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 2000-01assuming 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
Whether it is legal to tax aviation fuel used
for UK domestic flights [Q57].
There would be no specific legal obstacles to
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 degreefor 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
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
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].
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
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
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 commitmentsagriculture, 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
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.
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.
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
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
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
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
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
The details can be found at:
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.
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
in changes to the structure of air
services from the South East as lower marginoften European
or domestic - services are dropped to make room for higher yielding
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.
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