Passenger-based “eco-taxes” seem to be “en vogue”. Several European countries have implemented and/or discussed such a tax over the last few years. Examples include the “Passenger duty tax” in the UK, the “ecotax” in the Netherlands, and most recently the “Luftfahrtabgabe” in Germany.

The intent, to influence travel patterns towards more environmentally friendly behavior and to support infrastructure funding, is in line with the aspiration of more sustainable economic and transportation development. A passenger tax is only one potential element to achieve this goal. Evaluating such a tax should therefore consider the broader set of solutions on sustainable and environmentally viable transportation and transportation infrastructure funding (e.g., landing fees, fuel taxes).

This paper will not be able address this broader topic. Instead, it describes a few case examples and tries to provide some perspectives on lessons learned from those cases.

International experiences with passenger-based air travel taxes 

Two examples illustrate the impact and also the challenges of such a tax: UK’s “passenger duty tax” and the “eco ticket tax” in the Netherlands.

The UK’s “Air Passenger Duty” or “APD” was introduced in 1994 and then doubled in 2007 (to 22 to 54 GBP per passenger). It is expected to raise GBP 1.9 billion in tax income in 2009/2010 with current plans foreseeing an increase to GBP 2.9 billion in 2014/2015. It clearly provides a material contribution to government finances and hence indirectly to the funding of (air) transport infrastructure.

The impact on passenger volumes and more ecological travel pattern is hard to pinpoint. Fact is that growth rates for passenger volumes in UK and Ireland have recently fallen behind growth rates in countries that do not have such a tax (2010 year-over-year passenger growth in UK: -5%; in Germany: +7%; in France: +3%). But given the multitude of influencing factors (i.e., pace of economic recovery) this cannot be traced back mainly to the influence of the APD. Especially as local passenger have limited options to travel from alternative airports and hence one might expect only limited passenger volume deterioration. On the other side, it is well known that the price elasticity of “price sensitive” customer is very high for air travel which makes the tax particularly challenging for low cost carriers. Not surprisingly, Ryanair blamed the APD for its decision to cut winter 2010-11 capacities by 16% from UK airports.

The “eco ticket tax” in the Netherlands (EUR 11 to 45 per passenger) was introduced in mid 2008 with the expectation of leading to more environmentally friendly travel behavior and to raise around EUR 300 million in additional taxes for the government.

The timing of the introduction coincided with the financial crisis which led to a material decline of air travel passenger volumes from late 2008 and hence worsened the effect of the “eco tax”. Separating those two effects is difficult but a close look at the data indicates that the "eco tax" – net of the economic crisis – was  responsible for around 50% of the 17-18 ppt drop in growth of passenger traffic (comparing an average of +2.5% traffic growth between Jan 2007 and June 2008 to -15.5% between October 2008 and June 2009). Based on those implications, the Dutch government decided to eliminate the tax as of July 2009.

Aspects to consider for passenger-based air travel taxes

Decisions on the introduction and design of passenger-based air travel taxes need to consider a multitude of effects on the air travel industry, passenger and economic development overall. A few lessons learned seem to be evident:

• Airlines likely not able to fund the tax. Airlines and airports are likely not able to fund such a tax out of their profits, and that seems to be true not only in the recent crisis. Between 1998-2007, return on invested capital for airlines globally averaged around 4 percent, for airports around 5 percent. In Europe, those returns are only slightly higher. Airlines and airports (in average over time and over all major players in the industry) are hence not earning their cost of capital. Airlines and airports will therefore likely have to charge a large portion of those taxes through to passengers to ensure the viability of their business models. Experiences in the UK show that airlines are potentially able and willing to absorb the cost during a transition period but will ultimately fully charge it to customers (with the 2007 ADP increase from 5 GBP to 10 GBP, BA absorbed the cost for existing bookings while EasyJet and Ryanair more rapidly asked customers to fully pay for it.)
  
  
• Holistic perspective on direct and indirect economic implications. (Air) travel does have material indirect benefits to the economy. Governments have to consider those indirect effects – and not only the direct additional tax income – when discussing additional tax burdens on this sector. For the Netherlands for example, a commissioned report estimated the cost of the traffic declines to the Dutch economy to around EUR 1.3 billions (versus the expected EUR 300 million) of additional tax income.
  
  
• (Perceived) implications by traffic flow segment. Price elasticity and competitiveness of alternative travel routing differ significantly across traffic flow segments. It is for example obvious that the competition for connecting traffic in Europe will be fierce and even intensify over the next few years (also due to continued growth of Middle Eastern carriers and airports). International harmonization or reduced taxation of those segments is therefore essential to secure the competitiveness of domestic airports and carriers. Also true is that low cost carriers have been able to stimulate significant additional volumes in the short-haul markets from highly price sensitive travelers. It can be expected that the volume effects will be highest if the tax is fully applied in those segments.

Those challenges and risks just give an indication of the complexities that come with the introduction a passenger-based eco-tax. Looking forward however, it might even be justified to embed this discussion in a broader perspective on environmentally friendly mobility and transport infrastructure financing. Those topics inherit highly interdependent questions how to organize and fund transportation infrastructure (for air, rail and road transport) to support environmentally sustainable economic growth and welfare increase in times of increasing pressure on public finances.