Clearing the Air: Lessons from the EU ETS for Low Carbon Aviation

and | 6 March 2025
Fiscal, Blog | Tags: Carbon Pricing, Energy, Fossil Fuels, Tax Expenditures, Transport

In mid‐January 2025, Benjamin Smith, the typically reserved CEO of Air France-KLM, took an unusual stand by publicly criticizing the plan of the French government to raise taxes on flights departing from France. As of Sunday 2 March, industry criticism notwithstanding, the increased rates are in effect. For economy class passengers, the “taxe de solidarité sur les billets d’avion (TSBA)” now ranges from € 7.40 to € 40 depending on the destination. Business and first class customers face rates between € 30 and € 120. Private jets are subject to charges up to € 2,100. Smith warned that such measures will undermine France’s status as a vital international hub, yet his comments also highlight a crucial debate: should aviation finally be made to pay its fair share for the external costs of carbon emissions?

The Hidden Costs of Tax Exemptions

Aviation has long enjoyed a special tax status. Airline fuel for international flights is generally exempt from excise duties. International air travel also benefits widely from VAT exemption or zero-rated VAT (Black et al., 2024; De Bruin et al., 2022; European Commission, 2019). In addition, when charges or excise taxes are levied on passenger tickets or jet fuel consumption, the proceeds are often earmarked to finance airport services, aviation safety and air traffic control rather than pay for negative externalities. For instance, a variety of excise taxes on air travel in the United States are earmarked for the Airport/Airways Trust Fund, which finances the Federal Aviation Administration’s investments in the airport and airway systems.

As a result, the social costs of flying, especially the environmental damages it causes, remain largely unaccounted for. In the absence of environmental taxes, aviation has emerged as a significant consumer of fossil fuels. After the sharp decline during the pandemic, demand for aviation jet fuel is projected to return to record levels in 2026 and continue to increase. Under present trends, aviation is not on a pathway toward net zero emissions in 2050 despite past commitments.

Source: Goldman Sachs (2024), Peak oil demand is still a decade away.

Evidence from the EU Emissions Trading System

One clear indicator that pricing carbon can yield real environmental benefits comes from the European Union Emissions Trading System (EU ETS). Under the EU ETS, airlines operating within the European Economic Area (EEA) are required to monitor and report their CO₂ emissions and submit allowances accordingly.

Sahib (2024) explores the impact of the EU ETS on aviation emissions within Europe. The research is based on a dataset of emissions by 1,500 flights collected from Google Flights. The dataset utilises the Travel Impact Model (TIM) estimates of fuel burn, which are based on the Tier 3 methodology for emission estimation by the European Environment Agency. It encompasses flights both within and outside the EEA. A regression model was developed to assess the impact of the EU ETS on these emissions. The regression analysis reveals that intra-EEA flights emit on average 7 kilograms of carbon dioxide (CO2) per passenger less than flights outside the EEA, equivalent to a 5% reduction in emissions. This finding aligns with previous studies investigating the impact of the EU ETS on aviation, such as Fageda et al. (2022) and Zang et al. (2024). It confirms that putting a price on carbon emissions encourages airlines to reduce emissions – for instance by using newer and more fuel-efficient aircrafts and optimized operations. Though the reduction may appear small, it has the potential when combined with other regulatory measures and technological innovation to put aviation emissions on a declining pathway.

Stronger Price Signals Can Boost Technological Innovation

Modernisation of aircraft is a critical part of reducing aviation’s carbon footprint. For instance, older models like the Boeing 747-400 consume 3.2-4.0 litres of kerosene per 100 kilometres per passenger when the plane is full, whereas newer aircraft such as the Airbus A330-900neo can use as little as 2.5 litres—thanks to advanced engines, aerodynamic refinements, and lighter materials. Not only do these improvements result in substantial fuel savings, but they also reduce CO₂ emissions. On the ground, innovations such as single-engine taxiing and electric towing further decrease fuel burn.

Sustainable Aviation Fuels (SAFs), derived from renewable sources like waste oils, biomass, and synthetic processes, can reduce lifecycle CO₂ emissions, though they are available only in limited quantities, and they are costly. SAFs produced from waste oil cost twice the price of fossil jet fuels. As a result, they currently represent only a tiny fraction (around 0.1%) of global jet fuel consumption. This could change if frontier technology, such as direct air capture, becomes cost-effective, but only in the long term. Battery-electric aircraft is currently an option only for short-haul flights, while plans for hydrogen-powered aircraft have recently been postponed. Stronger price signals could stimulate all these innovations as they have done in other sectors—be they through carbon taxes or mandatory allowance purchases (Aghion et al., 2022).

From Self-Regulation to Mandatory Policies

Historically, the aviation sector has relied on self-regulation and voluntary targets to curb its emissions. Aviation’s voluntary commitment through carbon offsets, such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), aims to stabilize emissions at 2020 levels by requiring airlines to offset growth in their emissions, but its effectiveness has been widely criticized due to concerns over additionality and the long-term impact of offsets (Black et al., 2024).

By contrast, mandatory policies like the EU ETS have already demonstrated their effectiveness by nudging airlines to lower their emissions for flights within regulated regions. Expanding these policies—either by extending the EU ETS beyond the EU or by instituting an international carbon tax on aviation fuels—could drive further innovation and operational efficiency. Removing fossil fuel subsidies—such as tax exemptions on kerosene and zero-rated VAT on tickets—would not only help level the playing field with other transport sectors but also generate significant revenue (Black et al., 2024).

Balancing Economic Benefits with Environmental Responsibilities

Notwithstanding its negative environmental impact, it is important to acknowledge that aviation is a linchpin of global connectivity. Millions of passengers depend on air travel for affordable, safe, and rapid transit. Moreover, the aviation industry underpins an entire ecosystem that supports approximately 86.5 million jobs worldwide, spanning aircraft manufacturing, airline operations, and tourism. For many developing economies, air travel is a critical driver of economic growth, in particular through the arrival of international visitors. With progress toward sustainable aviation, tourism can contribute to sustainable prosperity, as targeted by the UN SDG (targets 8.9 and 12.b).

Research indicates that international air travel is predominantly undertaken by higher-income individuals, as lower-income groups often cannot afford the cost of flight tickets and associated travel expenses (Büchs and Mattioli, 2021). Consequently, implementing carbon pricing on aviation is unlikely to have a regressive impact on lower-income populations, as they make less use of air travel.

Policy measures, such as carbon pricing, should be designed to internalize the environmental costs of aviation while preserving its socio-economic benefits. A well-calibrated approach can incentivize sustainable practices without unduly restricting global connectivity, economic growth, or access to air travel. In the race against climate change, it is time for aviation to pay its fair share.

The industry’s future—and our collective future—depends on it.

REFERENCES

Aghion, Philippe, Lena Boneva, Johannes Breckenfelder, Luc Laeven, Conny Olovsson, Alexander Popov, and Elena Rancoita (2022), “Financial markets and green innovation”, ECB Working Paper, No. 2686, European Central Bank (ECB), Frankfurt a. M., https://doi.org/10.2866/426482

Black, Simon, Ian Parry, Sunalika Singh, and Nate Vernon-Lin (2024), “Destination Net Zero: The Urgent Need for a Global Carbon Tax on Aviation and Shipping”, IMF Staff Climate Notes 2024/003, International Monetary Fund, Washington, DC. https://doi.org/10.5089/9798400290244.066

Büchs, Milena, & Mattioli, Giulio. (2021). “Trends in air travel inequality in the UK: From the few to the many?”. Travel Behaviour and Society, 25, 92-101.

De Bruin, Kelly, and Yakut, Aykut Mert. (2022), “The impacts of aviation taxation in Ireland”, Case Studies on Transport Policy, 10(4), 2218-2228. https://doi.org/10.1016/j.cstp.2022.09.017

European Commission (2019), “Taxes in the Field of Aviation and their Impact”, https://op.europa.eu/en/publication-detail/-/publication/0b1c6cdd-88d3-11e9-9369-01aa75ed71a1.

Fageda, Xavier and Jordi J. Teixidó (2022), “Pricing carbon in the aviation sector: Evidence from the European emissions trading system”, Journal of Environmental Economics and Management, Volume 111. https://doi.org/10.1016/j.jeem.2021.102591

Sahib, Leila (2024), “The Effect of the European Union Emissions Trading System on CO2 Emissions in the Aviation Sector”, Master Thesis, Université Gustave Eiffel and Université de Paris-Est Créteil.

Zhang, Yueyue and Ke Wang (2024), “Mitigation effect of the European Union emission trading system on aviation emissions”, Transportation Research Part D: Transport and Environment, Volume 130. https://doi.org/10.1016/j.trd.2024.104186

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