Potential consequences of a CO2 aviation tax in Mexico on the demand for tourism

Abstract

There is limited evidence on the potential consequences of the implementation of a CO2 aviation tax in developing countries. In this paper we analyze the potential impact of a CO2 aviation tax on the inbound tourism demand from the United States, Canada and Europe to Mexico. The methodology consists of a panel cointegration estimation of the demand for international tourism to Mexico. Unlike previous studies we analyze the potential effect of the tax on both tourism expenditure and the number of airplane arrivals. The results indicate an income elasticity of 1.9 for tourism expenditure and 2.9 for the number of airplane tourist. The price elasticities of airplane tourism expenditure and the number of airplane tourists are -0.94 and -0.39, respectively. The difference in price elasticity between tourism expenditure and number of tourists suggest that a CO2 aviation tax in Mexico would lead to a larger adjustment in total expenditure rather than in trip decisions. The implementation of such tax is therefore consistent with a continuous growth of the demand for tourism. Furthermore, the tax has the potential to generate additional fiscal revenue for 163 - 480 million dollars. The price elasticity of the competitive destination highlights the importance of considering a regional agreement for the implementation of an international CO2 aviation tax.