On January 1st the EU went ahead and imposed its carbon emissions tax on all airlines flying into and out of the 27 European nations despite opposition from 26 countries who opposed the scheme.

In an effort to reduce CO2 emissions in EU skies, the tax will be imposed annually on all carriers who exceed a specific carbon limit. The tax will come into effect only after an airline has crossed its carbon emission limit as defined by the EU. The Times of India says that emissions will be measured for the entire length of the trip, irrespective of whether the flight begins or ends at an EU airport. So, for a Mumbai-London flight, the carbon emissions will be measured from the time the aircraft starts moving in Mumbai airport. Once an airline exceeds its limit, it will need to buy carbon credits through the emission trade scheme.

The tax is designed to airlines to reduce their carbon footprints by requiring them to purchase carbon credits when they exceed emissions limits. Those that come in under the limits can trade credits.

Immediately following the imposition of the tax, the larger German airline, Lufthansa, said it would eventually add the cost to its fuel surcharges to passengers while the American airline, Delta, announced it will immediately raise its US-Europe round trip fares by $6. United and US Airways said they would also increase fares Emirates, the world’s largest long-haul airline, warned its passengers to expect higher ticket prices as did Australian carrier, QantasChinese airlines are refusing to pay the tax.

As we all know from our basic microeconomics, who pays the tax ultimately depends on the price elasticity of demand and supply for flights in and out of Europe.  Tax incidence falls mostly upon the group that responds least to price (the group that has the most inelastic price-quantity curve). If the demand curve is inelastic relative to the supply curve the tax will be disproportionately borne by the buyer rather than the seller. If the demand curve is elastic relative to the supply curve, the tax will be born disproportionately by the seller.

While the carbon emissions tax is initially imposed on the airlines, they are an intermediate stage in the production process and the ultimate buyer (airline passengers and individuals and businesses that send air cargo) could end up bearing some or all of the tax burden depending on these elasticities.  For example, the demand curve for business/government travel and air cargo is more inelastic relative to that of general travelers, friends and relatives since the latter can delay trips until air fares are lower.  Thus, the former are more likely to bear a greater proportion of the tax.  In the short run the airlines are stuck with their existing fleet of aircraft but over time they can substitute more efficient (and less carbon emitting) aircraft to avoid paying the tax.

FuelFix writes about how the airline fare increases expose the flaws of the carbon emissions tax.

The idea of carbon trading lends itself to abuse by traders and companies who will, of course, try to game the system. But in this case, we’re talking about airlines, so the response is much more predictable. Some carriers are simply refusing to pay, while others, including Delta Air Lines, are tacking on yet another fee and passing the cost directly to passengers.

Perhaps Delta figures that its passengers, already so beleaguered by fees, won’t notice one more. After all, the price for airlines polluting in Europe is far less than the price for checking a bag in the U.S.

But Delta’s fee scheme represents more than just another indignity for passengers. It lays bare the entire carbon-trading boondoggle. If airlines simply foist the fees off on customers, then they have no incentive to actually reduce carbon emissions. Other fees, however exorbitant, at least are tied to a passenger benefit — a checked bag, a meal, a change of itinerary. What do passengers get for a carbon fee? The right to fly on an airline that pollutes more?

And what if the carrier pollutes less? The fees, at least in Delta’s case, are added up front. What if the airline winds up coming in under its carbon limits? It would actually then make money by trading its excess carbon credits, yet still collect fees from passengers as if it weren’t in compliance. In the end, the EU’s new rules underscore the fundamental problem with carbon trading — it creates far more profit-making opportunity for the traders and the companies that game the system than it does carbon-reducing opportunity for society.

UPDATE

Deutsche Welle says that the airlines will be reaping profits from the EU’s carbon tax scheme.  A airline industry study published this week in the Journal of Air Transport Management, suggests American airlines could reap the kind of windfall profits showered on European utilities when they first entered the EU emissions trading scheme, which aims to reduce the greenhouse gases blamed for climate change. US carriers could make profits of up to $2.6 billion (2 billion euros) because of the free emissions allowances they will receive. Their profits will increase if they pass on all the costs associated with the airline carbon tax onto consumers.  American and European airlines are rejecting the idea that they could benefit from passing on the carbon tax to air travelers.

 

 

 

 

 

 

 

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1 Comment on EU Aircraft Carbon Emission Tax is Here

  1. Elroy Jetson says:

    If they want to be fair (and that’s a dangerous presumption) they should calculate the tax at the end of the flight. A strong tail-wind can reduce fuel use and should reduce the carbon tax. What about the plane itself? Will they collect another carbon tax on the basis of how “greenly” it was manufactured? Hayek described the market economy as an information system. Great, if the information is provided objectively through individual transactions, but when the information is manipulated through government regulation and requires corporate cooperation, it becomes vulnerable to corruption. Let’s see how China responds to this initiative (they’ve already expressed dismay).