too may take on the form of a business entity to the benefit of the airlines and regulators, but the air traveler shall emerge as the eventual loser.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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