Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions - Taxation of aircraft fuel
Date: 2000-03-02
Institutions: European Commission
Subjects: aviation fuel, environmental protection, mineral oil, tax harmonisation, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 02.03.2000
COM(2000) 110 final

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL, THE EUROPEAN PARLIAMENT,
THE ECONOMIC AND SOCIAL COMMITTEE
AND THE COMMITTEE OF THE REGIONS

Taxation of aircraft fuel

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL, THE EUROPEAN PARLIAMENT,
THE ECONOMIC AND SOCIAL COMMITTEE
AND THE COMMITTEE OF THE REGIONS

Taxation of aircraft fuel

BACKGROUND

The structure of the taxation of mineral oils within the Community is currently governed by
Council Directive 92/81/EEC of 19 October 1992 on the harmonisation of the structures of
excise duties on mineral oils1. Article 8(1)(b) of this Directive provides a compulsory
exemption for Commercial aviation fuel. Article 8(7) of the same Directive requires the
Council to review this mandatory exemption ‘on the basis of a report from the Commission
and taking account of the external costs entailed in such means of transport and the
implications for the environment and shall decide unanimously, on a proposal from the
Commission, whether to abolish or modify these exemptions’.

This review was carried out in 1996 and the Commission in its report2 recommended that
excise duties on mineral oil should be extended to aviation kerosene ‘as soon as the
international legal situation allows the Community to levy such a tax on all carriers including
those from third countries’. This conclusion was reflected in Article 13(1)(c) of the
Commission Proposal for a Council Directive restructuring the Community framework for the
taxation of energy products3, which is intended to replace Directive 92/81. Article 13(2) also
makes provision for Member States to tax, on an optional basis, National flights and flights
between Member States on the basis of bilateral agreements.

Both the review and the subsequent Proposal for the taxation of energy products have been
discussed in various Council working-Groups. The result of these discussions was that the
Council requested the Commission, in its Resolution of 9 June 1997 concerning taxation of
aircraft fuel, to provide further information on all aspects of the taxation of aircraft fuel.

In response to this request, the Commission has conducted a comprehensive study4 of this
subject using an independent consultancy. This Communication sets out the results of that
study and the Commission's reaction5.

1

2

3

4

5

OJ L 316, 31.10.1992, p.12
Report from the Commission to the Council and the European Parliament under Article 8(6) of Council
Directive 92/81/EEC, on the situation with regard to the exemptions or reductions for specific policy
considerations as set out in Article 8(4) of Directive 92/81 and concerning the obligatory exemption of
mineral oils used as fuel for the purpose of air navigation other than private pleasure flying and the
exemptions or reductions possible for navigation on inland waterways other than for private pleasure
craft as set out in Article 8(1)(b) and 8(2)(b) of the same Directive, COM(96)549 final, 14.11.1996
OJ C 139, 6.5.1997, p.14
Analysis of the taxation of aircraft fuel, Resource Analysis, Delft 1998
See also Communication from the Commission to the Council, the European Parliament, the Economic
and Social Committee and the Committee of the Regions, Air Transport and the Environment, Towards
meeting the Challenges of Sustainable Development, COM(1999)640 final, 1.12.1999

2

OVERVIEW OF THE STUDY

The study examined five possible tax coverage levels ranging from taxation of national flights
only to taxation of all flights for all carriers to all destinations worldwide. Three possible
levels of taxation-low, medium and high-were also applied to each of these giving a total of
15 possible taxation options. These options were then analysed using a sophisticated
econometric modelling system to predict the likely effects of taxation in five specific areas
covering both the socio-economic and environmental fields.

In addition, an analysis of the current international, Community and national legislative
situation has been produced together with an examination of possible avoidance measures
and, finally, an assessment of cost internalisation in the air transport sector in comparison
with other modes of transport.

The results come in the form of a complete quantitative analysis for the year 2005 starting
from a base year of 1992 and assuming that taxation is introduced in 1998. In addition, a
sensitivity analysis is produced for the same year and, looking further ahead, a selective
quantitative analysis is produced for the year 2015.

SUMMARY OF CONCLUSIONS

General

The study concludes that the environmental, revenue and other effects depend on two main
factors: the level of taxation and the extent of coverage. It further concludes that the overall
environmental effect of taxation would be comparatively small unless all flights to all
destinations were taxed6. The positive environmental changes would result from a significant
slowdown in the speed at which demand is supposed to increase anyway. There are also legal
constraints in respect of certain scenarios. The results are briefly summarised below and in the
annexed tables.

Socio-economic effects

The study considers the effects of taxation on a number of areas. These include air transport
demand for both passengers and cargo, air transport supply, effects on aircraft operation and
operational efficiency, and regional cohesion. The economic effects for specific actors
(airlines, aircraft manufacturers and consumers) and macro-economic effects (gross value
added, employment, fuel tax revenues) are estimated as well as the shift in the modal split in
favour of ground transport volumes.

The study concludes, as might be expected, that the effects on demand resulting from the
various taxation options-compared with a no tax scenario-increase with higher levels of
taxation and wider coverage. The effect on RTK (Revenue Tonne Kilometres)7 for intra EU
routes varies from a reduction of 0.5% for low tax options to 7% for high tax levels. However,
the effect on the competitive position of EU carriers depends to a large degree on whether
non-EU competitors are treated in the same way. Taxation of Community air carriers only

6

7

In addition, the positive environmental effects of taxation in all scenarios may be reduced by avoidance
measures such as tankering or passenger switching carriers or destinations.
This is a revenue-earning payload of one tonne transported for a distance of one kilometre. (One
passenger=100 kilograms).

3

would not only affect
environmental benefit and socio-economic impact for the Community aviation industry.

their competitive position but also worsen the ratio between

Although the economic analysis indicates a slight overcompensation of negative socio-
economic effects to the Community's airline industry by positive effects for other economic
actors, in case of acting within present legal constraints, the implications of discriminatory
treatment of the home based industry remains a serious problem.

The effects on the Cohesion States were specifically studied to investigate whether fuel
taxation works against Cohesion Fund policy. It was found that there were no indications that
the direct effects in terms of aviation activity are more significant compared to the effects for
the other Member States. However, further analysis indicated that a given percentage change
in passenger demand might cause relatively greater economic disadvantage to the Cohesion
States due to their greater reliance on air transport.

Environmental effects

€

Positive environmental effects increase in line with tax levels and coverage despite various
avoidance. The study shows that the net reduction in CO2 emissions in 2005 varies from
55000 tonnes in case a tax rate of
10/1000 litres is applied on national routes only to
245/1000 litres on all routes. The higher figure
15 million tonnes in case of a tax rate of
represents a reduction of approximately 1.4% of EU CO2 emissions from transport and 0.34%
of total EU CO2 emissions if compared to the baseline scenario. The equivalent figures for
NOx are 110 tonnes and 70000 tonnes. Again, the higher figure represents reductions of
approximately 0.84% and 0.47% respectively. In case of taxing only intra-Community flights
of Community air carriers the corresponding reductions would amount to 0.26% (CO2) and
0.12% (NOx) of all emissions from transport.

€

Legal constraints

The Chicago Convention of 1944 governs the treatment of fuel already on board an aircraft.
The treatment of fuel loaded on to an aircraft is governed by a large number of bilateral Air
Service Agreements (ASA's) which exist between individual Member States and also between
Member States and third Countries. These usually contain a clause to the effect that both fuel
in transit and fuel supplied in the territory of the contracting parties are exempt from fuel
taxes. It
the existing ASA's be renegotiated to remove the
exemption for fuel supplied on the territory of the contracting parties. However, this could be
a lengthy and cumbersome process.

is, of course, possible that

Until re-negotiation of bilateral Air Service Agreements and of the relevant rules of the
Chicago Convention has changed the tax position of fuel in transit, the danger of tax
avoidance will remain. In addition, the current obligatory exemption contained in Directive
92/81 will apply until replaced by the optional taxation provision contained in the Proposal
for the taxation of energy products.

Tax avoidance

It is possible to avoid the effects of taxation in several ways. The main one is tankering, in
which more fuel is taken on board an aircraft than is necessary for one leg of a flight, thus
avoiding refuelling. For short haul flights in the EU, it would be possible to carry enough fuel
for a return flight rather than refuel after the first leg. On flights from North America,
tankering can cover only some 25% of the fuel required for the return flight. However, this
would still mean a 25% fuel tax reduction.

4

The advantage for operators gained by such action would depend on the level of taxation and
the availability of untaxed fuel somewhere along the route. In addition, more fuel would need
to be burned in order to carry the extra fuel and this would, in turn, reduce the environmental
benefits of the measure. Other avoidance measures include passengers switching between
carriers if not all are taxed and passengers changing destinations.

Cost internalisation

The extent to which external costs are covered is considered with emphasis on areas such as
air pollution-including smog formation and acidification-and the effects on climate change
caused by CO2 and NOx emissions. In addition, more specific mechanisms are considered
such as water emissions at high altitudes, emissions of SOx and soot and the effect of NOx on
ozone depletion.

Subject to a number of scientific uncertainties when determining the level of external costs
accurately the study concludes that when all factors including the costs to society of
accidents, noise, air pollution and infrastructure costs are taken into account, in addition to the
fact that a number of clear differences exist with respect to fiscal treatment and coverage of
external costs, air transport does not currently cover external costs. The Commission believes
that further research on the calculation of external costs of air-travel and long term
implications for the environment is needed for a better understanding and policy focus.

Conclusions

The results of this study confirm the conclusions, which the Commission drew in its 1996
report on this question. Principally for 'economic' reasons, it would not be practicable or
desirable for the Community as a whole to introduce taxation of aircraft fuel targeting
exclusively intra-Community flights operated by Community air carriers at the present time.
This conclusion remains unchanged in the light of the other results of the study, which show
that the environmental effects of such unilateral action would be significantly less.

there would be significantly higher
On the other hand, the study equally confirms that
environmental benefits from the introduction of kerosene taxation targeting all operations
from Community airports. In addition, the significant revenues accruing from such a measure
would allow Member States to reduce other taxes and charges, notably those on labour as
recommended in Article 1 of the Commission Proposal for the taxation of energy products.

The Commission therefore recommends that:

1.

2.

3.

The Council proceeds with the adoption of the Commission Proposal for a Council
Directive restructuring the Community framework for the taxation of energy
products permitting Member States to levy tax on aviation fuel used on National
flights, or by bilateral agreement, intra-Community movements.

Member States, in close co-operation with the Commission, intensify their work
within the ICAO framework for the introduction of taxation on aviation fuel and
other instruments with similar effects.

The Council reviews the situation on the basis of a Report from the Commission on
the outcome of ongoing discussions and negotiations within the ICAO framework,
targeting the 33rd ICAO Assembly.

5

ANNEX

Summary table: Summary of main impacts of taxation options for 2005
– EURO 245/1000 litres

Indicator

Unit

EU2005

Taxation options (taxation level: EURO 245/1000 litres)

109 1992 ECU
105employees

109 1992 ECU
105employees

1011 RTK pa

1011 RTK pa

Air transport and aircraft operation
Intra EU routes
Revenue Tonne km
Routes to/from EU
Revenue Tonne km
Effects on airlines
EU carriers
Operating result
Employment
Other carriers
Operating result
Employment
Economic effects for other actors
Change con.surplus
Revenue
Environmental effect
Fuel consumption
Legal obstacles
Required changes of ASAs
Tax avoidance by tankering
Reduction of revenues from taxation
Reduction of environmental benefits
Tax
Economic impacts of demand effects

avoidance

108 tonnes pa

106 1992 ECU
from 106 1992 ECU

changing

by

(1)

All routes
from EU

(2)
All routes
from EU -
EU
carriers
only

(3)
Intra-EU
routes

(5)
National
routes in
EU

(4)
Intra-EU
routes -
EU
carriers
only

0.3

1.7

3.6
7.2

8.6
2.7

n.a.
n.a.

-7.0 %

-6.8 %

-7.0 %

-6.8 %

-1.4 %

-7.5 %

-3.7 %

0.0 %

0.0 %

0.0 %

-14.7 %
-6.7 %

-74.6 %
-6.8 %

-4.0 %
-1.2 %

19.3 %
0.2 %

-10,223
10,822

-6,572
7,070

-7.1 %
-2.6 %

-0.2 %
0.1 %

-3,397
3,678

-11.7 %
-2.7 %

-2.7 %
-1.0 %

2.1 %
0.1 %

-3,284
3,551

0.0 %
0.0 %

-944
1,154

2.0

-2.4 %

-1.1 %

-0.5 %

-0.5 %

-0.2 %

n.a.

n.a.
n.a.

n.a.

Yes

No

Yes

No

No

10-25%
35-70%

10%
35%

5-10%
10-20%

5-10%
10-20%

25-50%
35-70%

+

+/o

+

+

+

6

Table: Economic and environmental effects of policy options in context of EU2005 scenario
(charging level of EURO 245 per 1000 litres).

Scenario

EU 2005

Policy results of fuel taxation of 245 EURO per 1000 litres (change w.r.t. scenario)

(1) All routes from
EU

(2) All routes from
EU - EU carriers only

(3) Intra-EU routes

(4) Intra-EU routes -
EU carriers only

(5) National routes in
EU

Indicator

Unit

EU

Other

EU

Other

EU

Other

EU

Other

EU

Other

EU

Other

Economic effects for specific actors

Airlines

Fuel costs

1992 ECU
pa

7.5E+09

2.8E+10

86.5 % 12.3 %

86.5 %

0.4 %

44.4 %

0.6 %

44.4 %

0.0 %

13.9 %

0.0 %

Operating costs 1992 ECU

9.7E+10

3.1E+11

1.0 %

0.2 %

0.4 %

0.4 %

0.7 %

0.0 %

0.6 %

0.0 %

0.1 %

0.0 %

pa

Operating
revenues

1992 ECU
pa

1.0E+11

3.1E+11

0.5 %

0.0 %

-2.3 %

0.9 %

0.4 %

0.0 %

0.2 %

0.1 %

0.0 %

0.0 %

Chng. oper. result 1992 ECU

3.6E+09

8.6E+09 -5.3E+08 -3.4E+08 -2.7E+09

1.7E+09 -2.6E+08 -1.5E+07 -4.2E+08

1.8E+08 -9.9E+07

0.0

pa

%

Result as %
revenue1)

3.6 %

2.7 %

3.1 %

2.6 %

0.9 %

3.2 %

3.3 %

2.7 %

3.2 %

2.8 %

3.5 %

2.7%

Costs per RTK 1992 ECU/

0.8

0.7

8.3 %

1.6 %

8.7 %

0.2 %

2.4 %

0.0 %

2.4 %

0.0 %

0.5 %

0.0 %

RTK

Aircraft manufacturers

Fleet size

Aircraft

4.3E+03

2.0E+04

-6.3 %

-0.4 %

-6.4 %

0.2 %

-4.5 %

0.0 %

-4.5 %

0.0 %

-2.5 %

0.0 %

Consumers

Chng. cons.
Expenses

Chng. cons.
Surplus

1992 ECU
pa

1992 ECU
pa

n.a.

n.a.

n.a.

4.5E+08

1.4E+08 -2.3E+09

2.8E+09

4.5E+08

2.4E+07

1.8E+08

2.8E+08

3.0E+07

n.a.

-6.7E+09 -3.6E+09 -4.8E+09 -1.8E+09 -3.3E+09 -1.4E+08 -3.1E+09 -1.5E+08 -9.4E+08

0.0

0.0

7

Macro-economic effects

Gross value added 1992 ECU

4.8E+10

1.7E+11

-6.9 %

-1.1 % -11.7 %

1.2 %

-2.8 %

0.0 %

-3.3 %

0.2 %

-1.1 %

0.0 %

pa

Total employment Employees

7.2E+05

2.7E+06

-6.7 %

-1.2 %

-6.8 %

0.2 %

-2.6 %

0.1 %

-2.7 %

0.1 %

-1.0 %

0.0 %

n.a.

n.a.

1.1E+10

0.0

7.0E+09

0.0

3.7E+09

0.0

3.5E+09

0.0

1.2E+09

0.0

Revenue from
taxation

1992 ECU
pa

Transportation market

Distortion
of
between airlines

competition

Scheduled pax-km Pax-km pa

6.3E+11

3.0E+12

-6.1 %

-1.1 %

-7.3 %

Charter pax-km Pax-km pa

2.6E+11

1.7E+11

-8.5 %

-3.9 %

-8.8 %

Total pax-km Pax-km pa

8.9E+11

3.2E+12

-6.8 %

-1.2 %

-7.7 %

Scheduled cargo-
km

Tonnes-km
pa

2.9E+10

1.2E+11

-6.6 %

-1.8 %

-7.5 %

0.3 %

1.1 %

0.3 %

0.0 %

-1.0 %

0.0 %

-1.1 %

-4.2 %

-0.2 %

-4.3 %

-1.9 %

-0.8 %

0.0 %

0.0 %

-2.0 %

-0.8 %

0.0 %

0.0 %

0.0 %

0.0 %

-0.4 %

-0.3 %

-0.4 %

-0.3 %

0.0 %

0.0 %

0.0 %

0.0 %

Charter cargo-km Tonnes-km

2.5E+09

2.0E+10

-5.4 %

-2.6 %

-4.8 %

-0.6 %

-1.3 %

0.0 %

-1.5 %

0.0 %

-0.5 %

0.0 %

pa

Total cargo-km Tonnes-km

3.2E+10

1.4E+11

-6.5 %

-1.9 %

-7.3 %

-0.1 %

-0.8 %

0.0 %

-0.9 %

0.0 %

-0.3 %

0.0 %

pa

Total revenue
tonne-km

Tonnes-km
pa

Change in ground transport

Car transport
(pax)2)

Car transport
(cargo)2)

Vehicle-
km pa

Vehicle-
km pa

HSL transport2) Pax-km pa

Other rail
transport2)

Pax-km pa

1.2E+11

4.6E+11

-6.7 %

-1.4 %

-7.6 %

0.2 %

-1.6 %

0.0 %

-1.7 %

0.0 %

-0.3 %

0.0 %

n.a.

n.a.

n.a.

n.a.

n.a.

3.3E+08

1.3E+07

3.1E+08

6.8E+06

3.2E+08

0.0

3.1E+08

0.0

2.0E+08

n.a.

1.1E+07

3.9E+05

9.6E+06

1.9E+05

1.0E+07

0.0

9.3E+06

0.0

4.7E+06

n.a.

n.a.

5.2E+07

0.0E+00

4.8E+07

0.0E+00

5.2E+07

3.8E+08

1.1E+07

3.6E+08

5.5E+06

3.6E+08

0.0

0.0

4.8E+07

3.6E+08

0.0

0.0

2.2E+07

2.8E+08

0.0

0.0

0.0

0.0

8

Environmental effects

Fuel burn and emissions air transport sector

Total fuel
consumption

Kg pa

4.1E+10

1.6E+11

-7.1 %

-1.2 %

-7.1 %

0.4 %

-2.3 %

0.0 %

-2.3 %

0.0 %

-0.8 %

0.0 %

CO2 emissions Kg pa

1.3E+11

5.0E+11

-7.1 %

-1.2 %

-7.1 %

Nox emissions Kg pa

5.6E+08

2.2E+09

-7.3 %

-1.4 %

-7.2 %

0.4 %

0.3 %

-2.3 %

-2.2 %

0.0 %

0.1 %

-2.3 %

-2.3 %

0.0 %

0.1 %

-0.8 %

-0.7 %

0.0 %

0.0 %

Emissions land transport
sector

CO2 emissions2) Kg pa
Nox emissions2)

Kg pa

7.9E+11

3.7E+12

7.7E+07

3.0E+06

7.3E+07

1.5E+06

7.4E+07

7.6E+09

3.2E+10

5.0E+05

2.0E+04

4.7E+05

1.0E+04

4.8E+05

0.0

0.0

7.1E+07

4.6E+05

0.0

0.0

4.6E+07

2.9E+05

0.0

0.0

1) Both for the scenario EU2005 and the various policies the operating result is presented as a percentage of revenues.
2) For these indicators ‘EU’ and ‘Other’ relate to the geographic region EU versus other geographic regions. For all other indicators ‘EU’ and ‘Other’ relate to carrier groups

9