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At the tourism conference last weekend in Dromoland, organised by the University of Limerick, Caeman Wall of Fáilte Ireland reviewed the impressive growth in visitor numbers in recent years, but conceded that a continuation of these favourable trends should not be taken for granted. Brexit does not help and visitor numbers from the UK have already weakened, economic prospects in mainland Europe are not encouraging, while President Trump is engaged in a trade war with China (and the EU) which has the potential to derail the world economy.
Aviation taxes
Several speakers commented on the impact of imminent climate policy actions, particularly those affecting aviation – almost 90% of Irish visitors arrive by air. The aviation industry has enjoyed a charmed life down the years, exempt from excise duty on jet kerosene and free of VAT. Kerosene has emissions per litre at sea level, comparable to those from petrol and diesel, both of which are liable to carbon tax, in addition to a long-standing excise duty and VAT. At high altitudes, some experts maintain that aircraft emissions do extra damage.
The European Commission has been hatching proposals to introduce a kerosene tax, which would raise the price to the airlines by about half, adding 10% to 12% to airline operating costs and hence to ticket prices. This would not happen suddenly but would, if agreed by the European Council, be phased in over several years.
The Department of Transport had expressed some weeks back its opposition to this proposal, citing Ireland’s island status and the importance of connectivity. Economists reckon that the price elasticity of demand for air travel is about one, which means that the Commission’s plan would knock demand back by the amount of the price increase, 10% or 12%. Phasing it in over maybe five years would likely result in sluggish, or even zero, growth, rather than an abrupt slump. But even an overnight imposition would hardly destroy connectivity – traffic has grown by these kinds of figures over the last two years, and the country was hardly unconnected two years ago.
In any event, the Taoiseach clarified the position last Saturday while attending a meeting of the European People’s Party, to which Fine Gael is affiliated, in Zagreb, Croatia. Ireland will support the proposal after all, as will all the other EPP-affiliated parties. The proposal appears to have already assembled enough political support to get through and the lobbying of the airline industry may have come up short.
Impact
For the tourism industry, the increase in the cost of airline tickets will be unwelcome, but if the change is confined to the carbon tax on jet fuel, the impact will be limited. Liability to VAT, which in most European countries is around 20%, would bring the total increase to 30% or a little more, with a far bigger impact. The European Commission is not currently pursuing the VAT option.
An increase in the air ticket component will not be a deterrent for longer-stay visitors. The outcome could be a hit to the short-stay, city break market, where the ticket is a bigger portion of the total trip cost, so the Dublin hotels could take a bigger hit than the accommodation business around the country catering for those staying for a week or two.
Pressure on airports
For airports, caution is indicated in plans for terminal expansion and for Dublin airport, the only one facing serious capacity pressure, the prospective slowdown in traffic growth weakens the case for a third terminal. Current plans are confined to extensions to the two existing terminals and that should be enough to relieve the pressure. The new runway nearing completion, at a cost of €320m, will be the cheapest runway constructed in Europe in recent times, a tribute to the foresight of those who bought the land 40 or 50 years ago. If a new runway is added to Heathrow in London, the cost will be about €6bn (for the runway component alone), since the suburb of Harmondsworth will have to be purchased and demolished.
Right direction
The Taoiseach acknowledged several weeks back, noted editorially in the Irish Farmers Journal, that the attribution of carbon emissions from agriculture to Ireland’s overall quota, even though the sector exports 90% of output, is problematic. Economists have long argued that consumption rather than production is the logical focus for worldwide climate action, which points to consumption-side taxes rather than arbitrary and inefficient restrictions on output in the most competitive producing territories.
The imposition of fuel taxes on aviation is a move in the right direction at European level but there is further to travel in framing a coherent policy for climate action. On the surface, aviation taxes appear to have nothing to do with farming. Not so - it is good news that Leo Varadkar is joining the dots.
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