Memorandum from Brian Pearce, Director,
Centre for Sustainable Investment, Forum for the Future
The following note has been written for in response
to a request for oral evidence to the House of Commons Environmental
Audit Committee inquiry on aviation's environmental costs.
By way of background Brian Pearce is an economist.
Now director of the Centre for Sustainable Investment at the sustainable
development think-tank Forum for the Future, he was formerly head
of global economic research at the investment bank SBC Warburg
and before that Chief Economist at Ernst & Young. An environmental
as well as a financial and international macro economist he was
the author of the research on aviation's environmental costs that
formed the basis for Pearce and Pearce (2000)[8]
and parts of the more recent Department for Transport and HM Treasury
papers. In the past four years he has been heavily involved in
the debate about valuation and the use of economic instruments
in the aviation industry, including taking the chair of the recent
expert group workshop on aviation's climate change impacts for
the HMT/DfT consultation.
Can the full environmental costs of aviation be
identified?
1. The first point I would like to make
is that, in the HM Treasury/DfT document Aviation and the Environment:
Using economic instruments, we are considering the economic
valuation of environmental costs. This is the economist "lens"
on the issue, which may or may not coincide with costs estimated
using the "lens" of the biologist or another discipline.
It measures economic efficiency. For example there would be an
increase in economic efficiency if the sum of the benefits to
the travelling public (and the industry), who gain by airport
capacity expansion, exceeds the sum of the costs to those who
lose (including the environment, local residents and those affected
by climate change). In this context, since it is possible for
individuals to have preferences over all changes that are likely
to take place, full environmental costs can be identified in principle.
What are the main issues of principle and methodological
difficulties in attempting to do so?
2. One issue of principle is that economic
valuation measures a particular version of environmental cost.
Economic efficiency is the best use of resources in terms of individual
preferences. It does not however measure other objectives of policy
such as distributional objectives of fairness or equity, nor does
it measure sustainability, or wider concerns regarding the transport
infrastructure, regional balance etc. Policy-makers may wish to
consider that aviation's environmental costs in terms of these
policy objectives in addition to, or perhaps offsetting, the loss
to economic efficiency.
3. Another issue is the extent to which
economic valuation captures the preferences of all the individuals
policy-makers wish to take into account. An important point to
note is that individual preferences measured under economic valuation
techniques do not just include issues of personal wealth. They
may also include concerns about health, for others, for future
generations and for the environment. However, they are the preference
of today's population. These preferences may not coincide with
the preferences of future generations nor be fully representative
of the preferences of low-income countries in southern latitudes,
who are the major groups affected by climate change for example.
4. The morality of using money as a measuring
rod if often seen as a major issue for the use of economic valuation
of impacts such as environmental costs. However, in any decision
of public policy with finite public funds and national resources
there is always an issue of opportunity cost and a trade-off between
objectives. The economic valuation of environmental costs enables
this trade-off with economic benefit to be made explicit.
5. Uncertainty of the estimates is another
issue. Economic valuations of many environmental costs, particularly
climate change, seem to be extremely wide and imprecise. However,
using expert-determined scores instead may just lead to spurious
accuracy. Social science data is by its nature more probabilistic
that natural science data.
6. One important issue is that economic
valuations can really only be made of individuals' preferences
at the margin, for relatively small changes. At the extreme it
makes little sense to try to measure the total value of the climate—clearly
it is of infinite value to all individuals. What economic valuation
measures is what resources or goods and services would compensate
individuals for a marginally poorer climate. Another example is
the value of life—clearly of infinite value to the individual.
However, every time we cross the road or fail to take sufficient
exercise we have made an implicit valuation of a slightly shorter
lifespan or a risk to our life. The point I would like to make
here is that figures for the total value of aviation's contribution
to climate change or noise do not, perhaps cannot, represent the
total environmental cost in economic terms (These would be much
higher for the reasons already discussed).
How comprehensive and accurate are the environmental
costs included in Aviation and the Environment: Using economic
instruments, and in the Department for Transport's consultation
The Future Development of Air Transport in the United Kingdom?
7. The difficulties of estimating total
environmental costs noted above are illustrated in the numbers
quoted by the Treasury paper for the total cost of aviation's
impact on climate change and noise. The estimate for total aviation
noise costs in the Treasury paper of £25 million appears
to have been based summing up the value of marginal noise outputs
from aircraft of varying types at various airports, using the
calculation shown in Pearce and Pearce (2000). If, as I believe,
the environmental cost of an extra aircraft movement is much higher
at a quiet airport than a noisy airport, other things such as
population exposed being equal, then the average environmental
cost of an aircraft movement will be higher than the marginal
cost. Pearce and Pearce (2000) go on to say "Therefore the
£19 million total [for Heathrow only] is likely to be a significant
underestimate of the total damage at Heathrow airport each year".
An alternative technique described in the same paper, based on
noise measured on the ground and average rather than marginal
measures of noise quantity, is the source of the £66 million
figure quoted by Professor Pearce.
8. However, even the latter estimate suffers
from the same methodological problem associated with trying to
estimate the value of total rather than marginal changes. The
total figures do not show the extent of total environmental costs
from aviation. However, they do represent the likely scale of
financial cost to the aviation industry should a tax or permit
be levied at the marginal (per passenger) environmental costs
quoted.
9. The marginal (per passenger) environmental
cost estimates are the most accurate numbers quoted in the consultation
papers. However, there are a number of factors that affect the
accuracy and comprehensiveness of these marginal costs which are
considered in the following paragraphs.
10. The climate change costs are perhaps
as comprehensive and accurate as possible given the current state
of knowledge. The major area of uncertainty are the 2.7x "dose-response"
multiplier used in the Treasury estimates to account for the impact
of NOx emissions and condensation trail formation. Another major
uncertainty is the economic valuation of climate change costs.
A practical issue is whether to adjust for different income levels,
as in the valuation used. Professor Pearce argues in his much
lower estimates that "equity-weighting" is inappropriate.
A point of principle is doubt as to whether individuals are able
to express preferences for a poorly understood scientific phenomenum,
plus the other points of principle noted above.
11. The noise estimates are based on the
methodology used in Pearce and Pearce (2000). Local residents
should be able to express very informed preferences about aircraft
noise, even if climate change is more difficult. A fairly sophisticated
methodology was used to measure these preferences based on the
difference in house prices in quiet and noisy areas around Heathrow
airport. The major uncertainty with these numbers is that house
price differentials do not capture the environmental costs suffered
by the environment, the community or non home owners. Stated preference
techniques (questionnaire surveys) usually reveal higher valuations
in noise studies, but we do not yet have this evidence for UK
airports.
12. The major missing element in terms of
economic valuation of environmental costs is local air quality.
No consideration at all is given to the valuation of recreation
and visual intrusion (related to landscape impacts), or impacts
on biodiversity, cultural heritage, water quality, land drainage
and flooding or community severance. However, these latter impacts
are usually very site specific and may be managed better using
planning tools rather than economic instruments.
Has the Government defined the correct environmental
policy objective for aviation—that, where appropriate, the
industry should pay for its environmental costs? How does this
relate to the Government's primary objective for airports—to
maximise the significant social and economic benefits, whilst
seeking to minimise the environmental impacts? What additional
measures, if any, would need to be taken if this were to have
little impact on rates of growth?
13. The point I would like to make here
is that paying for environmental costs is quite a separate issue
from minimising environmental impacts. "Polluter Pays"
is quite often seen as an issue of equity or responsibility rather
than creating the incentive for economic efficiency for which
economic instruments are ideal. For instance it is sometimes claimed
that Air Passenger Duty (APD) represents the aviation industry's
payment for its environmental costs. That may or may not be the
case, depending on the cost estimates discussed above. It is clear
however, that APD does not promote economic efficiency. It does
not create the incentive for aviation to minimise its environmental
impacts.
14. APD is a poor environmental tax because
it is not designed to create the incentives for better aircraft
operations or better technology ie supply-side responses. The
only way it could work is to suppress demand. Since demand for
air travel appears to have a strong underlying response to rising
income and the DfT are forecasting substantial underlying falls
in the cost of air travel, any rise in ticket prices from APD
or other charges look like having a minimal impact on numbers
flying. This emphasises the need for good design if an economic
instrument both pays for and minimises aviation's environmental
costs.
Would the incorporation of environmental costs
be sufficient to achieve sustainability in the air transport sector?
15. Incorporating environmental costs is
not the same thing as a sustainable aviation industry. I would
take the latter to mean that the industry is not depleting stocks
of assets, such as its balance sheet tangible assets, a stable
climate, local peace and quiet, local air quality, as well as
community goodwill.
16. The first point is that if the economic
instrument leading to an "incorporation of environmental"
costs is poorly designed (like APD) it may have very little impact
on whether or not the industry maintains or degrades key assets.
A well designed economic instrument that created the incentive
for supply-side operational and other changes might achieve sustainability.
17. The second point is that economic valuation
is based on people's preferences. It may be that today's population
does not care enough, relative to other issues, to value aviation's
environmental costs at a level high enough to stop the industry
degrading these environmental assets. Since many of the impacts
(for climate change) fall on future generations and low-income
countries in southern latitudes, economic valuations will not
fully capture their preferences. The relatively low estimates
of environmental costs in the Treasury paper would appear to support
this view.
To what extent is there a tension between the
policy of incorporating environmental costs (especially of carbon)
and the Government's long-term objective of a 60% reduction in
CO2 by 2050?
18. There is no necessary connection between
incorporating carbon costs in prices and the objective of a 60%
reduction in CO2 by 2050. Simulations carried out by ICAO suggest
a fuel tax of several thousand Euros would be necessary to reduce
aviation's CO2 emissions to 5% below 1990 levels. Economic valuations
of environmental costs are no where near that level, and so incorporation
of these costs by the aviation industry would do little more than
dampen the forecast increase in the contribution of aviation to
UK CO2 emissions (noting that international emissions remain outside
national inventories at present).
Given the international context, what practical
options for incorporating environmental costs are readily available
to the Treasury and the Department for Transport, and how should
any revenues be used?
19. What economic instruments could be used
to tackle climate change?
— The main focus should be on integrating
international aviation into the greenhouse gas trading schemes
under the Kyoto Protocol;
— An international cap and trade scheme
would be environmentally effective compared to a tax;
— High estimated abatement costs in
aviation suggest an open scheme would substantially reduce the
resource cost of emissions abatement;
— Competitive distortions would be
eliminated under a regional or global scheme (remember airline
hub airports cannot be shifted to low cost developing countries),
and a scheme based on emissions rather than fuel would prevent
"tankering" distortions;
— The feasibility of such a scheme
is high. An emissions-based scheme avoids the legal problems with
a tax or restriction on fuel. Administration could be undertaken
by the UNFCCC infrastructure. Under ICAO the industry has already
agreed this is the best option;
— An EU-level charge should be considered
as an interim measure on CO2 and as a separate instrument for
the regional effects of NOx and condensation trails;
— The second Kyoto commitment period
is a decade away. The EC has already designed an EU aviation environmental
charge that could be used as an interim measure to encourage the
industry to manage its CO2 and other Kyoto Protocol greenhouse
gases;
— NOx and condensation trails are responsible
for taking aviation's radiative forcing to 2.7 times the impact
of CO2 alone. However, these emissions are not linked to CO2 and
they are not in the Kyoto group of greenhouse gases. Therefore,
a separate economic instrument is necessary. Since they have regional
climate effects an EU-wide charge is an ideal economic instrument.
20. Should there be a priority to reduce
one particular aspect of aviation's contribution to climate change,
such as CO2?
— No. Total radiative forcing of aviation's
emissions is 2.7 times that of CO2 alone. Prioritising CO2 alone
could lead to a weak environmental impact at best, and a perverse
one at worst.
21. What would the advantages and disadvantages
of including international aviation in national totals for the
second Kyoto commitment period be?
— The major advantage is one of feasibility.
It is the only international agreement in town;
— It also has the advantage of including
aviation in an open trading system which could substantially reduce
the resource costs of CO2 mitigation;
— As an international cap and trade
system, if ratified, it will also be effective at achieving the
target reduction in emissions. A tax or charge would not be certain
to do this;
— The major disadvantage is that the
second commitment period is a decade away. It could be used as
an excuse to do nothing, which is why an EU charge as an interim
measure would be sensible in the absence of transport being part
of the EU emissions trading scheme.
22. What measures could be introduced to
encourage airlines to purchase assets which are less environmentally
damaging?
— The advantage of an economic instrument
is that it leaves the way in which emissions are reduced up to
the economic agent, unlike a BAT or BATNEEC regulation;
— So airlines would be encouraged to
purchase cleaner assets. They would also be encouraged to save
money by operational improvements which may include pressuring
air traffic control and the airports to improve air and ground
management;
— An extremely important point to make
is that the economic instrument must be designed well to create
these supply-side incentives. This means a tax or permit on the
emission. A fuel duty or a passenger charge such as APD will be
environmentally ineffective because it creates no incentive for
the supply side, relying on rather weak impacts on demand.
23. What other measures might be effective
at tackling climate change?
— Information or disclosure-based measures
should be considered;
— The implementation of informed consumer
choice could be improved by a labelling scheme for the "greenhouse
gassiness" of flights;
— Investor groups are an influential
force for improvement. Disclosure would help their investment
process, possibly through changes to the London Stock Exchange
listing requirements.
24. Should domestic or EU-level measures
be pursued in the short-term ahead of long-term international
agreements?
— Environmental effectiveness for a
global pollutant such as CO2 is reduced but there would be advantages
in adopting a leadership position and likely learning benefits.
An EU-level measure would minimise competitiveness distortions;
— Certainly an EU-level charge should
be pursued as a separate instrument for the regional effects of
NOx and contrails
25. What economic instruments could be used
to tackle impacts on local air quality and noise?
— Setting tradable caps or "budgets"
would create new markets in aircraft noise and LTO emissions;
— These would guarantee environmental
targets are achieved (unless enforcement is difficult which may
be the case with local air quality where, for instance, NO2 emissions
also come from surface transport);
— Abatement costs for the industry
would be minimised because of trading allowances;
— Cost of airport use would be higher
which may lead to some loss of competitive advantage over other
airports. However, these pollutants are local and should be paid
for under "polluter pays". Moreover, the levels of charge
are not likely to be excessive and, unlike, other industries,
an airline cannot transfer its hub to a low cost developing country.
A charge is another option which has been explored
in the literature both for the UK and at the EU level;
— A charge would create the financial
incentives required to bring about the supply-side changes required
in the long-run, but it would not guarantee achievement of the
environmental target;
— A charge would guarantee the cost
but have similar competitiveness impacts as a cap or "budget".
26. Should economic instruments vary by
emissions, or noise, or both?
— One of the key points to emphasise
here is that to be effective an economic instrument must be designed
well to create supply-side incentives (such as a better fleet
mix), because demand effect may be weak. This means a charge or
allowance on emissions and not fuel or passengers (this way APD
is ineffective as an environmental charge).
27. On which type of emission would it make
most sense to base economic instruments?
— On those with significant environmental
impacts.
28. Should economic instruments vary by
aircraft type, or location, or both?
— It has been shown to be feasible
to design a charge that varies by aircraft type and location.
The same methodology could be used to allocate permits;
— There is considerable variation in
emissions by aircraft type and location, because of different
populations exposed around airports. The economic instrument should
give an incentive to fly to less populated regional airports,
giving both environmental and regional development benefits.
29. Is there a role for economic instruments
to help meet mandatory EU limits for NO2 and PM10?
— A tax would not be suitable since
there would be no guarantee of holding the limit;
— A tradable cap or air quality "budget"
may work and reduce compliance costs. However, it may be that
the source of NO2 emissions from surface transport as well as
aviation may make such an economic instrument impractical;
— Regulatory instruments may be best
for this issue.
30. Should economic instruments be based
on estimates of external costs?
— Only if the best instrument is a
charge;
— A cap and trade scheme looks the
best instrument for most pollutants. In this case the price will
depend on the cost of preventing further pollution and not the
damage cost;
— The external costs in the consultation
paper are low. This implies economic instruments can be used without
serious financial difficulty for the aviation industry.
June 2003
8 Pearce, B and Prof D Pearce, 2000, "Setting
Environmental Taxes for Aircraft: A Case Study of the UK",
CSERGE Working Paper GEC 2000-26. Back
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