VoxEU Column Environment Taxation

The (non-) taxation of international aviation and maritime fuels: Anomalies and possibilities

Coordination problems make difficult the taxation of fuels used in international transport, but there are many economic reasons to pursue such a policy – to say nothing of environmental and fiscal concerns. This column argues that efficiency gains from correcting externalities and replacing more distortionary taxes make this daunting task worth pursuing.

It’s hard to think of a more efficient revenue source than taxing fuels used in international aviation and maritime activities. They are a major and growing source of carbon emissions and remain largely untaxed, amplifying the effects of other anomalies in the distinctly light taxation of both sectors. The prospective gains for the environment, revenue, and in easing non-climate tax distortions (as a second-best approach) are substantial. The challenges are in promoting the international coordination in rate setting made necessary by the high mobility of the tax base, and in allocating the revenues across countries and uses.  

Good for the environment, good for the fiscal stance

Fuels used for international aviation and maritime transport account for a rising share of global energy-related carbon emissions (about 4%), but they are almost always excluded from carbon pricing initiatives. They were explicitly excluded from the Kyoto Protocol, for instance. Aviation emissions have recently been included in the European Union's Emission Trading System (EU-ETS), but only for intra-EU flights. Moreover, these fuels are not subject to excise taxes of the kind routinely applied to other transportation fuels. For aviation, this reflects long-established, but not insurmountable, legal provisions in the 1944 Chicago Convention, and a large number of bilateral service agreements. For maritime transport it reflects intense tax competition arising from the ability of large ships – which can travel huge distances on a single tank of fuel – to easily reroute to take up cheaper fuel.

On top of this there are broader fiscal anomalies. Given the difficulty of assigning cross-border purchases to jurisdictions and operating cross-border credits and refunds, tickets for international air travel are almost always zero-rated under the VAT (so that not only is no tax charged on sales, but tax charged on inputs is refunded). Some countries apply sales taxes to international air travel, but this is unusual. (This may come as a surprise given the long list of taxes and charges often included in international ticket prices, but these are generally user fees of some sort, for security or other services). International maritime is also excluded from the VAT, but that is not so important because most shipping services are purchased for business rather than final consumption (so any VAT would be credited or refunded to the taxpayer). What does matter in maritime is that the normal corporate income tax often does not apply (again as a result of intense tax competition), tax instead being levied – at much lower effective rates – under special ‘tonnage tax’ regimes.

We analyse these issues formally and provide some illustrative numbers.1 The bottom line is straightforward: the potential benefits from putting a significant price on these fuels are very substantial – for the environment, for revenue, and to dampen the losses from other tax distortions.

In revenue terms, a global charge of $25 per ton on CO2 emissions – on the low side (US IAWG 2013) – would raise revenues of around $12 billion from international aviation, and $25 billion from shipping. That could go a long way towards meeting developed country commitments to mobilise $100 billion a year, from 2020 on, for climate finance in developing countries (even after compensation measures, discussed below). Given the political difficulties with allocating emissions and revenue from border-crossing activities to particular countries, this is in many respects a natural source of such collective finance. Of course, the revenue could be used to meet national fiscal needs; perhaps to reduce other more distortionary taxes.

In terms of reduced emissions, the initial impact would be modest (likely less than 5%), but environmental effectiveness would improve over time as charges are ramped up and cleaner technologies come into operation.

Due to the pre-existing tax distortions in these sectors, the welfare gains from our suggested charges may be as large as those from environmental improvement, especially for aviation.


We have been talking of ‘taxing’ fuel. In practice, how one chooses to put a price on carbon use – ETS being an alternative to carbon taxes – is less important than the particular means used, so long as the basic design features are appropriate. As common sense suggests, the keys here are:

  • to cover international emissions as widely as possible,
  • to exploit the fiscal opportunities (avoiding free allowance allocations in ETS and undue earmarking of revenues), and
  • to establish stable, predictable carbon prices (for instance, through price floors and ceilings under ETS).  

There are several ways in which carbon taxes or an ETS could be implemented. On this there need be no great difficulty, as there is much to build on: collecting fuel excises is a basic task of almost all revenue administrations, and these activities are subject to close tracking by the sectors’ oversight bodies – the International Civil Aviation Organization (ICAO) and the International Maritime Organization (IMO).

The real challenges are those of securing agreement on the applicable carbon price and its adjustment, and of designing incentives and a monitoring mechanism to assure participants that others are doing their part. Setting a minimum (rather than harmonised) price might help – the EU has long had such agreements on VAT and excises. And that same experience shows that agreements can be reached among groups of countries, which may be a start, at least for aviation. The ICAO and IMO could perhaps have important roles in facilitating agreements.

Compensation and incidence

A thorny issue for carbon mitigation policies has been the principle – embodied in the UN Framework Convention on Climate Change – of “common but differentiated responsibilities”. The relative ease with which operators can exploit differences in fuel prices (perhaps especially for shipping) means that effectiveness will require wide participation in these pricing schemes. The implication is the need for some compensation for developing countries (which account for over a third of the emissions from both aviation and maritime).  

For aviation, it seems natural for developing countries to retain the tax they collect for fuel tanked within their borders (or remit to them equivalent amounts). Indeed this may well overcompensate them (including tourist destinations, which have been a particular concern), because the incidence of the charge is likely to be largely passed forward to passengers from high-income countries. The impact on air ticket prices would be modest: about 2-4% for a charge of $25 per ton of CO2  as above. For shipping, there is a greater mismatch between who collects fuel taxes and who bears the burden of higher prices; an obvious example is landlocked countries importing shipped goods. Rebates in proportion to countries’ shares in the value, or volume, of global maritime trade might be a better approach (Stochniol 2012). Importantly, our calculations suggest that for most countries the amounts at issue are small: the average increase in import prices is typically less than 1%.

Full steam ahead?

The idea of pricing emissions from international transportation fuels has been rising up the political agenda over the last few years. After many ups and downs and much political heat, carbon emissions released by intra-EU fights are now included in the EU-ETS. But this is partly to maintain pressure for the sector itself to finally come up with proposals for a global scheme; the ICAO is now scheduled to hammer out such a scheme by 2016. Presumably the maritime sector will follow. But progress has so far been painfully slow, with widespread resistance to simple tax measures and an inclination to earmark significant fractions of the receipts to the industries themselves. Treating these as environmental issues and leaving design issues largely in the hands of the sectors themselves has not brought us very far. The time is right for a deeper engagement of finance ministers – not least given their interest in fiscal instruments and new revenues to meet consolidation needs or reduce other burdensome taxes.

The politics of making all this fly are certainly tough. But grasping the economics should be plain sailing.


Keen, M, I Parry and J Strand (2013), “Planes, ships and taxes: Charging for international aviation and maritime emissions” Economic Policy, vol. 28, pp. 710-749.

Stochniol, A (2012), “A rebate mechanism for an equitable maritime emissions reduction scheme,’ in  R. Asariotis and H. Benamara (eds) Maritime Transport and the Climate Change (Routledge: Abingdon).

US IAWG (2013), Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866, Interagency Working Group on Social Cost of Carbon, United States Government, Washington, DC.


1 Keen et al. (2013).

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