Supplementary memorandum submitted by
Sir David King (U34a)
QUESTION
Mr. Michael Jack:
1. Do think the Climate Change Levy is working?
How much carbon, for example, has been saved by the Levy to date?
ANSWER
When the Climate Change Programme was published
in 1990, the Levy package as a whole was forecast to save at least
5 million tonnes of carbon (MtC) per year by 2010. This included
savings of at least 2.5 MtC from the Climate Change Agreements
CCAs. The Government commissioned an independent study of the
effects of the CCL by Cambridge Econometrics in 2003. It hopes
to be in a position to release final results at Budget 2005.
In relation to the CCAs, in 2002, the first
target period, the total of the absolute savings in carbon emissions
from each CCA sector compared to its baseline was around 4.5 MtC
per annum. These figures are dependent on changes in industrial
activity and for 2002 take into account a significant drop in
output in the steel industry. Although a large fraction of these
savings (over 2.5 MtC) was achieved in the steel sector (mainly
through reductions in production) many other sectors also achieved
savings beyond their targets for the first and later milestones,
and many have already achieved their 2010 targets. The total absolute
savings from the other sectors combined was 1.9 MtC per annum.
These targets are currently being reviewed to ensure that they
continue to represent the potential for cost effective energy
savings taking account of any changes in technical and market
conditions.
QUESTION
Mr. Michael Jack:
2. Is there any work that you know of to
which you might be able to direct us to give us a better understanding
of the economics of air travel and the trade-offs that would occur
if by whatever fiscal measure you chose you put the price of it
up?
ANSWER
Hard evidence is difficult to get with problems
in fares data meaning that from air traffic forecasts in the Department
for Transports (DfT) they were only able to derive robust estimates
for some market segments. Previously the DfT have tended to rely
on estimates from the literature, which are subject to a range,
when looking at the impact of outside developments or policy scenarios.
DfT used an overall estimate of -0.8 until the
late 1990s, but rounded it up subsequently partly for reasons
of arithmetical simplicity but also because of changes in the
structure of the airline industry, principally the emergence of
No Frills Carriers (NFCs), which were indicating a higher passenger
responsiveness to lower fares by both business and leisure passengers.
In all the analysis of the impact of alternative
assumptions and policy scenarios carried out in the Future of
Air Transport White Paper and the preceding consultation documents,
the DfT assumed a fare elasticity of -1 (so that a 10% increase
in air fares would result in a similar reduction in passenger
demand). See for example paragraph 11 of Annex A of the White
Paper which considers the impact on demand of measures to cover
external costs. (BELOW—
http://www.dft.gov.uk/stellent/groups/dft_aviation/documents/page/dft_aviation_031507.hcsp)
"As the Government has a policy commitment
for aviation to pay for its environmental impacts, modelling takes
account of the effects of an economic instrument, such as a permit
trading scheme, on future demand. An economic instrument would
reduce the demand for flights, as the cost base for the industry
would be increased. In "Air Traffic Forecasts for the
United Kingdom 2000", we calculated that a notional 100%
fuel tax would lead to a 10% increase in airline costs (assuming
fuel costs were 10% of airline costs)—and a 10% increase
in air fares, assuming the increased costs were passed through
in full to passengers. This would then have the effect of reducing
demand by 10%.
12. Since the national forecasts were published
in May 2000, there appear to be factors at work leading to airline
costs—and hence air fares—declining faster than was
previously forecast; and their effect is sufficient to offset
the fall in demand expected from the impact of any economic instruments.
These factors are:
the "no-frills" sector: The
no frills sector (such as EasyJet and Ryanair) is expected to
capture more of the mainstream domestic and short-haul markets.
These airlines, with substantial lower costs and fares than traditional
airlines, will contribute a large stimulus on the UK aviation
market.
greater competitive pressure: It is expected
that to ensure commercial survival, the cost base of the traditional
scheduled airlines will need to be cut. The pressure to cut costs
stems from the competitive threat of the NFCs.
liberalisation: In long-haul markets,
it is expected that the liberalisation of current regulatory restrictions
will represent an important cost driver. It is also believed that
increased airline competition resulting from additional airport
capacity will put downward pressure on costs."
January 2005
| 
