Examination of Witnesses (Questions 1-19)
WEDNESDAY 30 APRIL 2003
JOHN HEALEY,
MP AND MR
PAUL O'SULLIVAN
Chairman
1. Welcome, Minister. Thank you for coming along
today. Thank you also for the government response to our Pre-Budget
Report that we received yesterday. As you know, we were very interested
in the joint document put out by the Treasury and the Department
for Transport on aviation and the environment. We want to spend
some time on aviation, but we also want to touch on some of the
other issues that came out of the Budget and the Pre-Budget Report.
Would you like to say anything by way of an opening statement?
(John Healey) Perhaps I may say something.
Thank you. It is a pleasure to be back with you again. I should
introduce Mr O'Sullivan, although his is probably a more familiar
face to you than mine. He heads up the Treasury's Environmental
and Transport Tax Policy Team. Since we last met to discuss these
issues, the Committee has produced its report following the Pre-Budget
Report and you now have my response on behalf of the Government.
I hope that that has cleared up several points that we can put
to one side. The first point is that there is a coherence to the
approach that we take towards road fuel duties and that the environment
is a significant element of the decisions that we take as part
of our strategy. Secondly, there is a considerable amount of work
across Government on waste, with the Treasury heavily involved.
Thirdly, errors that the Committee and others received in the
advice from the Association for the Conservation of Energy over
the scope to introduce a reduced rate of VAT on energy saving
materials for DIY installations has been cleared up. Fourthly,
the latest figures published on climate change show that we are
making progress rather than having problems with the strategy.
Finally, I hope that my response has in some way been able to
make clear to the Committee the nature and purpose of the important
document that we discussed last time—the one that we published
alongside the Pre-Budget Report in November—Tax in the Environment
Using the Economic Instruments. Mr Horam, I hope that the Committee
will welcome—and if it does not, I know that it will take
an interest in—a number of developments since the pre-Budget
Report, both in and beyond the Budget. Those are developments
on which the Treasury has been in the lead or heavily involved.
You mentioned publication of the discussion document about using
economic instruments in the aviation area to ensure that the aviation
industry pays its environmental costs. There is also the Budget
announcements on cleaner fuels, Budget confirmation of the increases
planned in the landfill tax rate and the agreement last month
that I am sure will not have escaped the Committee's attention,
of the Energy Products Directive within the European Union and
the political agreement there that will mean that every Member
State will need to introduce an energy tax. Added together, that
work demonstrates the Government's continuing deployment of environmental
taxes and other economic instruments as a central part of economic,
social and fiscal policy development more widely.
Chairman: Thank you very much indeed. That was
very succinct and very helpful. We shall start with aviation and
Mr Ainsworth will lead with those questions.
Mr Ainsworth
2. Good morning. The Government have recently
signed up to reducing CO2 emissions by 60% by 2050. I think that
implies 343 million tonnes of CO2 by 2050. Extrapolating the figures
that the Government have produced for aviation suggests that by
2030 aviation will have contributed something like 208 million
tonnes of carbon dioxide. Do you accept those figures and is it
acceptable that in some way in the middle of this century aviation
will contribute 60% of our carbon dioxide emissions?
(John Healey) I am not sure that I follow your calculations.
Let me try to deal with the two parts of that. The first is related,
as you correctly say, to the target that the Government have embraced
in the energy White Paper as a long-term aspiration to see a 60%
cut by the year 2050. That is a calculation that we have done
in terms of the challenge and direction that that sets us on,
with slightly clearer landmarks that we shall need to reach by
2020. It is an ambition supported by calculations that encompass
in aviation terms the UK's aviation component of that. But it
also highlights in the energy White Paper generally the need for
substantially more progress on an international front if we are
to deal with the climate change challenge effectively. In aviation
terms, dealing with the international dimensions of the industry
paying its way environmentally, we have to have in place part
of that very long-term objective. You also mentioned the figures
that I think you probably drew from our discussion document.
3. I should make it clear that I was applying
the factor for radiative force.
(John Healey) In the figures that we published in
the civil aviation discussion document, we identify a current
environmental cost from climate change emissions from aviation
in this country of £1.4 billion. That includes the radiative
index. Then the 2030 figure clearly also includes the radiative
index of 2.7, but it is based on an assumption that no policy
change whatever is put in place. In other words, the escalation
between now and then were we to do nothing at all, would lead
us to a cost of £4.8 billion by 2030 and a commensurate increase
in the proportion of our climate change emissions that would be
produced by the aviation industry. That is just about doubling
from 5% to 10% or 12%.
4. Do you accept that there is a need for policy
change?
(John Healey) Yes. That underlies the purpose of producing
a discussion document. It underpins the work that we are doing
in the Treasury alongside that with the Department for Transport
on the potential use of economic instruments as a way of trying
to achieve some of those objectives in relation to the aviation
industry. We aim to publish the conclusions in the White Paper
on aviation, which at the moment is scheduled for later this year.
5. I am pleased to hear that you accept that
there is a need for change. The Government's environmental policy
becomes incredible if there is no change in respect of aviation,
given the huge contribution that it makes towards global warming
and carbon dioxide emissions. Therefore, you accept, I take it,
that there is a need for demand management when it comes to aviation?
(John Healey) No. I think that there are three potential
policy objectives for which economic instruments may play a part.
The first one—we are very explicit about this in our discussion
document—is that at present the aviation industry has environmental
costs and consequences for the UK which are simply not internalised.
In other words, it is not paying its way and the discussion document,
as I have said, calculates that on the climate change consequences
as £1.4 billion a year. The second objective would be to
see the aviation industry play its part in the overall aim to
reduce our climate change pollution—that is the 2050 aspiration
that you mentioned. Clearly we want to see that as well. We believe—we
are trying to resolve this in our examination and then selection
of the appropriate instruments to use—that we can achieve
both. We believe that we can first and foremost ensure that as
a polluting industry, the aviation industry pays its way. Secondly,
we can do that in a way that encourages it to reduce its environmental
impact over time. The third point is arguably a potential policy
purpose, but not one for which we are examining the use of economic
instruments, which is a form of managing demand. Clearly there
may be an impact on demand of any taxation or other economic instruments
that we may introduce, but the principal purpose for looking at
the options is not to manage demand. The question of appropriate
development of capacity, appropriate levels of demand and supply,
are really the guts of the Department for Transport's consultation
paper on airport capacity. Clearly there are links. I want to
make it clear that I do not accept that a part of the policy instruments
that we are looking at at the Treasury with the DfT, the economic
instruments, should be explicitly to manage demand.
6. Do you accept that such arrangements rightly
apply in terms of road transport? There is evidence that the Government
think that and they are actively looking at road charging. If
they are doing that for roads, why not for airports?
(John Healey) To be honest, it is a little difficult
to draw direct comparisons. The way in which the aviation industry
is regulated, managed and organised, nationally and internationally,
gives all sorts of options for managing demand and flight patterns
in a way that just is not available for road transport. I do not
think that you can draw that direct comparison.
7. Do you think that to predict and provide
is an acceptable approach towards planning future aviation capacity?
(John Healey) I would not distill what is a complex
set of consultation documents into a simple phrase like that.
8. In effect, that is what you are telling the
Committee.
(John Healey) No. I am saying that the consultation
that the Department for Transport is undertaking at the moment
is to try to come to a better informed analysis of likely development
of demand and to consult over what is appropriate in different
parts of the UK in looking to provide for that.
9. It feels very much like predict and provide
to me. At the same time as you are undertaking these consultations
in the Treasury, the Department for Transport is consulting on
a massive increase in capacity, particularly in the South East,
but also at regional airports across the country. There appears
to be a lack of joined-up thinking at the moment.
(John Healey) On the contrary. The document that we
have published has been published jointly with the Department
for Transport. We have published the discussion document on economic
instruments and their potential use alongside the capacity consultations
that the Department for Transport is running. The deadline for
responses for both is the end of June. We have set out to publish
our considered views, responses and proposals in the light of
both, together in the White Paper at the end of the year. It is
difficult to see the strength in your accusation that it is not
joined up and that these are two separate exercises.
10. Why is the Department for Transport's prediction
and the entire consultation process based on the assumption that
costs will increase over a period to 2030 by 60%? Why do they
factor in an increase in the costs of air travel in this country?
(John Healey) You will have to explore that issue
with them if you want the detail. Essentially their modelling,
based on the trends in the aviation industry, suggest that the
cost of air travel is likely to be driven down. In the past two
or three years we have seen a significant impact of low-cost airlines,
not just in driving down the price of air travel on routes on
which they operate, but more generally within the rest of the
industry.
11. Nobody doubts that costs are being driven
down. My family and I went to Inverness over Easter. We flew there
because it was cheaper to fly than to go by train. The Committee
is looking at why that should be so and whether it needs to be
so. Given the impact of aviation on the environment, the Government
should be more pro-active in addressing the imbalance that exists
between the various transport modes.
(John Healey) That is a much wider question. As I
explained earlier, our policy purpose here is to ensure that the
environmental impact that the aviation industry has at present
in the UK is in a sense properly covered and paid for by the industry
itself. The consultation document and the analysis that it sets
out demonstrates quite clearly that at present it does not.
12. Have you looked at the additional cost that
you would need to require from the industry to neutralise the
environmental impact of the industry over the period to 2030?
(John Healey) Yes, on climate change it is £1.4
billion at present. On noise there is quite a difficult calculation
to do. But you will see from the document that across all UK airports,
as far as it is possible to put any monetary calculation on that
disruption and environmental pollution, it is about £25 million.
It is relatively small. In terms of local air pollution in the
UK, it is something of the order across all UK airports of around
£190 million to £238 million.
13. Have you looked at similar costs in relation
to neutralising growth in demand rather than the CO2?
(John Healey) No, because, as I explained earlier,
the policy purpose of our work at the moment is not to use economic
instruments as a tool for demand management.
Chairman
14. None the less, it will be a consequence
of pursuing your objectives that demand is managed?
(John Healey) I do not think that it will be a consequence
of pursuing our objectives that demand will be managed. As I said
earlier, there is likely to be an impact on demand.
15. That is the same thing.
(John Healey) We quantify that in the discussion document.
We reckon that if we were to put in place a set of economic instruments
that cover currently the cost that is not covered—the external
environmental costs—the cost to the industry would rise
by about 10% and probably the demand may be suppressed by the
same amount. Having an impact on demand is different from actually
managing demand.
16. That is—
(John Healey) Let me make it clear that our purpose
in what we are doing is not to price people off planes.
17. But it will have that effect.
(John Healey) That is not—
18. It may not be your purpose because as you
have rightly said, your purpose is environmental.
(John Healey) What you can assume is that there is
likely to be some impact on demand. It is difficult to quantify
and to model that because any increase in the aviation industry's
costs as a result of any measures we may bring in, would not necessarily
feed through to the price that passengers pay. It is possible
that the industry will absorb some of the costs and it is also
possible—certainly on the track record—that the kind
of technological improvements in development would mean that the
increase in price would not be paid in full by the passengers.
Mr Ainsworth
19. I am quite baffled by these answers. I had
expected that you would recognise some need to manage demand in
aviation, which of course creates major impacts on the environment.
While I accept that you do not want to price people off planes,
is it not the case that the current policy subsidises people onto
planes?
(John Healey) To the extent that the industry does
not pay its way in terms of the environmental economic costs that
it imposes, you could argue that it is under-taxed and under-priced.
But in a sense you are underlining for me the precise reason that
we are now examining this area and the reason that we published
the discussion document and why we are having the discussion with
the key players.
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