Select Committee on Environmental Audit Minutes of Evidence


Supplementary memorandum from HM Treasury

  Response to specific questions from the Environmental Audit Committee following the Economic Secretary to the Treasury's Oral Evidence Session, 30 April 2003

The amount of duty which would be raised from aviation fuel if levied on a similar basis to that on petrol [Q35-36].

  Assuming that duty were applied to fuel used in commercial aviation at the current level applied to the main road fuels (45.82 pence per litre), it would have raised £5.7 billion in 2000-01—assuming no impact upon demand or supply. There are of course substantial legal obstacles to introducing duty on fuel used in international commercial aviation. Furthermore, it should be emphasised that the Government does not accept such direct comparisons are valid nor does it have an objective of equalising the tax treatment across transport modes or other sectors, so does not regard any of these figures as relevant to judgements on the taxation of aviation.

The amount of VAT which would be raised from aviation fuel if levied on a similar basis to that on petrol [Q37, 40-43].

  Assuming an average one-way fare of £160 (based on the International Passenger Survey) for flights leaving UK airports in 2000, VAT applied to air fares would have raised £2.2 billion in 2000, assuming no impact on demand or supply. Current EU place of supply rules for transport would prevent the UK from introducing VAT in this way, and would only permit the levy of VAT on that proportion of a flight which took place over UK airspace.

Whether it is legal to tax aviation fuel used for UK domestic flights [Q57].

  There would be no specific legal obstacles to this.

What specific respects do the considerations applying to the taxation of aviation fuel differ from those applying to the taxation of road transport fuels [Q24, 29], and whether these differences would still apply in a UK domestic only context.

  Comparisons of taxation between sectors or between transport modes should be made carefully and on a like-for-like basis. This is because:

    —  The Government's decisions about tax rates faced by a given type of economic activity are the result of a principled assessment of the relative economic, social and environmental costs and benefits associated with that activity. For example, different transport modes exhibit external costs which may differ in both nature and degree—for instance the external congestion costs of road users are higher than those of air travellers.

    —  Tax levels ought to be considered alongside Government spending, the level of finance from both public and private sector, and regulatory issues.

  Hence it would be flawed in principle for the Government to set an objective to equalize tax treatment across different modes.

The breakdown of aviation emissions between international and domestic flights, and confirmation that this takes account of the disproportionately high level of emissions arising from short-haul flights [Q49].

  The National Environmental Technology Centre (NETCEN) estimated that in 2000, UK aviation accounted for 31.4 million tonnes of CO2 emissions, of which 2.9 million tonnes CO2 were emitted by domestic flights. On NETCEN figures, therefore, the breakdown of CO2 emissions between international and domestic flights is 91% and 9% respectively. These figures take into account the fact that international and domestic flights have a different proportion of emissions at altitude and in the landing and take-off cycle.

  Figures produced by the South East and East of England Regional Air Services Study (SERAS) show slightly different results. The two sets of results can be compared in paragraph D9 of the recent publication Aviation and the environment: using economic instruments. The Government is investigating the discrepancies between the two sets of results.

Information on the extent to which commitments arising from the World Summit in Johannesburg have been, or are being, incorporated into departmental delivery plans [Q70].

IMPLEMENTING WSSD COMMITMENTS

  The UK Government is committed to Sustainable Development. Implementation of the agreements reached at the World Summit for Sustainable Development (WSSD) in Johannesburg have an important part to play in achieving this, and within Government Defra has responsibility for ensuring that WSSD commitments are delivered.

  These commitments are implemented in a number of ways, including, but not limited to: through delivery planning for relevant Public Service Agreements (PSA) targets; through action with others in international fora; and through the Sustainable Development Task Force. The UK Government aims to use existing mechanisms for implementation where appropriate. Departments are reflecting on how the broad ranging WSSD commitments can be incorporated, where relevant, when developing delivery plans for their PSA targets.

PSA TARGET DELIVERY PLANNING

  Delivery plans for PSA targets are produced by departments as a tool to aid them in their management of delivery. The Treasury and the Prime Minister's Delivery Unit (PMDU) work with departments on these plans, providing advice and guidance as appropriate. The responsibility for delivery of targets remains with departments, and each department reports specifically on progress towards their PSA targets in their Autumn Performance Report, as well as covering progress in their Departmental Report.

  Although the PSA targets agreed in SR2002 do not specifically refer to WSSD commitments, as they were agreed before the Summit, several of the current targets are relevant to WSSD commitments. Responsibility for the various policy areas is spread across departments.

  Defra has lead responsibility for six of the main WSSD commitments—agriculture, oceans, fisheries, biodiversity, sustainable consumption and production, and chemicals; DFID lead in delivering commitments on water and sanitation, access to energy, integrating environmental issues into poverty reduction processes; DTI lead on corporate social responsibility and trade; FCO lead on human rights, renewable energy and energy efficiency. The lead is shared on commitments covering finance, international sustainable development governance and co-ordinated UN follow-up to Johannesburg and Monterrey.

  Consideration of PSA targets for the period covered by the next spending review has not yet begun. However, the PSA targets will reflect Government commitments, as and where appropriate, including WSSD commitments. WSSD is not likely to be considered as a separate section in delivery plans, as rightly, it is mainstreamed across Government commitments.

OTHER DELIVERY MECHANISMS

  WSSD commitments will also be pursued through other avenues. Delivery will depend on action at various levels, including the international level. International fora such as the September Cancun Ministerial on the Doha Development Agenda, and the G8 Heads summit at Evian in June, which is expected to address WSSD agreements on water and ongoing work on climate change technologies, will be important. The Government participates actively in EU level work to, for example, ensure coherence between external and internal policy on Sustainable Development; to increase innovation and uptake of environmental technologies; to reform the CAP; and the development of a "road map", or "implementation plan" on commitments made at Johannesburg, overseen by the EU General Affairs and External Relations Council.

THE SUSTAINABLE DEVELOPMENT TASK FORCE

  Margaret Beckett will chair the Sustainable Development Task Force. Its membership will consist of Ministers and external stakeholders, supported by an officials' group, and the Treasury will be represented. The Task Force discussions will inform the review of the UK Sustainable Development Strategy, due to be completed by 2005. This sets out domestic priorities and headline indicators which are intended to measure quality of life. The overall review will examine priorities and targets, and how to deliver them. WSSD commitments will inform the review.


The Economic Benefits of UK Aviation

THE CONTRIBUTION OF THE AVIATION INDUSTRY TO THE UK ECONOMY

  In November 1999, Oxford Economic Forecasting published the results of its analysis of the economic contribution of the aviation industry to the UK economy, commissioned by the Department for Environment, Transport and the Regions (DETR), the Airport Operators Association (AOA) and the British Air Transport Association (BATA) and their members. The report (98 pages) can be found at http://www.oef.co.uk/AviationUK.html.

  Key findings (for the year 1998) were that the industry:

    —  Contributed £10.2 billion to GDP, 1.4% of the total.

    —  Directly employed 180,000 people in the UK, 0.8% of the total. In terms of the number of people directly employed in the industry, therefore, aviation is similar in size to car manufacturing, hotels or telecommunications services but around half the size of food manufacturing or computing and related activities.

    —  Supported up to three times as many additional jobs through the supply chain, induced effects and jobs depending on inbound and outbound travellers. (These additional jobs could still exist in the long run without the aviation sector, but they are likely to do so only at somewhat lower real wages and living standards.)

    —  Produced around two and half times as much value-added per head as the average across all UK industries, helping to support the government's vision of a high-productivity economy.

    —  Exported £6.6 billion of services, 11% of UK exports of services and 3% of total UK exports.

    —  Transported a further £35 billion of UK exports, over 20% of all exports of goods.

    —  Contributed £2.5 billion to the Exchequer, on a conservative estimate.

    —  Invested £2.5 billion a year over the past five years, 3% of total UK business investment.

  The Report argues that aviation is an important component of the UK's transport infrastructure, playing a key role in facilitating productivity growth throughout the economy. Restricting aviation would hit growth and competitiveness.

The economic case for new airport capacity

  To inform the current consultation The Future Development of Air Transport in the UK, the Government commissioned a wide-ranging programme of studies. The largest was SERAS, the South East Regional Air Services Study, which lasted nearly three years and produced a wide range of study reports including an economic appraisal (SERAS Doc Ref no. 18), produced by the consultants Halcrow.

  The details can be found at:

  http://www.aviation.dft.gov.uk/consult/airconsult/se/technical/findings/index.htm.

  A similar economic assessment was carried out in each of the other Regional Air Services studies.

  The SERAS economic appraisal of providing additional capacity at South East airports by 2030, measured above the baseline of no additional airport capacity beyond that in the planning system currently and assuming the central DfT demand forecasts, shows that the net direct economic benefits could be up to £18 billion in present value terms[7]. The analysis of development options at South East airports assumed additional capacity at regional airports. Benefits from the expansion of South East airports would be larger if such capacity in the regions was not provided.

  The direct passenger benefits of providing more airport capacity come from allowing more people to fly, and from giving all passengers a greater choice of timings and routeings. The benefits arising from the first, larger factor were quantified by estimating the reduction in fare premiums enabled by additional capacity. A fare premium reflects the excess of demand over supply for a given service. An average fare premium of £100 or more per person (in today's prices) has been estimated for Heathrow, Gatwick or Stansted by 2030 if no new runway capacity is provided.

  There would also be benefits to airlines and passengers from reducing aircraft delays at airports by the timely provision of additional runways; taking this into account could add up to £3 billion to the benefits.

The costs of failing to build new runway capacity

  The costs of failing to build new runway capacity would manifest themselves:

    —  in direct costs to the travelling public through fare increases (mentioned above);

    —  in preventing large numbers of people from flying at all;

    —  in forcing some South East air travellers to use regional airports;

    —  through indirect costs to the economy, including increased business costs, some reduction in attractiveness for foreign direct investment, a reduction in inward tourism and damage to the UK's competitive position in relation to other European countries; and

    —  in changes to the structure of air services from the South East as lower margin—often European or domestic - services are dropped to make room for higher yielding routes.

  A summary of the economic benefits and costs covering both quantitative estimates where these can be derived and qualitative coverage of other impacts is given in Chapter 14 of The Future Development of Air Transport in the UK.

June 2003


7   See footnote to paragraph 14.25 in Chapter 14 of The Future Development of Air Transport in the United Kingdom : South East about changes to the discount rate used for appraisal of projects by central Government that was used in SERAS. Back


 
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