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The Proposed Global Fuel Tax On Aviation - A Deficit Of Judgment

Fuel makes up a significant portion of an airline's total costs, although efficiency among different carriers can vary widely. Short haul airlines typically get lower fuel efficiency because take-offs and landings consume high amounts of jet fuel.


l by Ruwantissa Abeyratne

INTRODUCTION


(September 24, Quebec, Sri Lanka Guardian) This article draws on circumstances that have spurred the World Bank onto considering the feasibility of imposing a global fuel tax on aviation as mandated by the Finance Ministers of the G20 countries. It argues that the thinking behind this measure is fundamentally flawed when considered as a means of finding financial resources to replenish the Green Fund as envisioned by the developed countries at the meeting of the Conference of the Parties to the United Nations Framework Convention on Climate Change in 2010. Detailed reasoning is contained in this work to analyse the issues involved, together with inconsistencies that may arise from the legal, regulatory and practical perspectives.

The fundamental premise of this article is that, in addition to the legal and regulatory anomalies that may arise, the imposition of a global fuel tax on aviation goes off at a tangent, bypassing the most critical need that would effectively combat global warming i.e. investment in technologies that would mitigate the environmental impact of aircraft engine emissions.

The ultimate message is that government, industry and the travelling public will need to invest in order to deliver technological innovation and development to ensure carbon free flight.

At its meeting on 14-15 April 2011, the G20 Finance Ministers requested the World Bank (WB) for a report on climate finance, suggesting that WB work with Regional Development Banks and the IMF in coordination with other relevant organizations. The Finance Ministers specifically tasked WB to “conduct an analysis on mobilizing climate change financing… drawing heavily on the Report of the UN Secretary General’s High Level Advisory Group on Climate Change Financing (AGF Report) and provisions and principles of the UN Framework Convention on Climate Change (UNFCCC)” It is worthy of note that this request comes at a time (particularly on revenues from aviation) when international aviation emissions account for less than 2% of total global carbon dioxide (CO2) emissions, where the concentration of CO2 is at 380 parts per million.

The AGF Report

The AGF Report, in its Introduction, recognizes that climate finance is needed to bridge the gap caused by developed nations in committing themselves [at the Copenhagen meeting of the UNFCCC Conference of the Parties (COP16) in late 2010] to the goal of jointly mobilizing US $ 100 billion a year by 2020 to address the needs of developing countries. To meet this goal, AGF aims at identifying practical proposals on how to significantly scale up long term financing for mitigation and adoption strategies in developing countries from various public and private sources and how best to deliver it.

Therefore, it is quite evident that, for a commitment made by a few countries who pollute the most, a private source, such as the air transport industry, which emits less than 2% of CO2 emissions, and the social cost attendant upon which is negligible compared with other high polluting industries, has been identified as causing economic distortions as a result of the under-taxation of the sector. According to the Air Transportation Association (ATA), fuel is an airline's second largest expense. Fuel makes up a significant portion of an airline's total costs, although efficiency among different carriers can vary widely. Short haul airlines typically get lower fuel efficiency because take-offs and landings consume high amounts of jet fuel.

The AGF Report States that the revenues would be generated by a tax on international aviation. It could be in the form of a levy on aviation jet fuels for international voyages, separate Emission Trading Schemes (ETS) for these activities or a levy on passenger tickets of international flights. The revenue estimates used in the report of the Advisory Group refer to a fuel levy.

The Report assumes that a fuel levy would cover the cost of emissions at the carbon price, so the total revenues raised would be the same as in the case of an ETS with auctioning of 100 per cent of available credits. A ticket tax could be implemented in different ways (e.g., a flat fee, a flat fee linked to average carbon content or different fees for categories of flights linked to average carbon content). The assumption is made that the ticket tax should cover the cost of the emissions from passenger traffic, and that three different types of ticket taxes will be charged for short, medium- and long-haul flights.

ISSUES INVOLVED

Since WB was requested to be guided by the AGF Report and the provisions and principles of the United Nations Framework Convention on Climate Change (UNFCCC) as given above, the following issues emerge:

a) The AGF Report recommends that the revenues would be generated by a tax on international aviation. It could be in the form of a levy on aviation jet fuels for international voyages et. al.

b) This would adversely affect the global aviation industry including air transport in the developing States and defeat the Principle of Common but Differentiated Responsibilities enunciated by UNFCCC and endorsed by The Meeting of the Conference of the Parties to the UNFCCC (COP 16) in Copenhagen in 2010. The principle of ‘common but differentiated responsibility’ evolved from the notion of the ‘common heritage of mankind’ and is a manifestation of general principles of equity in international law. The principle recognises historical differences in the contributions of developed and developing States to global environmental problems, and differences in their respective economic and technical capacity to tackle these problems. Despite their common responsibilities, important differences exist between the stated responsibilities of developed and developing countries

The proposed jet fuel tax is an indirect tax which is not properly measureable in the context of climate financing. If a tax were to be levied on climate financing, it should be a Pigouvian tax. However, the validity and effectiveness of this theory has been eroded by the wide A Pigouvian tax is a specific rate tax on units of emission or damage. It is a special tax that is often levied on companies that pollute the environment or create excess social costs, called negative externalities, through business practices. In a true market economy, a Pigouvian tax is the most efficient and effective way to correct negative externalities.

spread levy of environmental taxes that differ from Pigouvian taxes, in that they are not levied on units of emission or damage but on other bases or none at all and their uses are not related to environmental damage. This anomaly is further aggravated by the fact that the methodology, design and implementation of environmental taxes show significant divergence across national boundaries, creating a patchwork of national environmental taxes on a global fiscal quilt.

The main task of an environmental tax is to influence the damage caused by pollution to the environment by causing change in relative costs. These costs are factors which indicate environmental damage in a given instance, by enabling one to ascertain the point at which the marginal social cost involved in the use of environmental resources exceeds the marginal social benefit derived from the use of such resources. In this context the Pigouvian tax is by far the most efficient, although there are two other categories of taxes: those levied on the basis of production or consumption of goods which are directly or indirectly linked to environmental damage; and other taxes which contain provisions relating to environmental damage.

In the instance of the Pigouvian tax, its efficiency and effectiveness is dependent upon the fact that the tax itself hinges upon the unit of emission or damage. Conceptually, this methodology is analogous to a taxi fare which a passenger pays, which is based on distance travelled. The Pigouvian tax bases its levy on the marginal social cost at emission levels which are socially efficient. For instance, emission levels of an industry would become socially efficient at the point where the industry concerned breaks even between the marginal benefit accrued to the industry from the activity which causes environmental damage, and the marginal cost to society. Essentially, therefore, the Pigouvian tax achieves the dual objectives of ensuring that the polluter pays for the social and private cost of his action, by raising the price to be paid for pollution.

One of the most beneficial aspects of the Pigouvian tax is that it is based on the price system which is calculated to reduce the cost incurred by environmental damage. The pricing criterion of this particular tax ensures social efficiency, as against the ineptitude of a policy based on command and control. Another characteristic of expediency of the Pigouvian tax is that it enables industries to reduce pollution in a cost effective manner. This is achieved when an industry adjusts its pollution abatement at the lowest cost and is further encouraged to lower to an irreducible minimum its cost abatement on the activities of that industry.

DEFICIT OF JUDGMENT

The World Bank reports that additional needs in developing countries to limit the rise of the global mean temperature to +2 C above pre industrial levels will continuously grow over the next decades to reach US $139 billion to $ 175 billion annually by 2030. Therefore, no one would doubt that mitigating the adverse effects of climate change is a costly business. It is here that the deficit of judgment occurs, where the main focus seems to be on the generation of revenue as compensation for pollution. Any such revenue collected should be based firstly on external factors such as trading on the quantity of emissions rather than internally on the quantity of consumables such as fossil fuels. Secondly, the revenue collected should be used on modernizing technology rather than on buttressing national coffers. Greener aircraft engines should developed that would lesson global engine emissions, and resources should be pumped into developing the necessary technology for the manufacture of such engines. More sophistication is needed in the design of aircraft components towards this goal.

The key response to climate change should be investment, where investors accept the bulk of the scientific evidence available and invest in companies that would offer advanced technology in the field. The overall opportunity for investment is huge in that the value of low carbon energy markets would be around $ 500 billion by 2050 and cumulative net savings from energy efficient products by 2012 in the United States alone would be $ 84 billion. Investors will look at a long term model of investment, taking into account the importance of low carbon technologies; carbon prices; environmental actions by corporations and governmental environmental policies and regulations.

CONCLUSION

It is by no means suggested in this article that market based measures are not recommended as an effective measure towards responding to climate change. A levy on carbon emissions would encourage the industry to further improve efficiencies and implement the equitable principle of polluter pays. A carbon levy would, as Lord Nicholas Stern states in his Report, put an appropriate price on carbon-explicitly through…trading, or implicitly through regulation…and ensure that people are faced with the full social cost of their actions. This will lead individuals and businesses to switch away from high-carbon goods and services, and to invest in low carbon activities. Economic efficiency points to the advantages of a common global carbon price: emissions reductions will then take place wherever they are cheapest.

However, this principle should not be corrupted by the introduction of a global fuel tax which is calculated to providing financial resources to pay off developing countries through the Green Fund as proposed. The focus must not be on a financial instrument that aims at internalizing aircraft operations in terms of the quantity of fuel pumped into the aircraft. Rather, the solution would lie in external factors such as the quantification of engine emissions.

As Lord Stern observes, the key to tackling climate change is in international cooperation. In this regard mention must be made of the Conference on Aviation and Alternative Fuels (CAAF) at Rio de Janeiro in Brazil from 16 to 18 November 2009, convened by ICAO. The Conference was a major event showcasing the state of the art in aviation alternative fuels, and an event at which a Global Framework for Aviation Alternative Fuels (GFAAF) was considered. The GFAAF was designed as a living document that will be continually updated on the ICAO website that will share information, best practices and future initiatives by ICAO Member States and the air transport industry. The Conference made reference to the High-Level Meeting on International Aviation and Climate Change convened earlier by ICAO which recommended that States and International Organizations actively participate in CAAF with a view to sharing their efforts and strategies to promote such work and to update the 15th Meeting of the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC COP15) which was held in December 2009) .





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