When workers fill up their cars during their commute in the UK or EU, they pay more tax on petrol than an international airline does when filling up a plane with jet fuel. In fact, the airline pays no tax whatsoever. Despite widespread belief, this anomaly is, in many cases, not the result of restrictions under international law but more a question of political will. Exempting international jet fuel from tax presents a huge missed opportunity for untapped financial flows that could be instrumental in driving the green transition.
Aviation’s Privileged Tax Regime
Aviation’s climate impact is already high and only getting worse. The industry is responsible for 4% of all global heating and could be producing as much as 22% of global CO2 emissions in 2050, in addition to its non-CO2 impacts [1]. Flights and emissions are projected to double by 2050. At the same time, it is predominantly an activity of the wealthy, with only a small percentage of the global population taking international flights, and its climate impacts are disproportionately endured by the world’s most vulnerable, for example, through extreme weather damage.
Yet aviation currently does not pay for its pollution. The sector has always enjoyed a privileged tax regime. When challenged on this, politicians and industry representatives often point to legal restrictions, namely the 1944 Chicago Convention, and ambiguously cite ‘international agreements’ as prohibitive. But does that hold up to scrutiny?
The reality is that many of the perceived barriers to taxing aviation fuel are based on legal misconceptions and a lack of political will.
Debunking the Legal Myths
Despite claims to the contrary, the Chicago Convention, the international treaty concerned with international aviation, does not prevent the taxation of fuel by international airlines. The restrictions in the Chicago Convention only apply to fuel that is already on board an aircraft when it arrives at an airport, designed to ensure that it is not taxed twice, rather than not taxed at all.
When it comes to ‘international agreements’, bilateral and multilateral agreements between states governing air transport, generally referred to as “Air Services Agreements,” the legal landscape becomes more complex. There are several thousand Air Services Agreements worldwide, and the only comprehensive database of these is held by the International Civil Aviation Organization (ICAO) behind a $4,000 paywall.
These agreements commonly include a provision to exempt aviation fuel tax ‘on the basis of reciprocity’. This is a policy endorsed by ICAO and included in the US/EU Open Skies Agreement and the US ‘Model Open Skies Agreement’. However, legally speaking, this isn’t an absolute exemption. The legal meaning of this provision is, in fact, an agreement that if one state begins to tax aviation fuel, then the other state can, too.
In short, any state subject to that provision in an Air Services Agreement (and there are likely to be many) may tax aviation fuel supplied to aircraft of the other state without violating the agreement. The Chicago Convention and the common position adopted in international aviation agreements between states, therefore, do not prevent states from taxing international jet fuel.
The EU Question
EU law adds another layer to this legal puzzle. The EU exempts fuel used in international flights from tax under the Energy Taxation Directive (however, fuel used for international flights between EU Member States can be taxed with the agreement of the relevant Member States – an option no EU states have yet taken up). The European Commission [2] recognises the inconsistency of the tax exemption with EU climate policy, and a proposal to remove the exemption has been on the table since 2021 (and was meant to come into force last year but has been repeatedly delayed, and recent reports suggest it may even be reversed).
The result of the EU exemption is that Member States are likely more restricted than most countries around the world in their ability to tax international aviation fuel.
However, the EU can tax fuel used on flights to the UK under the EU/UK Trade and Cooperation Agreement. This international agreement overrides the ETD and expressly permits the UK and EU to tax fuel used for flights between them.
It would only take one bold move for all this to unravel. If the UK decided to tax fuel used on flights to the EU, for example, it is likely the EU would reciprocate, and that could potentially unlock the deadlocked political debate in the EU about whether or not to tax international jet fuel.
Untapped Finance
Aviation presents huge new potential streams of finance for governments as they face the climate emergency. Studies suggest untapped revenues of £6.7 billion in the UK [3], and €11.6 billion in the EU [4]– money that could go a long way to contributing to loss and damage funds and making the aviation industry pay its fair share for contributing to the climate crisis in line with the polluter pays principle. To put these figures into perspective, at COP28, the new Loss and Damage Fund was filled with just $900 million, 0.2% of the roughly $400 billion estimated to be needed. A UK aviation fuel tax alone could raise over seven times the global loss and damage funds promised at COP28.
Since some of the commonly cited legal barriers to taxing aviation fuel are not barriers at all, this is more a political issue than a legal one. Governments have the opportunity to flatten the tax disparity between aviation and other sectors that use fossil fuels, send appropriate price signals to a polluting industry, and raise much-needed money for climate finance. Whether governments take that opportunity remains to be seen, but it isn’t the law that is stopping them.
About the author.
David Kay is the Legal Director at Opportunity Green.
