Examination of Witness (Questions 162-179)
DR ANDREW
SENTANCE
8 DECEMBER 2004
Q162 Chairman: Good afternoon. It is
good to see you back in front of the Environment Audit Committee.
Dr Sentance: It is good to be
here.
Q163 Chairman: As you know, we are looking
at the feasibility or otherwise of emissions trading schemes in
general, and particularly in this session, with the first two
sets of witnesses, at aviation's role in future emissions trading
scheme. I have a report here produced by somebody called INFRAS.
I do not know if you have heard of them or seen their report The
External Costs of Transport, but they suggest that the external
costs of aviation amount to around 53 euros per thousand passenger
kilometres. I reckon that on that basis, if that figure is right,
if I were to go to Berlin and back I would be paying an extra
£35 each way for my flight. I noticed on your website today
that you can fly return to Berlin for £46 at the moment.
If that sort of cost were to be added to the ticket price for
passenger travel and for freight, what sort of impact do you think
it would have on the number of flights?
Dr Sentance: You said "if
that sort of cost were to be added" to the flight cost and
I think that is the big if. I was only able to look at that study
this morning but I think quite a few assumptions have gone into
producing that figure of 53 euros per thousand kilometres, which
involved some very high estimates of the climate change impact—much
higher I think than the UK Government would conventionally assume.
I think the notion of adding that to the cost of flight as a policy
measure is something that we would significantly question, both
on economic grounds and on environmental grounds because, as you
know, we favour a different approach, not just adding a big cost
to passengers but an approach for dealing with those climate-change
impacts based on emissions trading. But, to answer your question
as you have put it, if that sort of addition were made to the
cost of travel, it would clearly discourage travel and that has
social and economic costs as well as it may have some perceived
environmental benefits. The issue of balancing the social and
economic issues and environmental issues is what we have to do
in this arena.
Q164 Chairman: Do you have a figure that
you have worked out for yourselves for the cost per passenger
kilometre?
Dr Sentance: We do not regard
this external cost approach as being the best way for developing
policy in this area. I might have given our views to this Committee
before on this issue but I will reiterate them. We see that aviation
does have some very distinct environmental impacts and the way
in which we should approach those is to address the environmental
impacts and to seek to reduce them and mitigate them as best we
can. We can see an example of this with noise, where there is
an established approach for dealing with noise issues. The ICAO
United Nations body agreed what is called "a balanced approach"
and this involves reducing noise at source, taking operational
measures, putting in operational procedures and getting better
land-use planning at airports. Following that sort of approach,
if we see what has happened with noise at Heathrow, for example,
over the last 25 years the number of people in the noise disturbance
area of Heathrow has reduced by 85%.
Q165 Chairman: That is a whole range
of technical solutions. We have discussed before with aviation
that it has a variable impact on the environment because you cannot
get a plane off the ground without burning huge amounts of fossil
fuel. Do you not accept that it is possible to put an external
value on costs of aviation? The Royal Commission for environmental
protection put a price of £40 per passenger kilometre on
it, which is higher than the other figure we were talking about.
Dr Sentance: If I may develop
the answer that I am giving, if you would allow me to take a bit
of time. That is an example based on noise. There are two other
very distinct issues that the aviation industry faces. One is
local air quality at airports, and we have to find approaches
for making sure that that is reduced, and the other is climate
change, which is what I think you are focusing on and where the
big numbers come from in these calculations. We have made clear
that in addressing climate change we need to find the most environmentally
effective and cost-efficient approach, and the notion of adding
up the big total and then supposing that that is put as a tax
or an impost in the industry is not, according to analysis conducted
under the auspices of ICAO and by other independent bodies, a
cost-efficient or environmentally effective approach. There is
an approach based on emissions trading that is likely to be more
cost-efficient and environmentally effective.
Q166 Mr Challen: Do you not accept then
the "polluter pays" principle?
Dr Sentance: I think we have to
be careful how we apply that principle. When we are talking about
climate change we are saying that what we are trying to achieve
internationally is to reduce the amount of climate change gases,
greenhouse gases, particularly carbon dioxide, over time on a
long-term basis and we in the aviation industry would accept that.
That is a sound policy. That does not mean that we have to pay
for every ton of carbon dioxide. We have to make sure that we
are working consistently with the rest of the business community
and the rest of the economy in making sure that we play our part
in that reduction in carbon dioxide and greenhouse gases.
Q167 Mr Challen: Who would pay for the
other tons? Who picks up the tab for the amount that you do not
want to?
Dr Sentance: Under an emissions
trading scheme you would pay for the amount that you produced
over and above your allocation—which is absolutely right.
I think that is consistent with the "polluter pays"
principle. I would argue that emissions trading, rather than the
notion of adding a large amount to every flight as a sort of tax
or charge, is the right approach in this area of climate change.
It is the question of making the impact at the margin that you
want to make sure you are doing, not just taking large sums of
money out of the industry, and that is what emissions trading
achieves.
Q168 Chairman: One of the points that
we make is that in order to be effective an emissions trading
scheme needs international compliance policing system. That is
going to be very hard to achieve, is it not?
Dr Sentance: I think we make the
point in the context of international climate measures generally.
But emissions trading is not exempt from that. We can observe
what is happening on the international scene, that some countries
are moving faster than others to meet their climate change commitments,
and the extent to which that is being supervised, policed and
overseen at the international level is not, I think, totally satisfactory.
Part of that is a political issue. Part of it is that some major
countries, particularly, the United States have not signed up
to the approach that the rest of the international community is
following. I think as we develop our approach to this subject
internationally, we do need not only to put into place institutions
that will make sure that are you complying at the national level—because
when you introduce emissions trading we have seen in the UK and
at the European level compliance regimes put in place—but
to give some sort of open and international oversight to that.
Q169 Chairman: What do you think the
chances are of getting up and running an effective compliance
system?
Dr Sentance: As I said, this is
not specific to emissions trading; this is a question of making
sure that countries are following through on their climate change
commitments generally. I think it is a very difficult issue but
it is the same issue that we face whatever instruments we deploy.
If we are talking about taxes and charges or—
Q170 Chairman: They would be simpler,
would they not? They may not be more efficacious in your view,
but they would be simpler.
Dr Sentance: I do not think we
have any more scope of obliging, say, the United States to impose
a tax on aviation than we have of getting them to comply with
emissions trading. I think we have more chance of getting them
involved in emissions trading because it is a market mechanism
that in the US context has perhaps more degree of policy support.
Q171 Chairman: It is not only the US
that has a problem with this, is it? It is Germany as well. Could
you share with us your view of the current debate between Germany,
the UK and other EU countries about including aviation in the
emissions trading scheme?
Dr Sentance: I think a background
to the situation in Germany is that they have taken on the largest
reduction in the carbon dioxide and other greenhouse emissions
within the European Union, so they are bound to be more sensitive
generally on this topic, particularly in business circles. I think
it is fair to say that when we discuss this with our European
counterparts in the aviation sector in Germany, it is a more general
business issue, it is not specific to aviation. There seems to
be perhaps less support within the business community for emissions
trading than there is in the UK, but I think there are a number
of factors behind that. One is that they have taken on a large
commitment, and I think it may reflect the political and economic
climate in Germany.
Q172 Chairman: Including the tax regimes.
Dr Sentance: I do not think they
are any more enthusiastic about taxes. I suppose that is my point.
Q173 Chairman: They do not want both,
they want one or the other.
Dr Sentance: I think Germany is
in a very difficult situation politically and economically. The
German economy has been growing on average at 1% per annum slower
than the average of the European Union, whereas the UK the economy
has been growing faster than the average for the European Union.
When times are difficult economically, I think the business community
is in general very cautious about taking on new commitments in
the environmental domain or elsewhere.
Q174 Chairman: On the question of tax
versus emissions trading, we have discussed in the past the extent
to which aviation is exempt from taxes which other businesses
pay. If other industry is going to participate in the emissions
trading schemes, as it is going to, is there any reason why they
should continue to pay tax—VAT and fuel taxes—as well
as participating in an emissions trading scheme? Or should they
be treated like you and exempt from tax?
Dr Sentance: If I could go back
to your initial statement, you are saying aviation is exempt from
taxes that other industries pay. You are referring, I think, perhaps
predominantly, to fuel tax. There are some very good reasons to
do with international agreements for that.
Q175 Chairman: I am not asking you to
justify it this afternoon. We have been through all that. It is
just a question of whether it is fair on the rest of the participants
in an emissions trading scheme that they have to pay taxes which
you do not have to pay or whether you think it would be fairer
for them to exempt them in the way you are exempt.
Dr Sentance: In one of the Government's
publications there is a table at the back called Environmental
Taxes, and one of the largest revenue raisers, as the Government
defines environmental taxes, is air passenger duty, which raises
over £800 million a year. I do not think that puts us in
a position where we are exempt. The Government is raising money
in different ways from the aviation industry where it is raising
money, for example, with a climate change levy, from other ground-based
sources. If I could just take you to what British Airways have
done, we have in a sense taken on voluntary commitments within
our sector where we can, by participating in the UK emissions
trading scheme. I think we are keen to address the environmental
issue. I do not think it is question of fairness; I think it is
a question of what is the most effective mechanism that we can
find both environmentally and in terms of its impact economically
on the industry to address the issue that we face. We have seen
in relation to motor fuel that taxes can go to economically very
high levels—and levels where they begin to experience political
obstacles rather than economic constraints—without actually
achieving the environmental objectives that we would like to achieve.
I think it is well worth thinking about a different approach when
we come to aviation.
Q176 Joan Walley: I would like to press
you a little bit more about some of the comments you make in paragraph
7 of your evidence and preface them by saying that a lot of people
are having difficulty understanding how an emissions trading system
actually works and I thought I was one of the few but it seems
from today's press reports that it is perhaps something whose
time has come and not everybody understands it entirely. Just
for a little bit of casting light on it, when you say in your
evidence that emissions trading can take many different forms,
each of which deserves detailed consideration could you set out
for me which different forms there are that it could take.
Dr Sentance: Certainly. I think
the basic notion of emissions trading is there is some sort of
cap or allowance or benchmark or target that a company or participant
has, and then they will trade or they will get credits or they
will have to purchase credits or permits if they are above or
below that. That is the sort of basic notion behind emissions
trading. The advantage of that from an environmental point of
view is: if you are trying to hit an environmental objective such
as reducing CO2 emissions, you can specify that in the target
or in the cap that you are trying to achieve, and if that is policed
properly you should almost by definition achieve that. I think
the differences come in the way in which you apply that. One of
the key issues is in terms of allocation of those targets or caps.
I think there are three different approaches that people have
discussed. One is a grandfathered approach, where basically you
have an allocation which depends on what you have done in the
past with some sort of reduction target possibly built in; another
is a benchmarking approach, where there is some calculation of
what you ought to be emitting based on objective benchmarks; and
then there is an auctioning approach, which says you have to pay
for everything. And you could have different combinations and
variants. The other area where people have introduced variants
into these schemes is the notion of whether we should have some
sort of safety valve—and I am not putting this forward,
I am just saying that this is an idea that is around. The advantage
of an emissions trading scheme is that it is environmentally effective
but you cannot predict—and the debate we had at the beginning
about costs and prices is because this is quite a difficult area—the
cost. You cannot predict exactly the cost of achieving that. Some
people have suggested that some sort of safety valve should be
built in, some sort of ceiling on the cost of permits to give
business some reassurance that it is not going to face very large
economic penalties. I know certainly this is an issue in the United
States where there is a feeling that the agreements that have
been made in Kyoto could incur, potentially—they do not
know—a very high economic cost. That is one of the reasons
the United States is reluctant to sign up. That is what we meant
when we said there are various shapes and forms of these schemes,
but I think the basic principle of some sort of cap/target/allowance
with trading: if you exceed you have to buy, if you go under you
can sell, is the sort of common theme.
Q177 Joan Walley: Thank you for what
must be one of the most definitive accounts of the variations
in emissions trading that we are understanding right now. You
mentioned a cap. Would you say that, whatever variation you are
looking at, whether you are looking at benchmarking on the grandfather
approach or the auction approach, the really important thing is
to have a cap so you actually have limits and a ceiling of what
will be emitted?
Dr Sentance: Absolutely. I would
go beyond that and say the other important thing is to make sure
that that cap is enforced and can be consistently applied across
the range of participants. As our paper highlights, there are
some issues that we have not fully addressed, certainly in the
broader international domain, about making sure that is done when
we get into broader international emissions trading. But, if I
could say, in the broader European context, where I think the
real policy debate is now happening about bringing aviation into
the European emissions trading scheme, the European Commission
and the European institutions act as that international broker
and policeman, or however you want to describe it. We do have
an infrastructure within Europe that allows us to have that international
cooperation. We may not have it more broadly internationally.
Q178 Joan Walley: Given that there are
some industries or some sectors where it is actually very difficult
if there are not technological solutions available to minimise
or reduce the amount of carbon emissions, is it not the case that
you are actually setting up what could be a demand management
scheme? How do you get round that conflict, if you like, between
just a demand management tool and whoever can afford to pay for
it does pay for it? How do you link that to the ceiling to make
sure it is not just a demand management tool that we are introducing?
Dr Sentance: Demand management
has a specific meaning in aviation, I think, in the sense that
it has the meaning that you try to stop environmental impacts
of aviation by stopping the growth of aviation and stopping the
growth in demand. I would agree with you, in the sense that there
will clearly be some impact on demand, of an emissions trading
scheme—that is clear. It would introduce extra costs into
the industry—if it is done correctly it should introduce
them on a level playing field basis—and costs impact on
prices and that impacts on demand but I would draw a distinction
between an emissions trading approach and a crude demand management
approach that says we will stop the production of certain forms
of goods and services, whether it is aviation or anything else,
as a policy instrument, as a policy act in itself. I would draw
a distinction between that and a more sophisticated approach which
works through the market which is emissions trading. Coming back
to the point that the Chairman raised about fairness, one of the
advantages of emissions trading in terms of fairness is that the
costs of the permits are equalised in the market place. If you
are in an industry where it is harder because of technological
reasons, or if, as in our industry, there are various safety and
technical constraints that mean that a certain form of technology
is required to get an aircraft off the ground, you are not penalised
unduly for that. The market can equalise the costs to various
industries of making a reduction across the whole global industry
or across the whole region or across the whole country depending
on which level you are operating. It will have an impact on demand
but I think it is far superior to some sort of approach that says
we will stop the production of something purely because it has
an environmental impact.
Q179 Joan Walley: Are you really saying
that the emissions trading scheme is really about enabling those
companies and sectors which can reduce their emissions to do so
but those that cannot will be forced to buy extra credits from
within the scheme.
Dr Sentance: Those that cannot
or do not wish to, in the sense—
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