Supplementary memorandum from the Aviation
Environment Federation
AEF SUPPLEMENTARY
RESPONSE JUNE
2003
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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