“Planes, ships & taxes: charging for international aviation & maritime emissions” paper by IMF and World Bank experts

“Planes, ships and taxes: charging for international aviation and maritime emissions”

http://onlinelibrary.wiley.com/doi/10.1111/1468-0327.12019/full

October 2013

 by Michael Keen, Ian Parry and Jon Strand  

from Fiscal Affairs Department, International Monetary Fund; Fiscal Affairs Department, International Monetary Fund; and Development Research Group, Environment and Energy Team, The World Bank

More on Michael Keen at  http://blog-imfdirect.imf.org/bloggers/michael-keen/

More on Ian Parry at http://blog-imfdirect.imf.org/bloggers/ian-parry/

More on Jon Strand at  http://blogs.worldbank.org/team/jon-strand

[They say: Views expressed here are ours alone, and should not be attributed to the management, staff, or executive directors of the IMF or World Bank. ]

1. INTRODUCTION

International aviation and maritime transport account for a significant and growing share of global carbon emissions. Yet these emissions are explicitly excluded from current mitigation schemes (they are carved out of the Kyoto protocol, for instance).

Moreover, they are not even subject to ordinary excise taxes of the kind that are routine for almost all other transportation fuels.  And the consequent tendency to excess emissions – and loss of tax revenue – is exacerbated by other distinct and substantial tax privileges enjoyed by these sectors: for international aviation, exclusion from the value-added tax (even, in some cases, outright subsidies); for international maritime, unique and very light forms of corporate taxation.

The aim of this paper is to set out these anomalies and evaluate – analytically, in broad quantitative terms, and from a practical perspective – ways in which they could be overcome.

These issues have been rising up the political agenda, and seem set to become more heated still. For several years – far too long, many argue – both the International Civil Aviation Organization (ICAO) and the International Maritime Organization (IMO), which are the UN bodies responsible for oversight of these sectors, have been working to come up with carbon emissions pricing schemes – more often referred to in this area as ‘market-based mechanisms’ (MBMs).

The leading forms of such a scheme are a carbon tax and an emissions trading scheme (ETS), with ‘offsetting’ a third approach. Frustrated with this lack of progress, the European Union included flights to and from the EU in its ETS (the ‘EU-ETS’) from the start of 2012.

Faced with a sharp outcry from the United States, China and others, and fears of prompting a trade war, this plan was suspended in November 2012; but it is to snap back into place in January 2014 unless the ICAO produces a proposal for some global mechanism at its triannual General Assembly in Fall 2013.

The stage is thus set for another turning point in late 2013. In parallel, charges on international air and maritime transport have attracted increasing attention as one of the ways in which developed countries could go some way toward meeting their commitment to mobilize $100 billion a year (in some unspecified mix of public and private finance) from 2020 onwards for climate change mitigation and adaptation projects in developing countries.

As the deadline looms, if developed countries are to keep their promises, this debate too must become  ore intense. Our concern here, however, will not be with the case for using the revenue from such charges as a source of collective climate finance. (It is not clear, for instance, why meeting these commitments should require earmarking some new ‘innovative’ source of finance). The use made of the proceeds does, though, have implications for  the practicalities of implementing these charges, and these will need close attention.

And of course the case for these charges does not hinge on that for expanding climate finance or other international public goods: the dire fiscal need of many advanced economies is itself enough to heighten the search for new and relatively efficient sources of revenue.

Despite their evident importance, however, these issues have attracted almost no attention from public finance economists. They have been left instead to industry specialists, their consultants and civil society organizations. The issues are not easy ones, either politically or technically. Beyond the lobbying for sectoral or national interests are deep issues of international competition and coordination, as well as very practical challenges of implementation.

And these are complicated by the need to reconcile the principle of equal treatment of carriers and nations that is fundamental to the operations of both the ICAO and IMO with the principle of ‘common but differentiated responsibility’ that is deeply embedded in international climate negotiations.

Reconciling the two appears to require pricing schemes with wide participation, combined with some form of compensation to developing countries that join in these pricing schemes.

Our aim in this paper is to show that, while it does not resolve all issues, applying the tools of tax analysis – thinking through, for instance, issues of incidence and the implications of other tax distortions – can go a long way towards identifying mutually beneficial and practicable reforms to undo, or at least lessen, the massive anomalies in the tax treatment of these key sectors.

The plan of the paper is as follows. Section 2 describes key features of the international aviation and maritime sectors and the various anomalies in their tax treatment; though the two sectors are commonly lumped together in discussions such as the present, there are important differences between them. The potential environmental, revenue and welfare gains from alternative responses to these anomalies are addressed in Sections 3 and 4, dealing with the two sectors in turn. Section 5 considers issues of implementation, and Section 6 concludes.

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49 page report

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6. CONCLUSION    [AW’s emphasis in red]

The exclusion from any kind of charge on fuels used in international aviation and maritime is highly anomalous, and interacts with other unique and extraordinarily favourable tax provisions for these sectors to generate significant costs in terms of the environment, government revenue and welfare more broadly defined.

The basic case for such charges is independent of the use to which the consequent revenue is put (assuming this not to be too foolish).  For national governments now in difficult fiscal circumstances, they should appeal as a source of revenue likely more efficient than almost any other option available to them.

Though the case for this was not explored here, they are also among the more appealing of the instruments that have been suggested as a source of climate finance.  But while the use to be made of the revenue may affect issues of administration and governance, it does not affect the core economic case for these charges.

While it is the damage done to prospects for meaningful mitigation of carbon emissions that is most obvious, the analysis here has shown that amplification of pre-existing distortions in commodity and profit taxes levied on these sectors – a concern almost absent from the debate – can be quantitatively significant. Indeed most likely, the proportionate emissions reductions from reasonably scaled charges (of say $25 per ton of CO2) would be modest for the foreseeable future, so that the narrowly fiscal case for these instruments can be more important than the environmental.

In the aviation sector in particular, it has been seen that substantial fuel charges would be warranted even in the absence of climate concerns as an imperfect correction for failure to levy VAT or other sales tax on international leisure travel.  In maritime, the implications for optimal fuel taxation of the pre-existing tax distortion – a preferentially favourable corporate tax regime – are less pronounced, reflecting, for example, a lesser impact of fuel prices on the price of final products given that maritime services are generally an input rather than final consumption. 

The revenue at stake is also sizeable: even with developing country compensation (which on some estimates might absorb around 40% of potential revenues), charges could raise (from both industries combined) around $22 billion a year in 2020.

The technical obstacles to achieving these considerable gains from charging these fuels, we hope also to have shown, are very modest.  

Certainly there are difficulties.  But the familiarity of almost all national tax administrations with the  implementation of fuel taxes (one of the very simplest they have to deal with); the close monitoring to which international aviation and shipping are in any event subject; features of the industrial organization of these sectors (including the high concentration of emission among what is little more than a handful of ships); and the existence of international bodies charged with their oversight and development in the common interest should all mean that the technical issues are, if anything, easier to handle than in many other sectors.

There is no great difficulty in envisaging how such charges might be applied.  Indeed there are several ways in which this could be done, with the best choice depending to a large degree on the simple question: Who gets the money?

If simply retained where collected, then implementation through national tax administrations (or pre-existing trading schemes, as in the EU) is the obvious choice.

If, on the other hand, the revenue is to be allocated entirely to climate finance, then a centrally organized cap-and-trade scheme becomes more attractive.  To the extent that compensation schemes are needed to induce wide enough participation for the schemes to be workable – a particular concern in maritime – these too seem to pose no insuperable obstacles.

The price effects are likely to be fairly minor: the impact of aviation ticket prices would be in the order of 2–4% and on landed import prices mostly well below 1% (for a $25 CO2 charge).  Compensation may well be politically necessary for the participation of developing countries, and if so seems perfectly feasible: the analysis here suggests that in aviation, retaining proceeds on fuel taken up will often be adequate, while in maritime there is a case for more formulaic approaches based on import and export values.

These approaches will require closer study and fine-tuning – but there is little doubt that conceptually coherent and practicable schemes can be designed.

The obstacles lie elsewhere. They are to some degree different in the two sectors: in aviation, progress has been allowed to be held up by a mass of outdated legal provisions; in maritime, securing near universal participation is made necessary by the extraordinary flexibility that large ships have on where they take up fuel. This likely means that progress will need to take different forms in the two sectors: gradualism in terms of breadth of country participation, for instance, seems much more feasible in aviation.

But some obstacles – and opportunities – are common to both. It might be, for instance, that allocating the proceeds to climate finance would cut through at least one practical and political problem: that of allocating emissions from international transportation, and the proceeds from taxing them, to specific countries.

Perhaps the most fundamental difficulty, however, is that it has been left to the sectors themselves to come up with charging schemes. One consequence has been the emergence of principles of doubtful merit: quite why a tax-based approach should be ruled out in aviation, for instance, is entirely unclear, and the general emphasis on earmarking proceeds to the benefit of the industry itself is no less questionable. The more profound consequence, however, of simply leaving the matter to the industry itself is that nothing approaching agreement has yet emerged. The costs of this unnecessary failure are large, and will grow.

http://onlinelibrary.wiley.com/doi/10.1111/1468-0327.12019/full

More on Michael Keen at  http://blog-imfdirect.imf.org/bloggers/michael-keen/

More on Ian Parry at http://blog-imfdirect.imf.org/bloggers/ian-parry/

More on Jon Strand at  http://blogs.worldbank.org/team/jon-strand