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Air Quality

The Wacky Untaxed World Of Jet Fuel Is Coming To An End

The emissions of aviation will be priced, the cost of aviation will go up, and that’s part of why my projection of aviation growth is flat through 2100.

For something which produces 2-5% of global CO2 emissions depending on how you count it and who you ask, you’d think that aviation fuel would be a commodity that every country taxed heavily, especially more rational entities like the EU. However, that’s just not true, as I discovered to my bewilderment. Josef Mouris of electric airplane startup ELECTRON Aviation dropped that little bombshell on me late in 2021, and I’ve been meaning to dig into it since.

So what are the taxes today, and how do they compare? In the EU, aviation turbine fuels (ATF) including Jet A, Jet A-1, and Jet B were completely exempt from taxes until 2003, and only at that point were EU member countries allowed to tax it if they wanted to. Since 2008, starting with Germany, about 6 EU countries of the EU27, as well as 3 other European countries, have put taxes and levies of various types on sale of ATF. It’s distinctly not a level playing field, and mostly it’s been a surcharge on ticket prices that’s poorly aligned to emissions. The average cost increase is low as well.

Table of aviation fuel taxes now and in 2033

Table of aviation turbine fuel taxes now and in 2033 by author

And the EU only allows this tax for intra-EU flights, not to international destination flights, a major source of global emissions. The EU has historically depended on the International Civil Aviation Organization (ICAO), a UN sub-body, to address international flight emissions, a theme with an ugly twist.

As a side note, all numbers I’ll use are for ATF, as the avgas often used in smaller private planes, crop dusters, and the like is a completely different kettle of fish with its own wild variances in treatment between jurisdictions.

In the US, by comparison, ATF is taxed at an average of $0.28 per US gallon, of which $0.22 is federal, and the remainder state. This appears to apply regardless of whether the flight is domestic or international. There are lots of state-by-state variances, with some states using sales taxes, others using gasoline levies, others explicitly excluding aviation fuels from taxation, others providing refunds, others capping the number of gallons that can be taxed annually, and yet others giving avgas refunds, but not ATF refunds.

In Canada, there are province-by-province taxes, often aligned with gasoline taxes. And Canada often appears to think like the EU, with provinces such as Alberta providing tax rebates on ATF purchased for international destinations. Ontario, by comparison, still taxes aviation fuel for international destinations at around $0.08 per US gallon (note: I’m converting everything into USD and US gallons for ease of comparison).

In other words, accountants and other spreadsheet jockeys in airlines spend a lot of their year figuring out which jurisdictions to support with how many flights of what types, simply because fuel is currently about 19% of an airline’s annual expenses. Picking airports becomes important.

One thing that these various taxes, levies, and surcharges have in common is that they are dirt cheap compared to the negative externalities of burning jet fuel, which in addition to direct CO2 emissions, include nitrous oxides with global warming potentials 265 times that of CO2, other nitrous oxides which cause ground level smog around airports, contrails in the stratosphere which forces more global warming, and of course noise pollution for everyone around the airport, but especially in the landing and take-off paths.

And the other weird thing about this is that the US actually taxes aviation fuel more than other countries and doesn’t give the money back if the planes are leaving the country. Momentarily, the US’ aviation fuel policies are ahead, even if still completely misaligned with the scale of their negative externalities.

But that’s changing. Among other things, explicit carbon pricing is being applied to fuels in jurisdictions that have a carbon price. Let’s start with Canada, which has introduced a carbon price that’s rising from about $16 per ton of CO2 in 2019 to a current target of about $133 in 2030. That’s actually pretty respectable. What’s even better, from the sake of the world, if not the airlines, is that it applies to aviation fuel, at least for the provinces that don’t have their own carbon pricing mechanism, with British Columbia and Quebec being the big exceptions as they are in California’s carbon trading plan. That turns into about $0.27 per US gallon at the start, and about $2.20 per US gallon by 2030. That’s hefty, about 8 times US aviation fuel taxation. There’s also no indication that it’s going to be subject to a rebate if the planes happen to leave the country.

There’s another good news story about Canada’s carbon price. The Liberal Party has now fought three elections on climate change and a carbon tax, and won them with majority and minority governments. Further, the center and center left parties — the NDP, BQ, and Greens — also support the carbon tax, and with the Liberals represent two-thirds of the popular vote and a large majority of seats in Parliament. The federal Conservative Party is eating its young at the moment, having turfed its third leader in three elections, and schisming with two far-right parties emerging in the past couple of elections and taking 6% of the popular vote, if no seats. While the Liberals hold a minority, in other words, the carbon price is very unlikely to be overturned in the coming years, unlike the sad fate of a similar carbon price introduced by the Australian Labor Party.

The EU has a had a movement for years to both normalize aviation fuel taxes across the EU countries, but also include them in the EU emissions trading scheme, the ETS. Yes, that’s right, the EU actually gives enormous ETS allowances away to aviation, enabling them to dodge the currently approaching $114 per ton. As part of the EU’s plan to reduce carbon emissions by 55% by 2030, they have proposed reducing the allowances starting in 2024 down to zero allowances in 2027. An ETS price at that level will add about about $1.50 per US gallon to the cost of ATF. Like Canada’s Carbon price, that’s hefty, and if the ETS value continues to increase, it may match Canada’s values.

But the EU has another lever it’s also hoping to pull, an actual aviation fuel tax designed to promote sustainable aviation fuels that applies across the board of about $1.46 per US gallon. The combination means that the EU goes from remarkably backward to leading the world, with an increase in the cost of ATF by 2033 of almost $3.00 per US gallon.

There’s a catch with the EU increases, sadly. They still only apply to intra-EU air travel, with most international destinations being exempt. The EU continues to believe that the ICAO will actually get its thumb out and deal with this, something that they continue not to do, including the phrase ‘aspirational measures’ directly in their reports. As a side note, every time I mention the ICAO, someone from them complains that I’m not being fair to them. Apparently they are rightly feeling defensive for not delivering on climate action as they’ve been promising to for decades.

Oh, and the EU efforts exclude cargo planes already, a significant portion of aviation, even if the measure gets past intensive aviation and fossil fuel industry lobbying, which my European contacts tell me is up in the air at the moment. It’s not guaranteed that the EU will appropriately tax and carbon price aviation fuel, but at present it excludes international destinations and all intra-EU cargo, which is a deeply compromised choice.

In the US, there’s a different measure under way. The Biden Administration’s Build Back Better bill included as of late last year a target of increasing sustainable aviation fuels from the current 1% to 14% of total fuels used by 2030 with a $1.75 to $2.00 per US gallon tax credit to sellers of sustainable aviation fuels. Naturally, there’s a lot of lobbying going on by various biofuel sectors to make sure that their sector is included, as there are grease and fat vs corn pathways. And, of course, the Build Back Better bill was scuttled by Joe Manchin (D-West Virginia) later last year, so who knows if this will ever see the light of day. I think it’s likely simply because both Republican and Democratic politicians love to give farmers money, although it benefits Republicans more.

For context, the January average price of ATF was $2.46 per US gallon. Canada’s carbon price in 2030 will be a 73% increase in the price. The EU’s will be a 120% increase, while the US is unlikely to be able to get a carbon price or increase fuel prices through Congress with the structural and cultural problems they have in that country. If we take doubling the price of jet fuel as the basis for a calculation, that turns the annual airliner expense for fuel from 19% to 32% — a massive business disruption.

US Kerosene Jet Fuel Historical Monthly Prices

US Kerosene Jet Fuel Historical Monthly Prices courtesy US EIA

Of course, ATF has significant price volatility, and that’s only increased in the past 15 years. The 2019-2020 dip was due to a significant drop in demand as COVID curtailed aviation globally, of course. But as the energy transition plays out, volatility in fossil fuel prices will only increase, as was the case with natural gas price spikes in late 2021. Airlines will have to hedge potential fuel volatility more and more regardless, and the stability of electricity especially will start to become more attractive.

In recent months I’ve been projecting out various aspects of electrifying aviation, with a refueling scenario through 2100 and more recently an electrified regional air mobility maturity model projected through 2040. An interesting thing about electrified aviation is that it’s taking its fuel from rapidly decarbonizing grids, so it will pay less and less carbon tax over time, not more and more. Another interesting thing about electrified aviation is that the global aviation and fossil fuel industries haven’t been lobbying for decades to keep their tax breaks or incredibly low taxes, so electric aviation is actually paying normal taxes on electricity, which can be quite high. In the Netherlands, where ELECTRON is based, electricity costs from $0.12-$0.18 per kWh and has a 19% VAT applied, but ATF isn’t taxed at present, a clearly problematic state of affairs.

What this means is that Canada and the EU are appropriately applying market mechanisms to the fuel with negative externalities and allowing competition between replacements such as electricity, SAF biofuels, hydrogen, and synthetic fuels — which electricity and SAF biofuels will win –, while the US appears set on picking a single winner and not using market mechanisms. One assumes that rational decision-making will resurface in the US at some point, per Churchill’s observation on the country. At some point, the US will have to tax aviation fuels and price carbon, but at present it’s unlikely that it will even manage to subsidize better alternatives.

Which leads to the next interesting point. A thread I’ve been pulling at recently, and will return to in future aviation-oriented articles, is that airports are amazing places for behind-the-meter solar and storage. Aviation regulations require that large amounts of open space are everywhere around runways so that planes can actually land and take off safely. Ground-mounted solar has lots of room, with Groningen in the Netherlands having a 21.9 MW solar array and Edmonton International in Canada developing a 120 MW solar farm.

Electric aviation and behind-the-meter solar become a virtuous pairing, and combined with the potential for electric fleet vehicle and freight vehicle behind-the-meter charging, turns airports into energy powerhouses, giving them a valuable new revenue stream and role in decarbonization. I suspect that like the Texas Gigafactory, they’ll have to formally become an electricity utility to sell it to plane and ground operators, but regardless, there’s a strong climate win between cheaper behind-the-meter electricity and electric aviation that’s going to change flight economics.

All of this to say that the emissions of aviation will be priced (even in the US in the coming years), the cost of aviation will go up, and that’s part of why my projection of aviation growth is flat through 2100, not growing. The actual opportunity market is a displacement of current business models and airframes with electrified regional air mobility, electric drivetrains on increasingly large planes, and SAF biofuels.

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is a member of the Advisory Boards of electric aviation startup FLIMAX, Chief Strategist at TFIE Strategy and co-founder of distnc technologies. He spends his time projecting scenarios for decarbonization 40-80 years into the future, and assisting executives, Boards and investors to pick wisely today. Whether it's refueling aviation, grid storage, vehicle-to-grid, or hydrogen demand, his work is based on fundamentals of physics, economics and human nature, and informed by the decarbonization requirements and innovations of multiple domains. His leadership positions in North America, Asia and Latin America enhanced his global point of view. He publishes regularly in multiple outlets on innovation, business, technology and policy. He is available for Board, strategy advisor and speaking engagements.


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