Select Committee on Environmental Audit Minutes of Evidence

Supplementary memorandum from the Aviation Environment Federation


1.   The Government argues that equality of tax treatment between aviation and other modes of transport is not an objective of fiscal policy. To what extent does the AEF think it should be? Is there not an argument that the proper comparison is with rail and buses—both of which are heavily subsidised—rather than cars?

We have been told on many occasions, both face to face and in writing by the DfT and its various past iterations, that the tax-free status of aviation fuel is an anomaly and that it is Government policy to remove this status through action at ICAO. However, the European Commission, in its Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions—"Air transport and the environment: Towards meeting the challenges of sustainable development" 1999, stated that if action internationally through ICAO doesn't remedy this anomaly, then the EC reserves the right to take unilateral action as a bloc. This stance has been reinforced by the EU White Paper "European Transport Policy for 2010".

  The Communication also said this, for instance, in the 1999 Communication about the importance of sending price signals through internalizing external costs:

    "The Commission intends to continue its work on the creation of equitable conditions for competition within the overall transport system. This implies working towards integration of environmental costs into charging systems and significant improvement of the infrastructure at inter-modal connecting points so that users and operators can actually orient their choice towards the environmental quality of transport services and avoidance of congestion. This will contribute to replacing shorter flights by truly competitive rail transport."

  There are three routes to get aviation taxed at an appropriate level—one is internalizing its external costs (our current conservative [low] estimate puts the total external costs of UK aviation at around £6 billion a year), another is to add fuel tax and VAT. We have researched this latter route extensively in our report "The Hidden Costs of Flying". The third is a combination of both the above! As Kenneth Clarke, the Chancellor who introduced APD said at the time:

    " . . . air travel is under-taxed compared to other sectors of the economy. It benefits not only from a zero rate of tax: in addition, the fuel used in international air travel, and nearly all domestic flights, is entirely free of tax."

  It is true that the UK rail and bus network are heavily subsidised. Our view is that the very high utility nature of both modes and their significantly lower environmental impact per passenger kilometer renders these subsidies publicly and politically acceptable.

  The environmental impacts of all forms of fossil fuel based travel should be carefully considered when developing sustainable mobility policies. In addition to Kenneth Clarke's view, which we share, there is taxable capacity available particularly in terms of the flying public's "willingness to pay" both for the privilege of flying (the perceived benefit cost) and, as the DfT/ONS research "Attitudes to Air Travel" 2002 shows, an acceptance of increases in air fares to cover environmental costs.

  Twenty-five per cent of the surveys respondents said they would find an increase of 15% in airfares for environmental reasons acceptable.

  The above GDP growth rates of air transport are effectively subsidised by the tax exemptions the industry enjoys. These may have played a role in establishing a fledgling industry in the immediate post-war period but are simply no longer appropriate.

2.   Even when the AEF re-ran the DfT computer model with its own assumptions, the results still showed a significant growth in aviation. Does the AEF accept the need for growth? How, in this context, would it define "sustainability" in terms of the aviation industry?

  The re-run of the Government's SPASM model, based on a revised set of assumptions put forward by the environmental NGOs[7]showed a reduction in forecast demand from the projected figure of 501 million passengers per annum (mppa) in 2030 to 315 mppa.

  The base case scenario is 180 mppa in 1998. At a forecast level of 315 mppa in 2030, the SPASM model shows that there is no need to provide additional runways in the UK to meet demand over this period, as existing runway infrastructure is sufficient to meet the demand both nationally and in the regions. This avoids the large-scale demolition and land-take impacts associated with the Government's options for airport expansion.

  However, as highlighted in the question, this still implies considerable growth compared to the base case. Do we accept the need for growth? We would ask this question in a different way, namely, can our environmental objectives be met and in turn allow for controlled growth of the industry?

  Our environmental objectives have been determined based on published advice from expert and scientific communities. We support the RCEP's recommendation that the UK needs to reduce its CO2 emissions by 60% by 2050; the World Health Organisation's guidelines that no-one should be exposed to noise levels likely to cause high annoyance in excess of 55 dBA Leq and full compliance with the EU Directive on air quality. Achieving these goals will be fundamental to delivering a sustainable aviation policy. We accept that in the short-term more flexible goals could be adopted.

  To return to the question about growth, we believe that these short-term goals can be met whilst permitting growth in demand perhaps up to 315 mppa. To reach 315 mppa by 2030, traffic will grow at the rate of 1-2% per annum (We should state that we believe an element of this total demand would not occur as some market maturity would set in; regional airports would, in our view, be unlikely to show any significant "claw-back" growth, which we think SPASM over-estimates; and the physical infrastructure at and around airports would become congested unless very carefully planned).

  This, by general consensus, is the rate of technological improvement forecast by the industry. While the business as usual forecast assumes a rate of efficiency improvement of 1% per annum, reports (such as the Arthur D Little study commissioned by the Government as part of the consultation process) indicate that higher gains can be achieved if the right economic or regulatory drivers are provided (a situation taken into account in our revised assumptions for SPASM).

  In conclusion, we would like to restate our view that the key factor in a sustainable aviation policy is setting and achieving environmental goals, not agreeing a target level for demand and then try unsuccessfully to "mitigate" the resulting environmental impacts

  We were asked to respond directly to the above two supplementary questions by the Committee. We also set out below two further short clarification statements.

3.   Air quality at Heathrow

  The DfT SERAS study clearly identified significant local air quality problems with growth on the scale predicted at Heathrow with NOx volumes exceeding statutory limit values with 35,000 people affected by 2015. We understand this is an issue the Committee is concerned about and would comment as follows.

  The DfT Heathrow air quality study, contained in the SERAS report, was carried out by consultants AEA Technology. The same consultants have also previously produced a study looking at exactly the same issues at and around the airport for BAA plc for the Heathrow Terminal 5 Public Inquiry. And AEA Technology also produced the recent Heathrow air quality update/revision post-SERAS, again for BAA plc. We now have three reports from the same consultants with, we understand, similar baseline calculations of emissions at Heathrow but different outcomes.

  The baseline inventory for this latest study uses, we are told, "real life" measurements gained over recent months from air pollution monitors around the airport. However, the final results differ significantly, with less negative air quality impacts being claimed by BAA plc. This is because the latest revised study uses, in our view, highly optimistic assumptions about future aircraft technology performance and their rate of in-service introduction. It is these assumptions that cause the air quality problem to apparently be reduced although still not in compliance with limit values for NOx.

  And to further muddy the waters, British Airways have stated that they believe the air quality problem is overstated because their pilots frequently avoid the use of full throttle take-off power, thus reducing emissions of NOx in particular.

  We are keen to see some independent resolution in this important area. To this end, we would respectfully ask the Committee to consider supporting our suggestion for a peer review of all three studies into local air quality at Heathrow.

4.   Climate change and the re-insurance industry

  We will be pursuing this area over the summer months of 2003. In the meantime, we recommend the Committee read the UNEP press release below. (October 2002)

Financial Sector, Governments and Business must act on Climate Change or face the consequences

  Too few financial companies including banks, pension funds and insurance companies are taking the risks and opportunities posed by climate change seriously, members of the United Nations Environment Programme's (UNEP) Finance Initiatives are warning.

  Zurich/Nairobi, 8 October 2002—Losses as a result of natural disasters appear to be doubling every decade and have reached one trillion US dollars in the past 15 years. Annual losses, in the next 10 years, will reach close to $150 billion if current trends continue. The massive economic losses stemming from the devastating summertime flooding in central Europe are in line with the kinds of increasingly severe weather events anticipated by scientists as a result of human-induced climate change. This year has also seen a failure of the Monsoon in Asia, dramatic forest fires in the United States and the onset of another El Nino event in the Pacific. Members of the UNEP Finance Initiatives, a unique partnership between UNEP and 295 banks, insurance and investment companies, argue that climate change-driven, natural disasters, have the potential to wreak havoc across the world's stock markets and financial centres.

  "The increasing frequency of severe climatic events, threatening the social stability or coupled with significant social costs, has the potential to stress insurers, re-insurers and banks to the point of impaired viability or even insolvency," the report, Climate Change and the Financial Services Industry, says.

  The property market, where loans for houses and buildings are made over relatively large periods, could be particularly vulnerable as a result of extreme weather events. Homeowners and companies with property holdings may find that their insurance cover is cancelled at short notice, leaving them highly exposed.

  Government action to arrest the problem will inevitably mean a reduction in emissions of the main sources of greenhouse gases linked with global warming. This will require cut backs and the more efficient use of fossil fuels such as coal and oil.

  Asset managers, such as pension funds which are slow to appreciate the climate change threat, may see the value of energy or power company holdings decline as investors become more aware of the liabilities linked with carbon intensive industries, the report further concludes.

  Yet opportunities are emerging that should allow the financial services industry to reduce or hedge against the risks and even help curb emissions of the greenhouse gases linked with the de-stabilisation of the Earth's climate and weather systems. The report says that the annual market in trading greenhouse gases, emerging as a result of international agreements to reduce emissions, could be worth as much as US $ 2 trillion by 2012. The market for clean energy could stand at $1.9 trillion by 2020, according to some estimates.

  Meanwhile the financial services industry, with over $26 trillion in assets under management, could if mobilized "wield significant influence over future economic development . . . and therefore the future global greenhouse gas emissions" for the benefit of itself and society as a whole.

  However a survey of mainstream financial institutions carried out for the report indicates that most are "unaware of the climate change issue" or have adopted a "wait and see policy". These attitudes are due to the prolonged wrangling over the Kyoto Protocol, the international treaty designed to deal with the threat of global warming, compounded by practical issues like the lack of solid information on emissions and delays in finalising the regulations of the new greenhouse gas markets.

  As a result, only a small group of forward looking financial companies are addressing the issue many of whom are re-insurers whose businesses are already feeling the economic impact of rising, weather-related, insurance claims.

  Klaus Toepfer, UNEP Executive Director, said today at the launch of the report: "This report is a wake up call for the global financial community. It highlights the real risks and economic perils they are facing as a result of human-influenced climate change. It also highlights how the industry can make a real difference through harnessing the new market instruments and mechanisms made possible by the Kyoto Protocol and by developing their own imaginative solutions."

  "It also underscores how, given the financial muscle available to them, these institutions could move markets and minds to deliver a cleaner, healthier and less vulnerable world for the benefit of the world economy, for the benefit of people everywhere," he said.

  The report and its studies, supported by a group of the world's biggest banks, insurers and re-insurers, were launched today at the Swiss Re Greenhouse Gas conference in Zurich, Switzerland. The findings will also be presented to governments at the next round of climate change negotiations set to commence in New Delhi, India, on 23 October until 1 November.

  "In addition to the emitting industry needing to take a carbon constrained future into account", concluded John H. Fitzpatrick, CFO and member of the Executive Board of Swiss Re, "the financial services industry, of which we are a part, also has an obligation to contribute to the solution of these problems through its own investments and business expertise. After all, climate change and substantial emissions reductions—like any other strategic global business challenge—ultimately becomes a financial issue. The problems associated with environmental disasters quickly become measured in dollars and cents. Our industry needs to lead by developing financial solutions and risk mitigation techniques to assist our clients in achieving global emission reductions."

  The report has drawn up a blueprint for action, designed to galvanize the financial services industry to address the climate change threat more directly. The blueprint is also aimed at assisting governments to create the right conditions for the industry to operate swiftly and effectively in delivering new climate-related businesses and markets.

  Recommendations include urging insurers and re-insurers to better reflect the risks from climate-related perils in policies and to develop public/private partnerships in high-risk areas so that cover can be maintained.

  Commercial banks should fully price risks from climate change into loan agreements and give incentives to schemes that encourage energy efficiency or cleaner fuels.

  Asset managers, such as pension funds, should request the companies in which they invest better information on their carbon emissions and their exposure to greenhouse gases.

  Accountants, actuaries, analysts, credit rating agencies and others providing professional services should help corporate clients to better understand the threats and opportunities of climate change. Greenhouse gas trading markets need standardized accounting methods to operate and is thus another area where professional people and their professional organizations can help.

  Meanwhile governments are urged to adopt a long term, global plan, to keep greenhouse gases at safe levels. This is vital because the Kyoto Protocol runs out in 2012 whereas carbon dioxide, methane and the other greenhouse gases can persist in the atmosphere for many tens of decades. At home, governments should also take a variety of actions including a clear commitment on how greenhouse gas reduction targets will be met alongside economic incentives for investing in clean energy schemes and clean energy research and development.

  Governments are also asked to work with stock market regulators to help boost understanding of the impacts of global warming on publicly listed companies and new offerings.

  The report concludes by calling for a major drive to mobilise the financial sector on this issue and recommends that new financial techniques and methods are developed to help investors and project financiers factor in climate change into the valuation of their assets.

July 2003

7   The revised assumptions included imposing VAT on air travel and a tax on fuel equivalent to the rate paid by motorists (on the basis that the environmental effects of aviation are of a similar or greater magnitude, per passenger km, when compared to road transport). We assumed that a tax on fuel would be gradually introduced over the period to 2030, and that the existing Air Passenger Duty would be phased out. Back

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