The impacts of aviation taxation in Ireland

Abstract

The EU Green Deal sets a 90% reduction target in transport emissions by 2050. Aviation emissions, which constitute 13.9% of EU transport emissions, continue to rise while the sector benefits from several tax exemptions. In Ireland (an island state), aviation plays an important economic role. This paper explores the sectoral, economic, environmental and distributional impacts of several aviation taxation options, including taxing the aviation commodity (passenger tax and value-added tax) or taxing the aviation fuel (kerosene taxation, removal of ETS allowances). The results of an intertemporal general equilibrium analysis reveal that the real value-added of the aviation sector will not decrease more than 4% by 2030, compared to no policy change. However, if taxation is accompanied by an increase in the EU ETS price, the sectoral real value-added will decline by 27% by 2030. The impacts on GDP and household disposable income are negligible. The economy-wide emissions will decrease by 2.1% and 43% by 2030 with low and high EU ETS prices, respectively. Overall, we find that the taxation options will have limited impacts, and more policies are needed to ensure the needed reduction in aviation emissions.