House of Commons - Environmental Audit

Select Committee on Environmental Audit Ninth Report

GOVERNMENT POLICY AND THE FUTURE

68. Under the Chicago convention of 1944, states have agreed not to impose any taxes on aviation fuel used in international flights. Because of the way that this convention has been ratified through many bilateral agreements between countries, it would be difficult to do so. When compared to motoring, where fuel duty and VAT comprise 80% of the price the public pays, the absence of fuel duty on aviation fuel and fares in the UK amounts to over £9 billion.[62] The favourable tax treatment of aviation represents, in effect, a subsidy to the industry. The size of this hidden subsidy is in the same order of magnitude as the £6 billion total external costs which AEF has identified in relation to aviation.[63]

69. Environmentalists argue that, by comparison with road transport, aviation is receiving subsidies of more than £9 billion through the absence of a fuel tax and VAT on tickets, and that this unfairly penalises competing forms of transport and in particular rail.

70. A number of organisations (eg the Sustainable Development Commission) have pointed out that road transport fuels are taxed at over £150 per tonne of CO₂.[64] This compares to the value of £19 per tonne CO₂ (£70 per tonne carbon) suggested in Aviation and the Environment. We agree that this appears inconsistent. Indeed, some organisations went on to argue that if you take into account the concept of radiative forcing, then you would need to tax aviation at about £400 per tonne of CO₂ to create a level playing field with other forms of transport.[65]

71. The Treasury have stated that it is not an objective of fiscal policy to equalise the tax treatment between different forms of transport.[66] The reasons for this are unclear, and the Treasury response on this specific point was completely inadequate.[67] We have previously pointed out the need for the Treasury to develop a strategy with regard to road fuel duties. It needs to do so also for the different modes of transport. The Treasury should set out clearly what principles underpin the different tax treatment which different forms of transport attract.

72. The aviation lobby has argued that low air fares are justified on grounds of social equity, and that the proper comparison is not with road transport but with buses and trains—both of which receive considerable subsidies. Such an argument is quite clearly justified in the case of buses and trains, as the absence of basic low-cost public transport could have a huge impact on elderly or disadvantaged members of society. Moreover, subsidies for public transport are provided largely to facilitate travel to work. By contrast, most travel by plane is for leisure purposes and evidence from the CAA shows that people from the top three social classes take, on average, more than four times as many flights per year as those in the bottom three.[68]

73. It is not for the Government to discriminate between different forms of leisure activities and provide support for some rather than others. The only instance where this may be justified is in providing air services to remote parts of the UK—for which more appropriate specific mechanisms are available. We see no reason why aviation should be treated differently to motoring in terms of fiscal policy, and why it should not be taxed to earn revenue. We do not consider that it is possible to justify the favourable treatment it currently receives on grounds of social equity.

Aviation taxes or charges - the scope for action

74. Although it may not be possible to tax fuel directly, various other European states have introduced emissions charges or other forms of tax, subject to some limitations. Switzerland, for example, applies a carbon tax to domestic flights, while an emissions charge has been introduced at Zurich airport. Sweden has introduced an emissions charge, while Norway has replaced its passenger levy by a National Aviation Green Tax. levied on carbon emissions.[69]

75. In addition, many EU member states charge VAT on domestic air fares—including Germany (16% rate of VAT), the Netherlands (19%), Spain (6%), and France (5.5%). Germany is considering extending VAT to cover international flights insofar as they relate to its domestic airspace.[70] We also note that in March 2003 the EC agreed the "Community Framework for the Taxation of Energy Products" which specifically allows member states to tax aviation fuel for national use.[71]

76. Various organisations have pointed out that the existing UK tax on aviation—Air Passenger Duty—is levied at too low a rate and is in any case a poorly designed environmental tax. There is scope for the Government to introduce more effective forms of tax or charge on a domestic basis. This is particularly the case for domestic UK flights, where there is a need to promote a modal shift to rail in order to address the particularly damaging environmental effects of short-haul flights which the RCEP identified. While we accept that domestic measures can only have limited effect, they are worth exploring. They would also demonstrate the commitment of the UK to addressing these issues at an international level.

77. We recommend that the Government replaces the current Air Passenger Duty with an emissions charge levied on flights and which is clearly displayed on travel documentation. This should be set initially at a level which will raise £1.5 billion a year, but be subject to an annual escalator so that revenue will increase over time. In addition, it should consider the case for introducing VAT on ticket sales for domestic flights within the UK and set out the results in the next Pre-Budget Report.

78. Such measures, however, will be insufficient to ensure that aviation is subject to environmental limits. In order to achieve this, there would need to be agreement at an international level, or at least within the EU, to a common system of environmental charges or taxes. The aviation industry supports the development of an open emissions trading scheme, either to be incorporated within the planned EU scheme or else in the context of the second Kyoto commitment period from 2010. It also argues that pressure to introduce taxes or charges as an "interim" solution should be resisted.[72]

79. However, in the view of many, it is unlikely that aviation could be incorporated within an international trading scheme before 2012 at the earliest. Environmentalists are also highly sceptical of the commitment of the International Civil Aviation Organisation (ICAO) and its sub-committee, the Committee on Aviation and Environmental Protection, to pursue such an agenda.[73] The progress it is making is very slow and there is little likelihood that it will achieve the necessary consensus. In the light of this, the EU has announced that it will take action itself if ICAO does not do so. It is carrying out further work in this area, and both the EU Commission and Parliament appears to be broadly supportive of the concept of an emissions charge as an interim measure. This stance has been reinforced by the EU White Paper "European Transport Policy for 2010".[74]

80. While it is only anecdotal evidence, one of our memoranda paints a rather dismal picture of Government commitment at an EU level. The Stop Stansted Expansion memorandum includes the following:

81. Evidence suggests that there is little ministerial will to pursue within the EU fiscal policies to address the impacts of aviation. With regard to the introduction of duty on aviation fuel or alternatively an emissions charge or trading system, the Government should take a leadership role within the EU and the International Civil Aviation Organisation and commit itself to bring forward specific proposals in the next two years. It should also state whether it favours the introduction of an emissions charge at an EU level as an interim measure pending the inclusion of aviation in international trading schemes.

82. If fiscal policies are introduced to address emissions from aviation, the price of carbon might turn out to be very much higher than expected. The Government should also give its assurance that it will not bail out the aviation industry if—after investing lots of money in extra runway capacity—it turns out that they are left with stranded assets if demand is less than projected.

Realistic pricing

83. There is another area where the Government needs to ensure that aviation pays for all its costs. A number of memoranda pointed out that the use of runways and associated facilities by airlines was heavily subsidised through the 'single till' arrangements and the absence of any slot auctioning.[76]

84. BAA's revenue is derived from two main sources—airport landing charges, and retail operations within the airports it owns. Currently, the "single-till" arrangements caps total revenue from airport charges and retail sales combined according to an RPI-X formula. The more money BAA earns from retail operations, the lower the landing and take-off charges will be. It is astonishing, for example, that these charges are lower at Heathrow than they are at Prestwick. Under a 'dual till' approach, new take-off and landing charges could be set according to aircraft size and other factors affecting their environmental impacts.

85. Airlines also do not pay for access to landing and take-off slots. Slot access is determined under EU rules based on the extent of use in previous years. We support the recent proposal by the IPPR for 20% of slots to be auctioned each year on a five year rota, though this will require a change in the EU directive governing slot access.[77]

86. At present, landing charges are too low to have any real impact on airlines. The Government should re-examine the scope for introducing a dual-till system to ensure that airlines pay a greater share of the infrastructure costs. It should also work within the EU to enable slots to be auctioned on a regular basis so that demand is reflected in the price.

62 Ev12, 30. Back

63 Ev36. Back

64 Ev136. Back

65 Ibid. Back

66 Ev5, Q31. Back

67 Ev30. Back

68 The Sky's the Limit, IPPR 200, page 64. Back

69 Ev30ff. Back

70 Ibid. Back

71 Ev Ev12. Back

72 Ev58. Back

73 Ev36. Back